Black-letter propositions
- 01
A mortgage transfers an interest in land as security for a loan; the borrower is the mortgagor and the lender the mortgagee, and California defines it as a contract by which specific property is hypothecated for the performance of an act without a change of possession.
- 02
Three theories describe who holds title: under title theory the mortgagee holds title, under lien theory, which most states follow, legal title stays with the mortgagor until foreclosure, and under the intermediate theory the lien theory applies until default and the title theory afterward.
- 03
A deed of trust involves a lender, a borrower who conveys an interest to a trustee as security for a promissory note, and the trustee, usually a title company; it almost always contains a power of sale allowing nonjudicial foreclosure without a court order.
- 04
An installment land contract, which California calls a real property sales contract, is an agreement to convey title on satisfaction of specified conditions, usually payment over time, where conveyance is not required within one year; where it contains a power of sale, California treats it as a mortgage for its foreclosure statutes.
- 05
A deed that is absolute in form but was given as security for a debt is treated in equity as a mortgage, parol evidence is admissible to show that intent, and the proof must be clear and convincing; a grantor's affidavit that the deed was absolute is not conclusive.
- 06
A borrower cannot waive, in the loan documents, the protections the foreclosure statutes give, and such an agreement is void in California; this reflects the rule against clogging the equity of redemption, which lets a mortgagor recover the property by paying the debt.
- 07
Purchase-money protections: in California no deficiency is owed after a sale for the purchaser's failure to complete a contract of sale, under a deed of trust or mortgage given to the vendor for the balance of the price, or on a loan for a dwelling of not more than four families that the purchaser occupies and that was used to buy it, and refinancing generally keeps the protection except as to new advances.
- 08
A defaulting mortgagor's equity of redemption lets the mortgagor redeem before foreclosure by paying the debt, and in many jurisdictions a statutory right of redemption follows the sale, with any surplus going to the mortgagor.
Use this attack sequence under time
Frame the issue
Identify the device and its parties: mortgage, deed of trust with trustee, or installment contract with vendor and vendee.
Resolve the next checkpoint
Determine which title theory the jurisdiction follows if title matters to the question.
Resolve the next checkpoint
If a deed absolute in form was given for a loan, look for evidence of intent to secure a debt and apply the clear-and-convincing standard.
Finish the conclusion
Check whether an anti-deficiency rule protects the borrower because the loan was purchase money or the sale was nonjudicial.
Common wrong turns
- Most states follow lien theory, so the mortgagor holds legal title until foreclosure and can convey and lease it.
- A deed absolute in form is not a sale if the parties meant it as security, but the borrower must prove that intent by clear and convincing evidence.
- An anti-deficiency rule protects the borrower from a personal judgment for a shortfall, and a guarantor may still be liable.
Worked example
A borrower deeds his land to a lender by a deed that says it conveys the land absolutely, in exchange for a $200,000 loan, with a side letter promising to reconvey when the loan is repaid. The lender sells the land to a third party after the borrower defaults.
The deed absolute in form may be shown to be a mortgage because it was made to secure the loan, though the borrower must prove that by clear and convincing evidence. If it is a mortgage, the lender must foreclose, and its sale to the third party may not have cut off the borrower's equity of redemption.
Practice this topic
Mortgages and deeds of trust
Cornell's Wex entry says a mortgage involves the transfer of an interest in land as security for a loan or other obligation. It identifies the mortgagor as the party transferring the interest and the mortgagee as the lender, and it describes three theories of title. Under the title theory, title to the security interest rests with the mortgagee. Most states follow the lien theory, under which legal title remains with the mortgagor unless there is foreclosure. The intermediate theory applies the lien theory until default and then the title theory. The entry lists judicial foreclosure and power of sale foreclosure as the most common processes.
Wex describes a deed of trust as a secured real estate transaction some states use instead of mortgages, with three parties, a lender, a borrower and a trustee. The borrower gives promissory notes and transfers a real property interest to the trustee as security. Deeds of trust almost always include a power-of-sale clause that allows nonjudicial foreclosure without a court order. California Civil Code section 2920 defines a mortgage as a contract by which specific property is hypothecated for the performance of an act without the necessity of a change of possession.
Installment contracts and deeds absolute
California Civil Code section 2985 defines a real property sales contract as an agreement in which one party agrees to convey title to real property to another upon satisfaction of specified conditions and which does not require conveyance of title within one year of its formation. Section 2920(b) treats a real property sales contract that contains a power of sale as a mortgage for purposes of the nonjudicial foreclosure sections.
In Beeler v. American Trust Co., the California Supreme Court held that a deed absolute in form was in fact an equitable mortgage. It said that clear and convincing evidence is required before a court finds that a deed that purports to convey land absolutely was intended as a mortgage, that parol evidence may show the character of the instrument, and that a contemporaneous affidavit declaring the transaction to be an absolute conveyance is not a conclusive criterion. The court quoted the basic doctrine that a conveyance made as security for the performance of an obligation is, in equity, a mortgage.
Anti-deficiency and waiver rules
California Code of Civil Procedure section 580b provides that no deficiency shall be owed or collected, and no deficiency judgment shall lie, after a sale for the purchaser's failure to complete a contract of sale, under a deed of trust or mortgage given to the vendor to secure the balance of the purchase price, or under a deed of trust or mortgage on a dwelling of not more than four families given to a lender to secure a loan used to pay the purchase price of that dwelling, which the purchaser occupies. Subdivision (b) extends the protection to refinances of a purchase money loan, except to the extent of new principal advanced that is not applied to the purchase money loan or related costs.
Civil Code section 2953 says any agreement by a borrower, made with a loan secured by a real property lien, to waive the rights conferred by specified foreclosure sections is void. Wex's entry on equity of redemption says the mortgagor's right to redeem by paying the debt and, in many jurisdictions, a statutory right of redemption within six months after the sale and entitlement to surplus from the sale.
Frequently asked questions
What is the controlling rule for security devices: mortgages, deeds of trust, installment contracts, and deeds absolute?+
Name the security device, state the title theory, test for recharacterization of an absolute deed, and address anti-deficiency and redemption protections.
What is the difference between title theory and lien theory?+
Under title theory the mortgagee holds title to the security interest, while under lien theory, which most states follow, legal title stays with the mortgagor until foreclosure, according to Cornell's Wex entry.
Who are the parties to a deed of trust?+
A lender, a borrower, and a trustee who holds an interest in the property as security, usually with a power of sale for nonjudicial foreclosure.
Can a deed that says it is absolute be treated as a mortgage?+
Yes. Beeler v. American Trust Co. held that a deed absolute in form may be shown by parol evidence to be an equitable mortgage, on clear and convincing evidence.
What does a real property sales contract require?+
An agreement to convey title on satisfaction of specified conditions where conveyance is not required within one year, under California Civil Code section 2985.
Who is protected by California's purchase-money anti-deficiency rule?+
Vendors' borrowers and purchasers of owner-occupied dwellings of not more than four families whose loan paid the purchase price, under Code of Civil Procedure section 580b.