Lien Theory/Title Theory/Joint Tenancies

Questions on the MBE may require understanding the distinction between a lien theory state and a title theory state. A typical example has a joint tenant mortgaging his interest in the property held in joint tenancy. According to the lien theory, the mortgagee is considered the holder of a security interest only and the mortgagor is deemed the owner of the land until foreclosure. In contrast, according to the title theory, legal title is in the mortgagee the moment that the property is mortgaged by the joint tenant.

As an example, let's assume that x and y are joint tenants with rights of survivorship. x decides to take out a loan from a bank, and in exchange for the loan, x gives the bank a mortgage on the property that he owns with y as joint tenants. Determining the interest that the bank receives will depend entirely on the rules above; namely, in a lien theory state the bank merely has a security interest and x is still deemed the joint owner of the property with y until foreclosure. In a title theory state, however, the mortgage severs the joint tenancy so that the the bank receives legal title to the property and becomes a tenant in common with y at the time of the mortgage.

Let's also assume that after the mortgage but before x defaults on the loan x dies. In a lien theory state, x and y remained joint tenants and as per the rights of survivorship, the moment that x died, y became the sole owner of the property. As such, there would be no property for the bank to foreclose upon. In a title theory state, however, the bank is a tenant in common with y so the death of x has no effect on the interest of the bank.