Mortgage law              

Hypothecation. It is common to use borrowed money to purchase real estate. When a borrower gives a note promising to repay the borrowed money and executes a mortgage on the real estate for which the money is being borrowed as security, the financing method is called mortgage financing. The term “mortgage financing” also applies to real estate loans secured by a deed of trust. The process of securing a loan by pledging a property without giving up ownership of the property is called hypothecation.

Lien theory vs. title theory. States differ in their interpretation of who owns mortgaged property. Those that regard the mortgage as a lien held by the mortgagee (lender) against the property owned by the mortgagor (borrower) are called lien-theory states. Those that regard the mortgage document as a conveyance of ownership from the mortgagor to the mortgagee are called title-theory states. Some states interpret ownership of mortgaged property from a point of view that combines aspects of both title and lien theory. Florida is considered a lien-theory state.

Loan instruments       

A valid mortgage or trust deed financing arrangement requires

  • a note as evidence of the debt
  • the mortgage or trust deed as evidence of the collateral pledge

Promissory note.  In addition to executing a mortgage or trust deed, the borrower signs a promissory note for the amount borrowed. The amount of the loan is typically the difference between the purchase price and the down payment. A promissory note creates a personal liability for the borrower to repay the loan.

A borrower who executes a promissory note is the maker or payer of the note. The lender is the payee. To be properly executed, all parties who have an interest

in the property should sign the note. The note sets forth:

  • the loan amount
  • the term of the loan
  • the method and timing of repayment
  • the interest rate to be paid
  • the borrower’s promise to pay

The note may also state that it is payable to the bearer, if used with a deed of trust, or to the mortgagee, if used with a mortgage. Other items in the mortgage document or deed of trust may be repeated in the promissory note, especially:

  • the right to prepay the loan balance
  • charges for late payment
  • conditions for default
  • notifications and cures for default
  • other charges

A promissory note is a negotiable instrument, which means the payee may assign it to a third party. The assignee would then have the right to receive the

borrower’s periodic payments.

Mortgage instrument. A mortgage is a legal document stating the pledge of the borrower to the lender. The mortgage document pledges the borrower’s ownership interest in the real estate in question as collateral against performance of the debt obligation.

A borrower who executes a mortgage is a mortgagor. The lender named in the mortgage is the mortgagee. In a trust deed, the borrower is the trustor and the lender is beneficiary. The mortgage or trust document identifies the property being given as security, giving both its legal description and mailing address. The document contains much of the same information as the note, including:

  • the debt amount
  • the term of the loan
  • method and timing of payments

The document does not usually provide details about the payment amount, interest rate, or charges.

Mortgage priority       

First mortgages vs. junior mortgages. As discussed in Section 9 under “Liens,” lien priority determines the order of the liens’ claims on the security underlying the debt. The highest ranking lien is first to receive proceeds from the foreclosed and liquidated security. The lien with lowest priority is last in line. The owner receives any sale proceeds that remain after all lienors receive their due.

Lien priority is of paramount concern to the creditor, since it establishes the level of risk in recovering loaned assets in the event of default. Date of recording determines priority. The rule is: the earlier the recording date of the lien, the higher its priority.

Subordination agreements. Also as discussed in Section 9, a lienor can change the priority of a lien by voluntarily agreeing to subordinate, or lower, the lien’s position in the hierarchy. This change is often necessary when a mortgage lender will not originate a mortgage loan unless it is senior to all other junior liens on the property. The lender may require the borrower to obtain agreements from other lien holders to subordinate their liens to the new mortgage.