When parties sell a property, the question is how the original mortgage is to be resolved. The primary method of resolution is that the seller takes the cash from the buyer and uses it to pay of his debt to the mortgagee. This process would remove the seller’s obligation.

There are other ways of making the transfer.

First, the buyer could assume the mortgage. This means they would take the property, assume the mortgage terms and make payments on that mortgage. Additionally, the buyer is personally liable and has primary liability for the debt after assumption. Additionally, the seller remains personally liable unless the lender releases the seller. One reason for assuming a mortgage is because the interest rates are higher and the original mortgage had a lower interest rate.

Second, the buyer could take the property subject to the mortgage. In this situation, the seller remains responsible for the debt, but the buyer agrees to pay the mortgage. The buyer is incentivized to keep paying the mortgage because failure to do so will likely result in foreclosure of the property. However, the buyer has the added benefit of lack of personal liability for any outstanding balance after a foreclosure occurs. In these situations, the seller is likely to issue a promissory note to the buyer, basically being a second mortgage on the property. This is called a work-around mortgage.

Swanson v. Krenik

868 P.2d 297 (Alaska 1994).

Question

Whether Kreniks had to contribute to the deficiency judgment after the subsequent buyers defaulted.

Holding

Absent some express agreement to the contrary, a second grantee’s purchase of property and assumption of a mortgage obligation does not modify the surety-principal obligor relationship created between the mortgagor and the first grantee in their previous transaction.

Facts

In 1977, the Kreniks took out a mortgage to Alaska Federal (AF) Bank to purchase a property.

Four years later, the Kreniks sold to the Swansons who assumed the promissory note. AF consented to the assumption but did not release the Kreniks. Additionally, the Swansons gave another promissory note to the Kreniks.

Two years later, Swanson conveyed the property to another party who assumed the AF and Krenick promissory notes. Later, the other party defaulted and went into bankruptcy.

Thus, the Kreniks had third liability, Swansons had second liability, and the other party has the first liability. Here, the Swansons are arguing that instead of this hierarchy, Kreniks were cosurities (jointly liable) for any default caused by the third party.

Analysis

Here, there was no express agreement modifying the Kreniks liability. Thus, the Kreniks are not cosurities but instead are subsurities (third in line of liability).

Transferring

Property rights are freely alienable (transferrable) regardless of what title theory the state adopts. That is, the parties are free to transfer the property to another. However, a mortgage may limit the ability to transfer property. For instance, mortgages may have a due-on-sale clause or due-on-sale clause, which says the balance of the loan is due when the property is transferred to another without the permission of the lender.

Will Laursen

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