Future-Advance Mortgages (Optional vs Obligatory)

There is no doubt that mortgages is a subject that you'll want to understand very well when preparing for Real Property on the MBE.  If you take a look at the subject-matter outline prepared by the National Conference of Bar Examiners ("NCBE"), under the topic on mortgages is listed a sub-topic of "future-advance mortgages."  A few important points to keep in mind to be prepared to answer these questions correctly:

Watch for a situation in which a lender advances funds to a borrower for a fixed amount.  The lender secures a mortgage on property not only for the amount of money that it has advanced, but also for the amount (or amounts) it agrees to advance in the future.

It's possible that the future advances might be obligatory in the sense that the lender is contractually obligated to advance the future funds. But it's also possible that the future advances will be optional in which case the lender will retain the option to later decline to make any advances. This distinction is the key to the analysis.

If payments under a future-advance mortgage are deemed obligatory then a junior lender's lien is junior both to amounts advanced to the debtor before the junior lien was recorded and to amounts advanced after the junior lien is recored.

So, for example, if lender 1 lends money to debtor and secures a future-advance mortgage which is recorded in which the lender is contractually obligated to advance more funds in the future, then lender 1 need not worry about lender 2 (a 2nd mortgagee) lending money to buyer after lender 1's first advancement of funds but prior to the future advancement of later funds. Lender 1 will have priority over not only the first advancement but also over future advancements even if those advancements occur after lender 2 has recored its interest.

But if lender 1 lends money to debtor and secures a future-advance mortgage which is recorded but the future advancements are deemed optional then lender 1 will have priority over the 1st advancement but will be junior to any later mortgagee that advances money to the debtor prior to any future advancements by lender 1, assuming that the later mortgagee records to put lender 1 on notice.

The policy behind the distinction is that in the case of an obligatory loan, the junior lender can protect itself by checking the records and ascertaining the maximum amount of the senior lender's loan. But when those future advances are optional, the junior lender cannot know whether subsequent advances will be made and the senior lender can protect itself by choosing not to make those advances if a junior lender will be senior regarding any optional future advances.