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4. The bank is entitled to collect a deficiency judgment against
In an appropriate foreclosure action, the bank joined the woman, her friend, and the son as defendants. At the foreclosure sale, although the fair market value for Woodsedge in its depreciated state was obtained, a deficiency resulted.
There is no applicable statute or regulation.
After the son made three timely payments, no further payments were made by any party. In fact, the real estate had depreciated to a point where it was worth less than the debt.
A woman owned Woodsedge, a tract used for commercial purposes, in fee simple and thereafter mortgaged it to a bank. She signed a promissory note secured by a duly executed and recorded mortgage. There was no «due on sale» clause, that is, no provision that, upon sale, the whole balance then owing would become due and owing. The woman conveyed Woodsedge to a friend «subject to a mortgage to the bank, which the grantee assumes and agrees to pay.» The friend conveyed Woodsedge to his son «subject to an existing mortgage to the bank.» A copy of the note and the mortgage that secured it had been exhibited to each grantee.
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A mortgage is valid between the parties whether or not it is recorded, but a mortgagee might lose to a third party- another mortgagee or a good-faith purchaser of the property — unless the mortgage is recorded.
The property can be sold without paying off the mortgage if the mortgage is assumed by the new buyer, who agrees to pay the seller's (the original mortgagor's) debt. This is a novation if, in approving the assumption, the bank releases the old mortgagor and substitutes the buyer as the new debtor.
The buyer need not assume the mortgage. If the buyer purchases the property without agreeing to be personally liable, this is a sale «subject to» the mortgage. In the event of the seller's subsequent default, the bank can foreclose the mortgage and sell the property that the buyer has purchased, but the buyer is not liable for any deficiency.
B is correct. As explained above, a mortgagor is free to transfer the title of property BUT: (i) the mortgagor remains personally liable on the mortgage; and (ii) all subsequent grantees take the property subject to the mortgage. Further, subsequent grantees do not become personally liable on the mortgage unless they explicitly assume the mortgage. Subsequent grantees can lose the land through foreclosure if the mortgage is not paid.
In this case, the woman is the mortgagor, and she was not fully released from the obligations of the mortgage because she did not get a novation from the bank. The friend explicitly assumed and agreed to pay the mortgage, so he will also be personally liable for the mortgage.
A is incorrect. Although the woman will still be personally liable for the mortgage because she did not receive a novation releasing her from liability by the bank, the friend will also be personally liable because he assumed the responsibility of the mortgage and agreed to pay it.
C is incorrect. As explained above, the woman did not get a novation relieving her of liability from the bank, so she would still be liable on the mortgage. The son only took the property subject to the mortgage, so he is not personally liable for the debt.
D is incorrect. As explained above, the son will not be personally liable for the mortgage because he did not personally assume the mortgage.