17.3 Financing, Mortgages, Liens & Foreclosure

The PCCE tests secured real-estate credit as a documents-and-priority skill. Domain 2 asks which paper is the note, which paper is the mortgage or deed of trust, who is ahead in a foreclosure, and what a lien is. State statutes vary on lien theory versus title theory, judicial versus power-of-sale foreclosure, redemption, and anti-deficiency rules. Do not invent a current APR or a nationwide foreclosure timeline.

Note versus mortgage or deed of trust

The promissory note is the borrower's personal promise to pay. It states principal, interest, payment schedule, default, and often a due-on-sale clause. It is a contract. It is not the lien.

The mortgage is a two-party security instrument: mortgagor (borrower) and mortgagee (lender). It pledges the land to secure the note.

A deed of trust is a three-party security instrument used in many states: trustor (borrower), beneficiary (lender), and trustee (a third person with a power of sale). Functionally it is a mortgage substitute. On a stem, count the parties before you pick the label.

If the note is sold, the security typically follows the note. A recorded assignment of mortgage (or assignment of the deed of trust) is how the public record shows the new holder.

Lien theory versus title theory

In a lien-theory state, the borrower keeps legal title; the lender holds a lien. Foreclosure is often judicial.

In a title-theory state, the lender (or trustee) holds legal title until the debt is paid; the borrower has equity and possession. Power-of-sale foreclosure is common.

Intermediate-theory states treat the lender as getting title only on default. The PCCE wants the concept, not a 50-state map. If the stem names the theory, use it to predict who has title and which foreclosure path is likely.

Priority, purchase-money mortgages, and junior liens

Default priority is first in time, first in right, subject to the recording act. A later recorded mortgage is junior to an earlier recorded mortgage. Foreclosure of a senior lien generally wipes out junior liens (they may still have a claim to surplus). Foreclosure of a junior lien does not wipe out a senior lien; the buyer takes subject to the senior.

A purchase-money mortgage (PMM) secures the funds that enabled the buyer to acquire the land — vendor financing or a third-party purchase loan. As between the PMM and other claims against the buyer, a PMM often has superpriority in the acquired parcel. Do not assume a PMM beats a pre-existing tax lien or a properly perfected earlier interest in every state.

Subordination and release agreements change priority by contract. A future-advance or dragnet clause can let a recorded mortgage secure later advances; later-advance priority is statute-specific.

Liens in one paragraph

Voluntary liens are given by agreement — mortgages and deeds of trust. Involuntary liens are statutory (mechanic's, tax, assessment) or judicial (judgment, attachment). Liens are also specific, attaching to one parcel, or general, reaching all of the debtor's property in the jurisdiction. A mortgage is voluntary and specific; a judgment lien is judicial and typically general.

Section 17.4 takes the whole subject — mechanic's lien notice sequences and relation-back priority, judgment liens, property and federal tax liens, association super-liens, the priority exceptions, and the release paperwork that actually clears a lien off the record.

Foreclosure, redemption, deficiency, deed in lieu

Judicial foreclosure is a lawsuit that ends in a court-ordered sale. It is common in lien-theory states and is the only method in some jurisdictions.

Power-of-sale (nonjudicial) foreclosure follows the deed-of-trust power and a statutory notice sequence. No lawsuit is required if the instrument and statute authorize it. State variation is the exam point.

Equity of redemption is the borrower's right to pay the full accelerated debt before the sale and stop foreclosure. Statutory redemption, where it exists, is a post-sale period to redeem from the purchaser. Do not invent a nationwide redemption period.

If the sale price is less than the debt, the lender may seek a deficiency judgment on the note — unless an anti-deficiency statute blocks it (often for purchase-money residential loans). If the sale produces a surplus, juniors and then the borrower take in order.

A deed in lieu of foreclosure is a voluntary deed from borrower to lender to avoid sale. It does not automatically wipe junior liens; the lender who accepts a deed in lieu can take the land still burdened by juniors. That is why lenders run title and often still foreclose.

A short sale is a sale for less than the debt with the lender's consent. It is not a foreclosure.

RESPA, TILA, and TRID — paralegal awareness

Do not memorize or invent a current APR number. Learn the statutes' jobs.

TILA (Truth in Lending Act) requires disclosure of credit terms, including the APR as a uniform cost measure, and gives a right of rescission for certain refinances of a principal dwelling (commonly three business days). It does not set the interest rate.

RESPA (Real Estate Settlement Procedures Act) applies to most federally related mortgage loans on 1–4 family homes. It bans kickbacks and unearned referral fees for settlement services, regulates servicing transfers and escrow accounts, and works with TILA on closing disclosures.

TRID (the TILA-RESPA Integrated Disclosure rule, from the CFPB) replaced the old overlapping forms for most closed-end consumer mortgages. The lender gives a Loan Estimate (generally within three business days after application) and a Closing Disclosure (generally at least three business days before consummation). HUD-1 is the historical settlement statement for those consumer loans; do not treat HUD-1 as the current federal consumer form. Some commercial, cash, or exempt deals still use a settlement statement that is not a TRID Closing Disclosure.

A paralegal calendars TRID waiting periods, collects fee worksheets, and does not quote an APR as legal advice.

Path. Borrower signs a note and a deed of trust to Bank. A later home-equity lender records a second deed of trust. Bank forecloses by power of sale. The sale wipes the junior HELOC as a lien on the land (the junior may claim surplus or sue on its own note, depending on the facts). If instead Borrower offers Bank a deed in lieu, Bank must re-check title because the HELOC may survive.

Term-swap. Note is the promise to pay. Mortgage is two-party security. Deed of trust adds a trustee and often a power of sale. Lien theory leaves title in the borrower. PMM is purchase-money. Equity of redemption is pre-sale. Statutory redemption is post-sale where it exists. TRID Closing Disclosure is the current consumer form; HUD-1 is historical for those loans.