Mortgages come from old English Common Law with a document called seisin. A lender would retain title of the property until the borrower paid back the loan.
Courts also began to find it necessary to protect borrowers (mortgagors) from lender (mortgagee) control. As such, if the mortgagor missed a payment, they had the opportunity to redeem themselves by paying the mortgage back in a timely manner. This was called the right of redemption. However, to protect mortgagees from unlimited redemption rights, courts created the foreclosure, that is, foreclosing the mortgagors right to redeem within a reasonable timeline.
With time, however, mortgage law has developed intro three different title theories. Despite the differences, they are essentially treated the same.
- Title theory: The mortgagee maintains title of the property (also bears risk of ownership).
- Lien theory: The mortgagee maintains title to the property only at foreclosure (mortgagor maintains title and risk of ownership).
- Intermediate theory: The mortgagor maintains title and risk of ownership until default, at which time title automatically transfers to the mortgagee.
Doctrine of Waste
When more than one party has an interest property, the doctrine of waste applies. The doctrine says that one owner may not damage the property at the expense of the other interests. This doctrine applies to cotenants, landlords, tenants, mortgagors, etc. Additionally, the doctrine applies to maintenance and improvement of the property. There are two different kinds of waste, voluntary and permissive. Some courts, such as California, only allow the waste doctrine if the waste was caused in bad faith. The case below outlines the rule for what is bad faith waste.
Fait v. New Faze Development, Inc.
143 Cal. Rptr. 3d 382 (2012).
Faits lost a summary judgment ruling and appealed.
Question
Whether New Faze Development committed waste in bad faith.
Rule
Bad faith waste occurs if there is destruction of property when there were no economic pressures to do so.
Holding
A trier of fact could find there was bad faith, reversed.
Facts
New Faze Development, Inc. purchased property from the Fait trust for $525,000. The intent was to develop the land. Preexisting on the land was a small church and social wellness office. For the development of the plan to begin, the tenants of the building had to be evicted and the building demolished, which was done.
Unfortunately, New Faze Development was unable to keep up with payments under the promissory note and also failed to make property tax payments. As such, they defaulted and Fait foreclosed on the land, now selling for less than $15,000 with about $7,000 outstanding property taxes. This lawsuit followed. New Faze Development filed for a summary judgement saying they did not maliciously destroy the property because they had good faith efforts to develop it. The trial court judge agreed that the demolition was not bad faith but did not grant the order regarding the failure to pay property taxes.
Analysis
There was no economic pressure for the demolition so a jury could find for bad faith.
Mortgage Markets
Ever since the housing bubble burst beginning in 2007, housing markets have been much more cautious with who they approve mortgage loans. As such, there are factors and standards (underwriting standards) mortgagees consider before offering a mortgage. These include subjective analysis of willingness to pay and objective evaluation of ability to pay. Ability is often measured by a credit score (a score of 660 and above is likely to gain normal loan pricing). Additionally, ability is measured by the amount of debt the applicant has. Mortgagees do not like giving loans to people where the mortgage would be more than 31% of their gross monthly income or their total debt payments exceed 43% of their gross monthly income.
Mortgage Financing
Financing the purchase of a property is circular.
- The seller gives a deed to the buyer
- The buyer offers a downpayment to the seller
- Buyer then receives a mortgage from their lender for the remaining balance
- Balance is paid to the seller in full.
- Seller then provides their mortgagee with cash to satisfy any outstanding mortgage on the property.
- Any leftover cash after the mortgage is satisfied goes to the seller.
Walsh v. Catalano
12 N.Y.S.3d 226 (2015).
Facts
Plaintiff Walsh made a downpayment to the seller for the purchase of the property. Finalization of the sale was contingent on the purchaser getting a firm commitment, which did not become firm until an appraisal was conducted. If the purchaser was unable to get a commitment, the downpayment would be returned. Although the purchaser obtained a contingent commitment, hurricane Sandy hit and the resulting appraisal was not sufficient to obtain a firm commitment. When the seller failed to return the down payment, this lawsuit was initiated.
Analysis
Summary judgment is granted here because the purchasers did not obtain a firm commitment in accordance with the contract terms.
Malus v. Hager
712 A.2d 238 (N.J. 1998).
Facts
Malus is the buyer and the plaintiff. Their contract included a contingent provision on obtaining a mortgage commitment. There was another provision that if the buyer failed to close, then the escrow money would be liquidated damages. Although the plaintiffs originally got a commitment, he lost his job before closing and the bank revoked the commitment.
Analysis
Here, the plaintiff failed to get a commitment before the time outlined in the contract. So, the defendant gets to keep the liquidated damages.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
