Black-letter propositions
- 01
A due-on-sale clause authorizes the lender to declare the loan due if the property or an interest in it is sold or transferred without the lender's consent, and federal law lets a lender enforce it despite contrary state law, subject to exceptions for residential loans on fewer than five units such as a transfer by devise or on the death of a joint tenant, to a relative after the borrower's death, to a spouse or children, in a divorce, or into a trust of which the borrower remains a beneficiary.
- 02
A grantee who takes subject to a mortgage is not personally liable on the debt; under New York General Obligations Law section 5-705, a grantee is not liable on the mortgage debt or any deficiency unless the grantee signs and acknowledges a written statement assuming and agreeing to pay it, which may be part of the deed.
- 03
After the mortgage is satisfied the mortgagee must record a certificate of discharge, and in California the beneficiary of a deed of trust must deliver reconveyance documents to the trustee within 30 days and the trustee must record the reconveyance within 21 days of receiving them.
- 04
Under California's nonjudicial foreclosure statute, a trustee under a power of sale must first record a notice of default, wait at least three months, and then give notice of sale, and a borrower or junior lienholder may cure a default and reinstate the loan by paying what is due within the statutory period.
- 05
California allows a lender only one form of action to enforce a mortgage, a judicial foreclosure in which the court may order a sale and, unless a deficiency is waived or barred, determine personal liability for a shortfall, while a sale under a power of sale bars any deficiency judgment against the borrower, though a guarantor's liability is unaffected.
- 06
The most common foreclosure processes are a court proceeding, called judicial foreclosure, and a sale under a power of sale in the mortgage or deed of trust; the law of the place where the property lies governs, and an acceleration clause lets the lender declare the whole debt due on default.
- 07
A defaulting mortgagor's equity of redemption lets the mortgagor pay the debt to keep the property before the sale, and in many jurisdictions a statutory right of redemption exists after the sale, such as Minnesota's six months to redeem by paying the price with interest; any surplus after debts and liens goes to the mortgagor.
- 08
Under BFP v. Resolution Trust Corp., the price received at a foreclosure sale that complies with the state foreclosure law is a reasonably equivalent value for purposes of the bankruptcy fraudulent transfer provision, whether or not it equals fair market value.
- 09
Subrogation is the process by which one party assumes the legal rights of another, typically by substituting for a creditor, so that a party who pays off a debt may step into the creditor's position.
Use this attack sequence under time
Frame the issue
Identify the transfer or default and ask whether the lender may invoke a due-on-sale clause or an exception applies.
Resolve the next checkpoint
Decide whether the transferee assumed the debt in the required writing or took only subject to the mortgage.
Resolve the next checkpoint
Trace the foreclosure steps the statute requires, and check that junior lienholders were joined to be cut off.
Finish the conclusion
Compute any deficiency or surplus, note anti-deficiency limits, and address redemption before and after sale.
Common wrong turns
- A buyer who takes subject to the mortgage risks the property but is not personally liable, while a buyer who assumes is personally liable to the lender.
- Federal law preempts state limits on due-on-sale clauses, but not for the listed protected transfers of small residential loans.
- A foreclosure sale cuts off only interests that were joined in the foreclosure, so an unjoined junior lienholder keeps its lien.
Worked example
A homeowner dies, leaving her house, which is subject to a mortgage with a due-on-sale clause, to her son by will. The lender declares the loan due on the transfer.
Under the federal statute, a lender may not exercise a due-on-sale clause on a residential loan on a property with fewer than five units on a transfer to a relative resulting from the borrower's death. The son may take the house subject to the mortgage, and the lender may not accelerate solely because of the transfer.
Practice this topic
Transfers and discharge
The federal statute at 12 U.S.C. section 1701j-3 defines a due-on-sale clause as a contract provision authorizing a lender to declare the loan due if all or part of the property, or an interest in it, is sold or transferred without the lender's prior written consent, and it lets a lender enforce such a clause despite contrary state law. Subsection (d) lists transfers on which a lender may not exercise the option for residential loans on fewer than five dwelling units, including the creation of a subordinate lien that does not transfer occupancy rights, transfer by devise, descent or operation of law on the death of a joint tenant or tenant by the entirety, a lease of three years or less without a purchase option, transfer to a relative on the borrower's death, a transfer in which the borrower's spouse or children become owners, a transfer under a dissolution decree, and a transfer to an inter vivos trust in which the borrower remains a beneficiary.
New York General Obligations Law section 5-705 says no grantee of real property is liable on a mortgage debt or a deficiency unless the grantee simultaneously with the conveyance signs and acknowledges a written statement assuming and agreeing to pay the debt, stating the amount. California Civil Code section 2941 requires a mortgagee to record a certificate of discharge within 30 days after the mortgage is satisfied, and requires the beneficiary of a deed of trust, within 30 days after satisfaction, to deliver the documents for reconveyance to the trustee, who must record the reconveyance within 21 days.
Foreclosure procedure and cure
Cornell's Wex entry says foreclosure is the process by which a mortgagee takes mortgaged property from a defaulting mortgagor, that foreclosure is governed by the law of the place where the property lies, and that an acceleration clause lets the mortgagee declare the entire debt due. It describes judicial and nonjudicial foreclosure, and it notes that in some jurisdictions a borrower may undo acceleration by making up past-due payments and compensating the mortgagee.
California Civil Code section 2924 conditions the exercise of a power of sale on recording a notice of default, waiting not less than three months from that filing, and then giving notice of sale for the time section 2924f requires. Section 2924c lets the borrower, the borrower's successor, or a subordinate lienholder pay the amounts in default and reasonable costs and thereby cure the default within the statutory period. Code of Civil Procedure section 726 provides one form of action to enforce a mortgage, in which the court may order the sale and determine personal liability for a deficiency unless it is waived or barred by section 580b.
Deficiency, redemption, and value
Code of Civil Procedure section 580d bars any deficiency on a note secured by a deed of trust or mortgage when the property has been sold under a power of sale, without affecting the liability of a guarantor, pledgor or surety. Wex defines a deficiency judgment as money awarded to a creditor when the asset securing a loan does not cover the debt, available only in states that recognize deficiency judgments for that type of debt.
Wex describes the equity of redemption as a defaulting mortgagor's right to keep the property by discharging the debt, and says many jurisdictions also give a statutory right of redemption within six months after the sale and entitle the mortgagor to any surplus. Minnesota Statutes section 580.23 gives a mortgagor six months after the sale to redeem by paying the sale price with interest. In BFP v. Resolution Trust Corp., the Supreme Court held that a reasonably equivalent value for foreclosed real property is the price actually received at a foreclosure sale, so long as the requirements of state foreclosure law were met.
Frequently asked questions
What is the controlling rule for mortgage transfers, discharge, foreclosure procedure, deficiencies, and redemption?+
Say what transfer occurred and whether the due-on-sale clause is enforceable, whether the transferee assumed, how foreclosure proceeded, and what deficiency, surplus or redemption rights follow.
What is a due-on-sale clause?+
A provision that lets a lender declare the loan due if the property is sold or transferred without the lender's consent, enforceable under 12 U.S.C. section 1701j-3.
Is a buyer who takes subject to a mortgage personally liable?+
No. Under provisions like New York General Obligations Law section 5-705, a grantee is not liable unless the grantee signs and acknowledges a statement assuming the debt.
How long does a lender have to reconvey after payoff in California?+
The beneficiary has 30 days to deliver documents to the trustee, who must record the reconveyance within 21 days of receiving them, under Civil Code section 2941.
Is a deficiency allowed after a nonjudicial sale in California?+
No. Code of Civil Procedure section 580d bars a deficiency after a sale under a power of sale, though a guarantor may still be liable.
What price counts as reasonably equivalent value at a foreclosure?+
The price actually received at a foreclosure sale that complied with state law, according to BFP v. Resolution Trust Corp.