Bar Exam — MBE (Multistate Bar Exam)Real PropertyEasy
A mortgagee properly recorded a mortgage on a property. Later, the mortgagor obtained a second loan from a different lender, secured by a second mortgage on the same property, which was also properly recorded. The mortgagor then defaulted on both loans. The property was foreclosed and sold. After paying the costs of the foreclosure sale, $200,000 remained. The first mortgage had a balance of $150,000, and the second mortgage had a balance of $100,000. How should the remaining $200,000 be distributed?
- ABoth mortgagees receive a pro-rata share based on their outstanding balances.
- BThe first mortgagee receives $150,000, and the second mortgagee receives $50,000.
- CThe first mortgagee receives $100,000, and the second mortgagee receives $100,000.
- DThe mortgagor receives $200,000, as the liens are extinguished by foreclosure.
Show answer & explanationAnswer & explanation
Correct answer: B. The first mortgagee receives $150,000, and the second mortgagee receives $50,000.
Mortgages are generally paid in order of their priority, which is usually determined by the 'first in time, first in right' rule for recorded instruments. The first mortgagee is paid in full before the second mortgagee receives anything.
Why the other options are wrong
- A. Pro-rata distribution is not typical for mortgage priority; it's a 'waterfall' approach based on recording order.
- C. This would be incorrect; priority dictates full payment to the senior lienholder first.
- D. The mortgagor only receives any surplus after all valid liens are satisfied; here, the liens exceed the remaining funds.
Mortgage Priority
The order in which mortgages and other liens are paid from the proceeds of a foreclosure sale, typically determined by recording date.
- Generally, 'first in time, first in right' (first to record has priority).
- Senior liens are paid in full before junior liens receive any proceeds.
- Foreclosure of a senior mortgage extinguishes junior liens.
- Foreclosure of a junior mortgage does not affect senior liens.
Memory trick: Priority Pays First, Proceeds Pass Down.