NC Bar Exam: Mortgages 2012
MORTGAGES
I. Sources of Law:
1. Contract. Debtor gives (1) a promise to repay the debt, and (2) a lien on the property to secure the debt to
the creditor. The creditor gives money or credit to the debtor.
i. All traditional contract issues are still relevant!
1. Consideration:
2. Statute of Frauds:
a. Mortgage must be in writing [conveyance of land]
3. Duress:
a. Mere threat to sue is not duress
b. NC courts will not find duress if the amount of mortgage is close to the amount
of actual loss
2. Real Property. That which is conveyed by the debtor is a conditional interest in real estate (lien).
i. Mortgage must be in writing;
ii. Mortgage must be signed;
iii. To be effective against third parties, must be recorded; and
iv. Mortgage must be for land owned by the mortgagor.
3. Ancient Principles. A person should be divested of his land only where there is no other option. The law
favors the alienability of real property interests and disfavors restraints on alienation.
II. Finding a Mortgage.
1. A Court will reform the parties written document conveying an absolute deed on its face (satisfaction of a
debt) into a mortgage (security on a debt) only where:
i. There is clear and convincing evidence that a reconveyance clause was omitted because of
1. Ignorance;
2. Mutual mistake;
3. Fraud by the grantee; or
4. Duress by the grantee
ii. **May consider the relative sophistication of the parties**
2. Factors in favor of finding a mortgage:
i. The value of the property conveyed is greatly in excess of the amount of the original debt.
ii. After default, the original grantee demands that the original grantor “repay the money you owe!”
iii. After the transfer the original grantor remains on the property and exercises major destructive
acts of ownership.
3. Factors against finding a mortgage:
i. Only evidence that a mortgage was intended is the original grantor’s assertion that the property
was only transferred to secure the prior debt.
ii. The original grantor remains in possession and makes periodic payments to the grantor.
iii. The grantee was much more sophisticated than the grantor.
III. Scope of the Mortgage:
1. Improvements to Property. The mortgage interest of the mortgagee extends to later improvement on the
property if those improvement are permanently affixed to the real estate.
i. If the property is occupied by a tenant of the mortgagor, the mortgage does not extend to any
improvement that the tenant has a right to remove (i.e., trade fixtures)
, NC Bar Exam: Mortgages 2012
2. After-Acquired Property. In North Carolina, it is not possible for the mortgagee to claim an interest in the
mortgagor’s after-acquired property and have its priority date back to the time of the filing of the original
mortgage.
i. For a real property mortgage, North Carolina requires that there be a new filing as to any after-
acquired property. As to the new property, the mortgagee’s priority fates from the time of the new
filing.
IV. Debtor’s Freedom to Deal with the Mortgaged Property
1. Absent other facts, the debtor is free to sell the mortgaged property or subject it to additional mortgages.
Any later buyer or mortgagee takes the property subject to the prior mortgage.
2. The original mortgagee may stipulate that the balance of the mortgage debt will be “due on sale” of the
property. Such a provision makes the sale a default if the mortgage is not satisfied at closing.
3. A buyer of the mortgaged property is not automatically liable on the mortgage debt. Such liability arises
only if the buyer manifests an intent to assume the mortgage debt. Absent any manifestation, the buyer
purchases the land subject to the mortgage.
V. Essential Rules:
1. Formalities. A mortgage must be in writing to be valid. It is effective against third parties only if it is
recorded. Fraud, a lack of consideration, or any other basic contract defect will void a mortgage
transaction.
i. General North Carolina Rule: An agreement between a new buyer and the mortgagee which
modified the debt or releases collateral will produce some discharge of the original mortgagor.
1. Analysis:
a. Did the buyer assume the mortgage debt, or merely take subject to it?
b. Was the alteration in the contract a release of collateral, or some other type of
chance?
i. Release of Collateral: where there is a release of collateral, the original
mortgagor is discharged to the extent of the improved value of the
collateral released. This is true whether the buyer has assumed the
mortgage debt or taken subject to it.
ii. Other Modifications:
1. Buyer assumed mortgage original mortgagor is completely
discharged
2. Buyer took subject to the mortgage original mortgagor is
discharged to the extent of the value of the remaining collateral.
2. Sales of Mortgaged Property. There is no general prohibition on selling mortgaged property. The buyer,
however, takes the property subject to the mortgage. A buyer is not liable for the mortgage debt unless he
or she specifically assumes it.
i. Assumption of the Debt: Transferee becomes personally liable to the mortgagee for the unpaid
balance of the debt. Obligation of the transferee is in additional to that of the mortgagors. In
default, the mortgagee can proceed against the land, the transferee, or the mortgagor.
1. Effective if the buyer tells the seller that she will assume the debt, or if the buyer tells
only the mortgagor that she will assume the debt.
ii. Subject to the Mortgage: Transferee is not personally liable to the mortgagee. If there is a default,
the mortgagee can look to the property or he can look to the mortgagor – no right to collect the
balance of the debt from the transferee.
iii. Novation: explicit agreement by the creditor (mortgagee) to accept the buyer (transferee) as a
substitute for the original debtor (mortgagor)
MORTGAGES
I. Sources of Law:
1. Contract. Debtor gives (1) a promise to repay the debt, and (2) a lien on the property to secure the debt to
the creditor. The creditor gives money or credit to the debtor.
i. All traditional contract issues are still relevant!
1. Consideration:
2. Statute of Frauds:
a. Mortgage must be in writing [conveyance of land]
3. Duress:
a. Mere threat to sue is not duress
b. NC courts will not find duress if the amount of mortgage is close to the amount
of actual loss
2. Real Property. That which is conveyed by the debtor is a conditional interest in real estate (lien).
i. Mortgage must be in writing;
ii. Mortgage must be signed;
iii. To be effective against third parties, must be recorded; and
iv. Mortgage must be for land owned by the mortgagor.
3. Ancient Principles. A person should be divested of his land only where there is no other option. The law
favors the alienability of real property interests and disfavors restraints on alienation.
II. Finding a Mortgage.
1. A Court will reform the parties written document conveying an absolute deed on its face (satisfaction of a
debt) into a mortgage (security on a debt) only where:
i. There is clear and convincing evidence that a reconveyance clause was omitted because of
1. Ignorance;
2. Mutual mistake;
3. Fraud by the grantee; or
4. Duress by the grantee
ii. **May consider the relative sophistication of the parties**
2. Factors in favor of finding a mortgage:
i. The value of the property conveyed is greatly in excess of the amount of the original debt.
ii. After default, the original grantee demands that the original grantor “repay the money you owe!”
iii. After the transfer the original grantor remains on the property and exercises major destructive
acts of ownership.
3. Factors against finding a mortgage:
i. Only evidence that a mortgage was intended is the original grantor’s assertion that the property
was only transferred to secure the prior debt.
ii. The original grantor remains in possession and makes periodic payments to the grantor.
iii. The grantee was much more sophisticated than the grantor.
III. Scope of the Mortgage:
1. Improvements to Property. The mortgage interest of the mortgagee extends to later improvement on the
property if those improvement are permanently affixed to the real estate.
i. If the property is occupied by a tenant of the mortgagor, the mortgage does not extend to any
improvement that the tenant has a right to remove (i.e., trade fixtures)
, NC Bar Exam: Mortgages 2012
2. After-Acquired Property. In North Carolina, it is not possible for the mortgagee to claim an interest in the
mortgagor’s after-acquired property and have its priority date back to the time of the filing of the original
mortgage.
i. For a real property mortgage, North Carolina requires that there be a new filing as to any after-
acquired property. As to the new property, the mortgagee’s priority fates from the time of the new
filing.
IV. Debtor’s Freedom to Deal with the Mortgaged Property
1. Absent other facts, the debtor is free to sell the mortgaged property or subject it to additional mortgages.
Any later buyer or mortgagee takes the property subject to the prior mortgage.
2. The original mortgagee may stipulate that the balance of the mortgage debt will be “due on sale” of the
property. Such a provision makes the sale a default if the mortgage is not satisfied at closing.
3. A buyer of the mortgaged property is not automatically liable on the mortgage debt. Such liability arises
only if the buyer manifests an intent to assume the mortgage debt. Absent any manifestation, the buyer
purchases the land subject to the mortgage.
V. Essential Rules:
1. Formalities. A mortgage must be in writing to be valid. It is effective against third parties only if it is
recorded. Fraud, a lack of consideration, or any other basic contract defect will void a mortgage
transaction.
i. General North Carolina Rule: An agreement between a new buyer and the mortgagee which
modified the debt or releases collateral will produce some discharge of the original mortgagor.
1. Analysis:
a. Did the buyer assume the mortgage debt, or merely take subject to it?
b. Was the alteration in the contract a release of collateral, or some other type of
chance?
i. Release of Collateral: where there is a release of collateral, the original
mortgagor is discharged to the extent of the improved value of the
collateral released. This is true whether the buyer has assumed the
mortgage debt or taken subject to it.
ii. Other Modifications:
1. Buyer assumed mortgage original mortgagor is completely
discharged
2. Buyer took subject to the mortgage original mortgagor is
discharged to the extent of the value of the remaining collateral.
2. Sales of Mortgaged Property. There is no general prohibition on selling mortgaged property. The buyer,
however, takes the property subject to the mortgage. A buyer is not liable for the mortgage debt unless he
or she specifically assumes it.
i. Assumption of the Debt: Transferee becomes personally liable to the mortgagee for the unpaid
balance of the debt. Obligation of the transferee is in additional to that of the mortgagors. In
default, the mortgagee can proceed against the land, the transferee, or the mortgagor.
1. Effective if the buyer tells the seller that she will assume the debt, or if the buyer tells
only the mortgagor that she will assume the debt.
ii. Subject to the Mortgage: Transferee is not personally liable to the mortgagee. If there is a default,
the mortgagee can look to the property or he can look to the mortgagor – no right to collect the
balance of the debt from the transferee.
iii. Novation: explicit agreement by the creditor (mortgagee) to accept the buyer (transferee) as a
substitute for the original debtor (mortgagor)
