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New York Mortgages – Formation Requirements and Equitable Mortgages

Meir Shua
Meir Shua

What is a mortgage?

A mortgage is any conveyance of land which is intended by the parties at the time of the making to act as a security to ensure the payment of money or the doing of a given prescribed act. Usually, the debt is represented by a promise to pay, known as a promissory note, which is a promise to pay.

How does New York view a mortgage?

In New York, the creditor, also called the mortgagee, is in possession solely of a lien, but lacks title. The reason for this is that New York recognizes a mortgage as a mere security interest to ensure payment of a debt.

New York Mortgages - Formation Requirements and Equitable Mortgages

The Statute of Frauds

A mortgage must meet the requirements of the Statute of Frauds for it to be enforceable, as it constitutes a conveyance of an interest in land. A mortgage must take the form of a writing which is signed by the mortgagor or an agent to whom they had given written authorization to act on their behalf. This also applies to a contract entered to give a mortgage. The Statute of Frauds is taken from common law and requires that certain agreements be in writing for them to be enforceable. Specifically, it applies to the sale of land.

However, a contract by the mortgagee to transfer, or assign, the mortgage and its actual assignment may be entered orally. This is because the mortgage as it is held by the mortgagee does not have the status of an interest in land, but only as a chose of action, which is a right to bring an action or recover a debt or money.

What is an equitable mortgage?

An equitable mortgage is a security transaction in land which fails to satisfy the requirements to constitute a legal mortgage. This said, the Statute of Frauds still has applicability to the promise made by the debtor.

Why should it matter if a mortgage is legal or “equitable”?

The answer is that it affects one’s rights. While an “equitable” mortgage does take preference over subsequent judgement creditors, its rights will be superseded by those of a bona fide purchaser. As such, the mortgager will lose the right in favor of the bona fide purchaser to retain the land and will only have recourse against the proceeds of the sale.

Does an equitable mortgage always result from a failed legal mortgage?

Example one – Let’s say the debtor is owed $2,000 by the creditor and the former requests that the latter pay him an additional $300. As the creditor demands of the debtor a security, the latter gives him the land deed with the following proclamation: “Check this over and we will have a lawyer draft the necessary papers if you deem it okay.” At this point, the creditor loaned the debtor the additional sum. The court stipulated that, should the debtor subsequently die, no equitable mortgage would take effect. This is because partial performance neither satisfies nor complies with the Statute of Frauds.

Example two – Let’s say the debtor is loaned by the creditor $3,000. As a consequence, the debtor conveys to the creditor a mortgage which is intended by both parties to include, but does not actually do so, certain portions of the debtor’s land. It is held that, should the creditor foreclose on the non-included land in addition to that which is described in the mortgage, the part of the land which is intended but not included would have an equitable mortgage impressed upon it. The court states that the existence of the executed mortgage is enough for the Statute of Frauds to be satisfied. So too, the defective execution of a legal mortgage is sufficient to give rise to an equitable mortgage.

Example three – Let’s say that the debtor is loaned money by the creditor who, in turn, promises to convey to him a mortgage on his land. The debtor subsequently defaults, which results in the creditor taking possession of and making improvements on the property. The court ruled that this part performance is sufficient to remove the transaction from the Statute of Frauds.

An absolute deed and parol evidence

The addition of any other deed which was intended to create a mortgage would suffice to construe as a legal mortgage the conveyance of real property.

Absolute deed as an equitable mortgage – A mortgagor may use parol evidence to demonstrate intent to create a mortgage even in the absence of another written document. Parol evidence relates to oral or verbal witness testimony. The Parol Evidence rule excludes as evidence prior or contemporaneous oral agreements which would vary a written contract. If the asserting party can meet the burden of demonstrating such intent through parol evidence, the court will deem an equitable mortgage – as opposed to a conveyance of title –  to have been the result.

The court, when making its ruling, will take into account various facts which point more to a mortgage than a grant, such as the value of the land in relation to which the “grantee” made “payment,” and retention of possession by the “grantor.”

Yet, being an equitable mortgage, the mortgagor’s right to retention of the land will be severed by a bona fide purchaser, meaning one who acts in good faith in an honest, open and sincere manner and without employing deceit. As a consequence, the only recourse to which the mortgagor will be able to resort will be against the proceeds of the sale.

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