It's The Law
If It Acts like a Mortgage, It is a Mortgage
I am loaning a friend some money. I plan on asking him to deed me his real estate as security so I would not have to go through the expense and delay of mortgage foreclosure if he fails to pay. Will that work?
Section 697.01 of Florida Statutes makes it clear that transfer of any interest in property to secure payment of money is a mortgage. The key is whether the conveyance or other transfer is intended to secure repayment of a debt. If your deed will secure repayment of the debt, even though it is absolute on its face, the statute makes it a mortgage. So, from your perspective, it may not provide any real benefit.
In contrast, it might provide real detriment to the debtor. The statute provides that such a conveyance is not held to be mortgage against somebody who buys the property from you or loans you money secured by a new mortgage against the property if the third party does not have notice that you are actually holding title as security for a debt. That means you could sell or mortgage it to someone without notice of your arrangement with the previous owner and the original debtor might be left with nothing in return other than a claim against you for your wrongful action.
It is not unusual for a creditor to want to avoid the expense and delay associated with foreclosure of a mortgage. But, a mortgage still might be your best option. Mortgage foreclosure proceedings are something that Florida courts are very familiar with, especially of late. If the mortgage and note are in standard form and content, it is unlikely the judge will be confused and the foreclosure process can be relatively quick. When the debtor files suit to undue your deed claiming it is a mortgage or otherwise defends foreclosure of a non-traditional security arrangement, the court might require a lot of evidence and explanation before issuing a judgment and, if things are confusing enough or the documents are poorly prepared, you might even lose.
The statute generally provides that if it acts like a mortgage, it must be foreclosed like a mortgage. That applies to the deed you are considering, transferring trust to a third party, and even something called contract or agreement for deed. The contract for deed is something many of our Michigan clients feel is a better option than a mortgage.
Under a contract for deed, the seller and buyer agree in writing that when the buyer completes payments as required by the contract, the seller will deliver a deed to the buyer. In Michigan, a contract for deed can include a clause that provides for immediate forfeiture of the buyer's rights upon default. It is my understanding a Michigan seller does not have to foreclosure or take any other action against the buyer, albeit an action for eviction or possession in the nature of a landlord-tenant dispute might be required to get the buyer out of the home.
In Florida, the contract for deed is a mortgage and must be foreclosed as a mortgage. It does not avoid mortgage foreclosure. Worse, contract for deed is not often used in Florida so it may confuse the court and make the foreclosure process more difficult, expensive and lengthy. It does not even save money initially. When a contract for deed is used, at time of recordation, the documentary stamps and intangible tax due on a note and mortgage as well as on a deed must be paid in full, even though the deed is not then recorded. The same taxes are due when a deed and mortgage are placed of record.
Effort to use a document which is not a "mortgage" to secure a debt can create other problems if the drafter does not understand all the Florida requirements for mortgages apply. In these cases, there is frequently a balloon feature. After a series of payments, a large payment is due at maturity of the debt. By statute, every mortgage in which final payment with a principal balance due at maturity is greater than twice the amount of the regular, periodic payments is deemed a balloon mortgage.
Unless the balloon mortgage is a first mortgage, it must be clearly stamped with language confirming it is a balloon mortgage and the amount of the final principal payment or principal balance due at maturity. The disclosure language must appear at top of the first page and immediately above the signature line on the mortgage. If the mortgage does not have the disclosure language, the balloon feature is ignored and the debtor may continue making the periodic payments until those payments along pay the mortgage in full. There is an exception for mortgages between a buyer and seller of real estate and for most mortgages with terms of five years or more. Those exceptions might protect some of the security arrangements-but certainly not all.
Most of the time we counsel our clients who want to avoid a mortgage with some other arrangement to rely on standard form notes and mortgages instead of creativity. We believe they will get a better result if the borrower defaults and get virtually the same protection as with the alternative they came in to discuss. The circumstances of some cases may make an alternative preferable. For that reason, you should discuss your situation with an experienced attorney before proceeding further.
By: William G. Morris, Esquire
William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.
Questions for this column can be sent to: William G. Morris, e-mail: firstname.lastname@example.org or by fax, (239) 642-0722 or
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