Thursday, March 8, 2012

Future-Advance Mortgages

One of the topics listed on the NCBE subject matter outline for the MBE (you should use this outline as a study tool; it can be found on their website) is future-advance mortgages. It's been tested as recently as this past February's exam, and yet not much coverage is provided on this topic throughout the commercial outlines. Here is a quick review:

A future-advance mortgage is very similar to a line of credit. In other words, lender (let's call him "x") lends money to borrower, but all of the money is not disbursed at one time. The lender will make further advances of credit in the future.

An issue that comes up on the MBE is that a subsequent mortgagee comes along, (let's call him "y") and lends money to the borrower (let's call him "z"), and secures that loan with a mortgage which comes after the mortgage taken by x (the future-advance mortgage).

The original mortgage taken by x is the senior mortgage, assuming he has recorded his mortgage, as it was taken prior to y's mortgage. But the issue is whether any future advances provided by x will also take priority over y's mortgage, even if those future advances occur after the time that y has taken his mortgage.

The issue is resolved by determining whether the advances were obligatory or optional. An obligatory future advance is one that the lender is contractually obligated to make to the borrower. Other advances, those that the lender can make at his discretion, but is not obligated to make, are optional advances. If the advances are deemed optional, then they do not relate back to the time the mortgage was originally recorded, and therefore the subsequent mortgagee (here, y) can take priority over those advances, provided that he recorded his mortgage before those optional advances were disbursed. Once y records his mortgage, x is on record notice of that mortgage.

If, on the other hand, the future advances are deemed obligatory, then notice by x that y has taken a mortgage subsequent to x's mortgage, is irrelevant. Even if y records, the obligatory future advances will relate back to the time that x recorded his mortgage (which took place before y recorded his), and those future advances will, therefore, have priority over y's mortgage.



4 comments:

  1. Very clear explanation, thank you

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  2. Great, glad it helped. This is definitely a hot topic as of late on the MBE.

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  3. Tested today - reading your blog this weekend scored me at least 1 question. Thanks

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  4. Ah, they tested it again. Seems to now be the standard, thanks for the comment.

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