Agenda for 20 th Class

1. Agenda for 20th Class • Admin stuff • Name plates • Handouts • Slides • Co-ownership • Altman Fall 2017 exam • Review of last class • Recording (continued) • Mortgages

2. Assignment for Next Class I • Review any questions we did not discuss in class today • Read Co-ownership handout • Questions to think about / Writing Assignments • Do you think the court reached the right outcome in Martin v Martin as a matter of justice and policy? (WG1) • Do you think the court reached the right outcome in Harms v Sprague as a matter of justice and policy? (WG2) • If you were loaning money in Illinois in 1985 to someone who offered her interest in jointly owned property as collateral, what could you do to protect yourself? (WG3) • Son and daughter are joint tenants with right of survivorship in Blackacre. Son defaults on a debt, and the creditor obtained a judgment, which, according to statutes in the jurisdiction, is “a lien on the real property then owned” by the debtor. Six months later, the son died. Is the creditor entitled to enforce its judgment lien against Blackacre? (WG4) • See additional questions on the next page

3. Assignment for Next Class II • Questions to think about / Writing Assignments (continued) • Landowner borrowed 1,000,000 from lender and executed a valid mortgage on Blackacre. Two years later, landowner conveyed Blackacre to a developer with a deed that states that the conveyance was subject to the mortgage and that the developer assumed the obligations of the mortgage as part of the purchase. Developer defaulted on the loan. The property was sold at a foreclosure sale, which netted $900,000. Who is primarily responsible for the remaining $100,000? What if that person cannot pay? (WG5) • A and B are tenants in common in an apartment. A leases the apartment to C. B is homeless and wants to move in. Can she? (WG6) • Brother and sister owned a farm as tenants in common. Brother farmed the land and paid all applicable taxes. When Brother died, his son inherited his share and took over operation of the farm. The son failed to pay real estate taxes on the farm, and the government held a tax sale. The sister purchased the property at the tax sale for a price equal to the back taxes, interest, penalties and fees. Does the sister own the farm in fee simple? Does the son have any rights? (WG7) • Optional: Examples & Explanations: Chapter 13

4. Review of Last Class I • Covenants in Warranty Deed • Present Covenants: Seisin, Right to Convey, Against Encumbrances • Breached at closing; Only grantee can sue • Future Covenants: Quiet Title, Warranty, Further Assurances • Can be breached at any time; Subsequent purchasers can sue • Recording • Relevant time for constructive notice is subsequent purchaser’s transaction date, NOT subsequent purchaser’s recording date • O to A, O to B, A records, B records • B is without notice, because A had not recorded at time of O to B transaction • In most states, purchaser need only search up to time grantor granted property to grantee in chain of title • O to A, O to B, B records, A records, B to C • C is good faith purchaser without notice • Even if had notice, could take advantage of Shelter Rule • Shelter Rule • If B is good faith purchaser without notice, and B conveys to C. Fact that C has notice of transaction undermining B’s title does NOT affect C’s status as good faith purchaser without notice.

5. Recording • Problems (continued) • Other interests that need to be recorded • Easements • Covenants • Mortgages • Valid between initial parties regardless of recording • But validity against future parties depends on recording • Race statutes. Invalid unless recorded • Notice and/or race notice. Invalid, unless future parties had other notice

6. Mortgages I • Mortgage is a loan secured by land • Borrower = mortgagor • Creditor = mortgagee • If mortgagor defaults (fails to pay back the loan), the mortgage can foreclose (force the sale of the land) and use the proceeds to repay the loan • If there are other creditors, the mortgagee has priority over the proceeds of the sale (i.e. gets paid first) • Without a mortgage, the creditor would share the proceeds, pro-rata with other creditors • If there is any money leftover after the mortgagee is repaid, the money goes to other creditors and then to the debtor (mortgagor) • Example • Creditor 1 owed 100K • Creditor 2 owed 100K • Debtor’s only asset is property worth 150K • If neither creditor has a mortgage, • Each creditor gets 75K • If Creditor 1 has mortgage • Creditor1 gets 100K and Creditor2 gets 50K

7. Mortgages II • Mortgage runs with the land • Mortgagor borrows 100K secured by Blackacre • Mortgagee records mortgage • Mortgagor sells Blackacre to B • If mortgagor defaults, mortgagee can foreclose on Blackacre and take proceeds • Leaving at best some money to B • Recourse v non-recourse loans • Suppose mortgaged property is worth less than debt, can mortgagee require mortgagor to pay out of other assets? • No, if loan is “non-recourse” • Yes, otherwise • Most home mortgages today are non-recourse • Equity of redemption • Borrower who defaulted can repay in full before foreclosure sale and keep property • Two documents • Promissory note (loan) • Mortgage (like deed)

8. Mortgages III • Lien v. title theory • If mortgage is lien, mortgagee can only take possession after foreclosure • If mortgagee has title, then mortgagee is entitled to possession before foreclosure • Intermediate position • Mortgagee gets title on default • Securitization • Most loans are sold • Government-owned corporations buy high quality loans • Federal National Mortgage Association (FNMA, “Fannie-May) • Federal Home Loan Mortgage Corporation (FHLMC, “Freddie Mac”) • Other, private entities, purchased lower quality loans • Loans are then grouped together, and fractional shares are sold to investors • Loan originators have little incentive to ensure high quality if they are going to sell their loans to others • FNMA, FHLMC, and private securitizing entities did not check quality of loans carefully • Led to Great Recession of 2007-9

9. Mortgages Q • Betty Finn buys a house for $450,000. She puts down $90,000 and takes out a mortgage for $250,000 from Heather Chandler, and a second mortgage for $110,000 from Veronica Sawyer. When Betty defaults, the house is sold for $500,000 at foreclosure. Assuming the amounts due on the mortgages haven’t changed at all, how should the proceeds be distributed? What would the answer be if the house brought $350,000 at foreclosure?

10. Carol Rose, Crystals & Mud • Crystals – hard edge rules • Mud – fuzzy ambiguous rules • Early mortgages were crystals • Mortgagor conveyed property to mortgagee, with contract that mortgagee would reconvey property if mortgagor repaid loan in full • If mortgagor did not repay in full, then mortgagee kept property • Even if mortgagor had paid 99% of loan • Even if land worth much more than outstanding debt • 17th-century equity courts made mud • If debtor repaid in full, even late, he could get property back • “equity of redemption” • 19th century parties tried to make crystals • Contractual waivers of equity of redemption • Installment contracts • Creditor/seller retains title and gives it to debtor/buyer upon full payment • 19th & 20th century courts made more mud • Refused to enforce contractual waivers • Treated installment contracts as mortgages • Borrower had extra time to pay in full or could get money back

11. Q on Crystals & Mud • Do you prefer Crystals or Mud? If you prefer Crystals, is there a way to prevent judges (and others) from creating mud? If you prefer mud, is there a way to prevent lenders (and others) from creating crystals?

12. Other Mortgage Questions • Prof. Rasmussen owns two parcels, 1 & 2 Eastfield Rd. Bank1 has mortgage on 1 Eastfield Rd for 500K, Bank 2 has mortgage on 2 Eastfield Rd. for 500K. Prof. Rasmussen defaults on the loan to Bank 1. Instead of foreclosing on 1 Eastfield Rd., Bank1 gets a judgment lien, which, according to statute in the jurisdiction, gives it a lien on all of Prof. Rasmussen’s property. Creditor 1 then foreclosed on both its mortgage and the judgment lien. The sale of 1 Eastfield raised 400K and the sale of 2 Eastfied raised 700K. How much does each creditor get? How much does Prof. Rasmussen get? • Prof. Barnett owns 1 Crest Rd, which he financed with a mortgage for 1m from WaMu that was never recorded. Prof. Barnett sold the property for 2m to Prof. Rose and moved to Peru. Prof. Barnett then stopped paying monthly payments on the mortgage. WaMu then petitioned the court to foreclose on 1 Crest Rd. Can it do so?

13. Questions on Mortgage Brokers • Consider the way home mortgages are often sold. A bank contracts with a mortgage broker. A mortgage broker is an independent businessperson, not an employee of the bank. The mortgage broker solicits customers and, when a customer wants a loan, helps the customer fill out the relevant paperwork and sends the paperwork to the bank for approval of the loan. • a) The contract with the mortgage broker might specify that the mortgage broker gets a fixed salary – perhaps $3000 per month. What problems might occur under such a contract? Would the bank be wise to offer such a contract? • b) The contract with the mortgage broker might specify that the mortgage broker gets a percentage of the value of all loans approved. For example, the mortgage broker might get 0.5% of the value of each loan, which would be $2500 on a $500,000 loan. What problems might occur under such a contract? Would the bank be wise to offer such a contract? • c) What macro-economic problems might occur if most loans were negotiated through contacts such as those described in (b)? • d) Can you think of a better contract between the bank and the mortgage broker?