Mortgage Liens: Assignment & Assumption In Sales Transaction

Instructor: Shawn Grimsley
Mortgages are sometimes 'assumed' or 'assigned', which are two distinct concepts. In this lesson, you'll learn about assignments and assumptions of mortgages and the consequences for the parties involved in each. A short quiz follows the lesson.

Mortgage Assignments

Real estate financing involves a promissory note, which is the actual promise to repay the loan, and a mortgage, which is an interest in the real estate given to a lender to secure repayment of the loan. If the borrower doesn't pay, the lender can commence a foreclosure lawsuit and sell the property at auction to satisfy the debt. Thus, the mortgage is very important to lenders because it helps reduce the chance they'll get stuck with a non-performing loan.

It may surprise you to learn that many lenders who provide real estate loans don't actually keep them very long. Instead, the lender will often sell its loans to other banks or investors at a discount so they (the lender) can turn around and make more loans. Importantly, the mortgage will follow the note, which means that whoever holds the promissory note should also hold the mortgage securing it. This makes sense because there's really no reason to hold a mortgage if you don't own the debt underlying it (since the whole purpose of the mortgage is to secure payment of the debt).

Transferring a promissory note is pretty easy. If a promissory note is negotiable (i.e., transferable) all you have to do to negotiate (i.e., transfer) it is to endorse and deliver it, similar to endorsing the back of a check. The mortgage, on the other hand, is transferred by an assignment. Most mortgages have a provision that permits the mortgagor (the person who holds the mortgage) to assign it to another.

An assignment is the legal term used to indicate that someone is transferring a legal right or interest they have to someone else. In our case, the lender is transferring the mortgage. The party transferring the interest or right is called the assignor and the party receiving it is called the assignee. The assignee will record the assignment in the land records office to provide notice to the public that it now holds the mortgage.

What does this mean for the buyer? From a practical standpoint, not much except that the borrower now makes payments to someone other than the previous creditor. Of course, the borrower must be provided notice of the assignment.

Assume for a moment that an owner is facing foreclosure but there hasn't been a proper negotiation of the promissory note or assignment of the mortgage. In this instance, the creditor bringing the action may not be entitled to do so because it doesn't actually hold the note or the mortgage upon which the foreclosure action is based. In reality, this may only delay the inevitable as the creditor will correct the defect in negotiation or assignment.

Mortgage Assumptions

A mortgage assumption is an entirely different creature. A mortgage assumption involves a buyer and seller of real estate and occurs when the buyer agrees to assume or 'take over' the seller's loan and mortgage obligations. An assumption may be attractive if the present interest rates for new loans are higher than the interest rate on the current loan.

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