When real estate is sold subject to a mortgage (whether the grantee assumes or not), the original mortgagor is said to become secondarily liable, as a surety, while the grantee (in the case of an assumption) or the real estate itself (in the case of a subject-to transfer without assumption) becomes principally or primarily liable.
– The mortgagee still has a cause of action with either the mortgagor (on the debt) or the grantee (on the assumption agreement).
– The grantee or the real estate is ultimately liable though. The surety (mortgagor) may have recourse against the principal (grantee) through subrogation (full payment of the mortgage debt by the mortgagor is required), reimbursement (partial payment of the mortgage debt is sufficient), or exoneration (demand specific performance of the assumption agreement by the grantee).
– Suretyship defenses: The mortgagor/surety is discharged from his duties if the actions of the mortgagee (1) have made it less likely that the grantee or the land will satisfy the debt, AND (2) have made it more difficult for the mortgagor to assert recourse against the grantee and the land if the mortgagor is required to pay the debt. Mortgagee changes the “deal” in such ways as on page 444.
– First Federal Savings and Loan Association of Gary v. Arena (Indiana 1980): If a mortgagor consents to a change in the terms of the loan, he or she cannot complain about continuing to be held liable as a surety. In this case, the bank unilaterally changed the terms of the loan, and therefore, the mortgagor is not liable for the new terms.
– CHART Pages 451-452 – Surety defenses and the effect of mortgagee actions.
– Mortgagor is entitled to the benefit of any advantageous modifications, but not bound by any disadvantageous modifications (unless the mortgagor consented to them).
– Mortgagee can avoid surety defenses by either obtaining consent OR including a “reservation of rights” clause (ex. grant extension to grantee but reserves rights against the original borrower as though no extension were given) in the document of modification or release. Another possibility is a “preservation of recourse” clause stating that grantee can have the extension but the borrower’s recourse against the grantee is preserved as though no extension were granted.
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