ANSWER KEY
Chapter 20 Mortgages and Security Interests
Opening Case Questions
Questions for Review and Discussion
1. A secured loan is one in which creditors have something of value, usually
2. There are many different types of real property mortgages. Some of the most common mortgages
3. Recording a mortgage noties any third party who may be interested in
4. By law and by agreement, the mortgagor has certain rights and duties in conjunction with the
mortgage. First, the mortgagor has the right to possess the property. Second, the mortgagor has the right
to any income produced by the property. For instance, the mortgagor would be entitled to any rent
proceeds gained from leasing all or part of the property. The mortgagor could, however, assign this
right to the mortgagee, which is sometimes done as a condition of executing the original mortgage
agreement. Third, the mortgagor has the right to use the property for a second or third mortgage.
Fourth, the mortgagor has the equity of redemption, that is, the right to pay off the mortgage in full,
including interest, and thus to discharge the debt in total. In addition to these rights, the mortgagor has
certain duties. Chief among these duties is the duty to make payments on time. Mortgagors must
preserve and maintain the mortgaged property for the benefit of the mortgagee’s interest and security.
Similarly, the mortgagor is often required to insure the property for the benefit of the mortgagee for the
amount of the mortgaged debt. The mortgagor also must pay all taxes and assessments that may be
levied against the property. Frequently, the mortgagor will ease the burden of these obligations by
paying a percentage of the insurance premium and taxes each month along with the mortgage payment.
The mortgagee holds the money in an escrow account. An escrow account is a special account into
which money is deposited before the payment of the insurance or taxes is due. The money stays in the
account until the time comes to pay the insurance or tax. The mortgagee then takes the money out of
the account and makes the payments. The mortgagee has the unrestricted right to sell, assign, or
transfer the mortgage to a third party. Whatever rights the mortgagee had in the mortgage are then the
5. A financial recovery involves returning to the situation as it was before the financial crisis occurs.
Such a tactic is self-defeating because it places the economy in the same position it was in when the
crisis occurred and so it is just a matter of time before that crisis starts itself over again. A change in the
6. The short term measures include the takeover of Fannie, and Freddie by the Federal Housing
Finance Agency, the creation of HAMP and HARP, the passage of the Emergency Economic
7. Long term solutions to the crisis must address the underlying cracks in the foundation of the
9. A security interest is effective only between the debtor and creditor when it attaches. To be
effective as to others who might claim the collateral, such as other creditors or people who buy the
10. The UCC follows these rules to determine who prevails over whom when secured and unsecured
parties lay claim to the same collateral: (a) A perfected purchase money security interest in inventory
has priority over a conflicting security interest in the same inventory. (b) A purchase money security
interest in collateral other than inventory has priority over a conflicting security interest in the same
collateral if it is perfected within ten days after the debtor receives possession of the collateral. (c)
Buyers of goods in the ordinary course of business (except farm products) prevail over security
Cases for Analysis
1. Yes. Homeowners can request cancellation of private mortgage insurance when their equity
position reaches 20 percent of the original value of the property. Since Sanchez
2. No. The second mortgage is paid out of the remaining proceeds. Once First Colonial Bank
3. Yes. Variable-rate mortgages are not in themselves unenforceable as long as their terms are
certain and definite. A mortgage agreement that places no limit on the amount of interest that can be
4. No. The Woolseys were not entitled to a jury trial. The mortgage held by the bank was a lien on
the property. The bank had no legal right to possess the property. Its only recourse was the equitable
action of foreclosure. Therefore, the Woolseys had no right to a jury trial. The burden of proving bad
5. Northridge had first rights to the property. Recording a mortgage protects a creditor or subsequent
purchaser, without notice, who duly records a deed, mortgage, or other instrument, while penalizing a
party who does not duly record his or her instrument. Bloom’s mortgage in favor of Lakeshore was
executed on September 16 but was not recorded until 3:07 P.M. on October 25. In the interim, another
7. No. Matthew Motors had sold the Buick to Jenkins. Since Jenkins owned the car, Matthew
Motors had no power to pledge it as security for the loan from Averysboro National Bank. To be
effective, a security interest must attach. Attachment occurs when the collateral comes into possession
9. Yes. Since the filing statement was filed in the wrong country, the bank had an unperfected
10. No. Under the Uniform Commercial Code, the debtor must be given notice of the time and place of
END CHAPTER TWENTY