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23. Is the mother's assertion correct?
After the man later missed five payments to his mother, she commenced a foreclosure action. While the action was pending, the mother learned of the bank's loan modification. The mother asserted that her mortgage had become a first lien on the home and that the bank's mortgage had become a second lien.
The man later lost his job and was struggling to make loan payments to both the bank and his mother. To accommodate the man's financial situation, the bank extended the amortization period of its loan to substantially reduce the amount of each monthly payment. The bank did not alter the interest rate or increase the principal amount of the loan. At the time of the modification of the bank loan, the man was not in default in his payments to his mother. Neither the bank nor the man informed the mother of the modification of the bank loan.
A man borrowed $150,000 from a bank to remodel his home and executed a promissory note agreeing to repay the loan over a 10-year period. The loan was secured by a mortgage on the home. The bank promptly recorded the mortgage, which was the only lien on the home at that time. Several months later, the man borrowed $40,000 from his mother in order to purchase a new truck and gave his mother a mortgage on the home to secure repayment of the debt. The mother promptly recorded the mortgage.
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The general rule of priority is the same for real property security as for personal property security: the first in time to give notice of the secured interest is first in right. For real property, the notice is by recording the mortgage. Prior consent of a junior interest holder is not required to modify a senior mortgage.
Liens that have attached to the title before the mortgage lien are senior to, or prior to, the mortgage lien. Those attaching afterward are junior or subordinate. The purpose of this priority is to establish the order in which lienholders are entitled to foreclose their liens and recover their debts. If a property's title has multiple mortgage liens and the loan secured by a first mortgage is paid off, the second mortgage lien will move up in priority and become the new first mortgage lien on the title.
Lien priority can be affected by the modification of the mortgage. Where there is both a senior mortgage and a junior mortgage, modifications to the senior mortgage that are detrimental to the junior mortgage, such as raising the interest rate or the principal amount, thus making it more burdensome, will give the junior mortgage priority.
A is correct. The bank modified the loan to the man by extending the amortization period to reduce the monthly payment amount, but it did not change the interest rate or the principal amount on the loan itself. As a result, the bank's modification was not detrimental to the security interest held by the mother, and as a result, she will not be able to take priority over the bank's senior mortgage.
B is incorrect. This answer reaches the correct answer with the wrong reasoning. The mother's assertion is incorrect, but not because the man had not defaulted on the loan from his mother when the bank modified its loan to the man. The timing of the man's default is irrelevant in determining whether the bank's modification was detrimental to the mother's junior interest. Without raising the interest rate or otherwise making it more burdensome, this type of modification is not detrimental and the junior interest will not take priority.
C is incorrect. There is no requirement that the junior interest holder (the mother) must give consent before the senior interest holder (the bank) may modify its loan to the borrower (the man). Both the bank and the mother properly recorded their respective mortgages, which satisfied any notice requirements for real property security.
D is incorrect. The dispositive issue is whether the bank's loan modification was detrimental to the mother's interest, not whether the modification was «material.» As explained above, because the bank did not increase the interest rate or the principal loan amount, the modification was not detrimental and the mother's interest will not take priority.