PastPaperHero | Mortgages/security devices

Learning Outcomes

This article explains the main types of real property security devices tested on the MBE, including:

Distinguishing mortgages, deeds of trust, installment land contracts, sale-leasebacks, equitable mortgages, and equitable vendor’s liens.
Identifying the parties to each device, how legal and equitable title are allocated, and who possesses the property.
Comparing the borrower’s and lender’s rights, obligations, and remedies before default, at default, and after enforcement.
Determining when an absolute deed or sale-leaseback should be recharacterized as an equitable mortgage rather than a true conveyance.
Contrasting traditional installment land contract forfeiture rules with modern approaches that treat the arrangement more like a mortgage.
Recognizing how the classification of a transaction as a security device affects foreclosure requirements, forfeiture, and the borrower’s remaining equity.
Applying priority and recording principles to security devices, with attention to purchase-money arrangements and vulnerable equitable interests such as vendor’s liens.
Spotting common MBE fact patterns that disguise security devices as ordinary sales or leases and choosing answer choices that reflect their true secured character.

MBE Syllabus

For the MBE, you are required to understand real property security devices with a focus on the following syllabus points:

The nature and creation of mortgages and deeds of trust, including who holds title and who has possession.
The structure and consequences of installment land contracts, including traditional forfeiture rules and modern trends.
Equitable mortgages: when an absolute deed or other form is treated as security for a debt.
Sale-leaseback arrangements and when they function as disguised mortgages.
Equitable vendor’s liens as an alternative way to secure unpaid purchase money.
How the classification of a transaction as a security device affects foreclosure, the borrower’s equity, and third-party rights.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

Which of the following is NOT a recognized real property security device?
1. Mortgage
2. Deed of trust
3. Installment land contract
4. Fee simple determinable
In a deed of trust, who typically holds legal title to the property?
1. The borrower (trustor)
2. The lender (beneficiary)
3. A neutral third-party trustee
4. The state
An absolute deed given as security for a loan is most likely to be treated by a court as:
1. A valid conveyance
2. An equitable mortgage
3. A quitclaim deed
4. A lease
Which security device allows the seller to retain title until the purchase price is fully paid?
1. Mortgage
2. Installment land contract
3. Deed of trust
4. Vendor’s lien

Introduction

Security devices in real property law are legal mechanisms that tie a debt or other obligation to specific real estate. They give a creditor recourse against the land if the debtor fails to perform, usually by allowing foreclosure or similar enforcement.

Key Term: Security Device
A legal arrangement in which an interest in real property is used to secure repayment of an obligation, typically a loan, giving the creditor rights against the property on default.

At the most basic level, every real property security transaction has two main components:

The principal obligation (usually evidenced by a promissory note or contract).
The security device (mortgage, deed of trust, etc.) that makes the land collateral for that obligation.

Different devices structure this relationship in different ways. Some are explicitly labeled as mortgages; others look on their face like ordinary deeds, leases, or contracts but are treated by courts as equitable mortgages because they were intended as security.

Understanding which device you are dealing with matters on the MBE because:

It determines who holds legal title and who has mere security or equitable interests.
It affects what procedures are required on default (judicial foreclosure, nonjudicial power-of-sale foreclosure, forfeiture, etc.).
It determines whether the borrower has an equity in the property that must be foreclosed, rather than being cut off by a simple cancellation of the arrangement.

Key Term: Legal Title
Formal ownership of property recognized at law, typically recorded in the public records and held by the person who can transfer the property by deed.

Key Term: Equitable Title
The beneficial ownership of property, giving the holder the right to obtain legal title or to benefit from the property, even though legal title is in another’s name.

On the MBE, you must be able to classify the common devices and recognize disguised security transactions. The main types are:

Mortgages
Deeds of trust
Installment land contracts
Absolute deeds given as security (equitable mortgages)
Sale-leaseback arrangements used as security
Vendor’s liens

Types of Security Devices

1. Mortgage

A mortgage is the classic real property security device. The borrower (mortgagor) gives the lender (mortgagee) an interest in land to secure a loan or other obligation, while retaining possession and most incidents of ownership.

Key Term: Mortgage
A security interest in real property given by a borrower (mortgagor) to a lender (mortgagee) to secure repayment of a debt, allowing foreclosure against the property if the debt is not paid.

In most modern (lien-theory) states for MBE purposes:

The mortgagor keeps legal title and possession.
The mortgagee holds only a lien—a security interest that can be enforced if the mortgagor defaults.

In a minority (title-theory) view, the mortgagee holds legal title, but for MBE purposes you can generally treat a mortgage as a lien unless the question specifies otherwise.

Creation requirements (which the exam may test implicitly):

A valid principal obligation (often a promissory note).
A written mortgage instrument signed by the party to be charged, describing the real property and the debt (Statute of Frauds).
Recordation protects the mortgagee against later purchasers or creditors but is not required between the parties.

On default, the mortgagee’s primary remedy is foreclosure, usually by judicial sale. Foreclosure terminates the mortgagor’s equity in the property and allows application of sale proceeds to the debt. The details of foreclosure procedures, deficiency judgments, and redemption are typically covered in separate MBE topics, but you must recognize that foreclosure is required to cut off the mortgagor’s ownership; the lender cannot simply “take” the property without foreclosure.

Key Term: Purchase-Money Mortgage
A mortgage given to a seller or lender to secure funds used to acquire the property being encumbered, often given priority over earlier liens and competing claims.

Purchase-money mortgages often appear together with vendor’s liens and installment land contracts, so keep the concept in mind when comparing security devices that finance the purchase price.

2. Deed of Trust

A deed of trust (also called a trust deed) uses a three-party structure:

The trustor is the borrower.
The beneficiary is the lender.
The trustee is a neutral third party who holds legal title for the beneficiary’s benefit.

Key Term: Deed of Trust
A security device in which the borrower (trustor) conveys title to a neutral trustee to hold for the lender’s (beneficiary’s) benefit, with a power of sale if the borrower defaults.

Under a typical deed of trust:

The trustor retains possession and the practical benefits of ownership.
The trustee holds legal title solely for security purposes.
The instrument usually contains a power of sale authorizing the trustee to sell the property nonjudicially on default, after giving the required notices.

Key Term: Power of Sale
A provision in a security instrument authorizing a trustee or lender to sell the property, without court action, if the borrower defaults.

On default:

In many states, the trustee may conduct a nonjudicial foreclosure sale under the power of sale.
Some states permit either nonjudicial foreclosure under the deed of trust or judicial foreclosure similar to that for mortgages.

For MBE purposes, the key distinctions between a mortgage and a deed of trust are:

The number of parties (two in a mortgage; three in a deed of trust).
The presence of a trustee with power of sale, which often allows a faster, nonjudicial foreclosure.

Functionally, however, courts treat deeds of trust and mortgages similarly: both are security devices, both must be foreclosed to cut off the borrower’s ownership, and both are subject to the same basic rules about priorities and redemption unless a question tells you otherwise.

3. Installment Land Contract

An installment land contract (also called a contract for deed or land sale contract) is another common way to finance a purchase. The buyer makes periodic payments to the seller over time, and the seller retains legal title until the contract price is fully paid.

Key Term: Installment Land Contract
A contract under which the buyer takes possession and makes periodic payments to the seller, while the seller retains legal title until the full purchase price is paid.

Typical structure:

The buyer immediately takes possession and often assumes responsibility for taxes, insurance, and maintenance.
The seller keeps legal title as security for the unpaid balance.
The contract often contains a forfeiture clause allowing the seller, on the buyer’s default, to terminate the contract, regain possession, and keep prior payments as liquidated damages.

Key Term: Forfeiture Clause
A contractual term allowing one party—commonly a seller in an installment land contract—to terminate the agreement and retain prior payments if the other party defaults.

Traditional rule (often tested):

On default, the seller can invoke the forfeiture clause, cancel the contract, retake possession, and keep past payments. The buyer loses both the property and the equity built up through prior installments.

Modern trend (which may appear in answer choices):

Many courts treat installment land contracts more like mortgages, especially when a significant portion of the price has been paid. They may require the seller to use foreclosure procedures, allow the buyer an equitable right of redemption, or grant restitution for amounts paid in excess of the seller’s damages.

On the MBE, unless the question mentions a specific modern statute or equitable trend, you can assume the traditional rule applies: the seller retains title until full payment, and default allows termination consistent with the contract’s terms.

4. Absolute Deed as Security (Equitable Mortgage)

Sometimes parties structure a transaction as a deed that appears to be an outright sale, but in substance it is meant to secure a loan. For example, a landowner “sells” land to a lender, but stays in possession and agrees he can get the land back by repaying the “purchase price.” In this setting, the deed is not treated as a true conveyance; equity treats it as a mortgage.

Key Term: Equitable Mortgage
A transaction that is not in mortgage form but is treated by a court as a mortgage because it was intended to serve as security for a debt.

Key Term: Absolute Deed
A deed that, on its face, appears to convey full title without conditions; when used as security for a loan, it may be recharacterized as an equitable mortgage.

Courts recharacterize an absolute deed as a mortgage when clear evidence shows that it was intended as security. Factors (no single factor is determinative) include:

There is an existing debt or promise to repay from the grantor to the grantee.
The grantee has agreed, expressly or impliedly, to reconvey the land if the debt is repaid.
The “purchase price” paid for the deed is much less than the property’s value.
The grantor remains in possession and continues to treat the property as his own (pays taxes, insures, improves, etc.).
The grantor is in financial distress, making it more likely he would use his land as collateral rather than truly sell it.
The parties’ prior negotiations looked like loan negotiations rather than a sale.

If a court finds an equitable mortgage:

The “grantee” is treated as a mortgagee.
The “grantor” is treated as a mortgagor who still owns the property in equity.
The grantee must foreclose in order to cut off the grantor’s rights; a simple refusal to reconvey is not enough.
The grantor retains the usual borrower protections, such as an equitable right of redemption, unless lawfully waived.

This doctrine often appears on the MBE in disguised form: the facts describe a deed that looks like a sale, but the surrounding circumstances clearly indicate a secured loan. When you see a deed plus ongoing payments or possession by the “seller,” think equitable mortgage.

5. Sale-Leaseback

A sale-leaseback arrangement occurs when:

An owner sells property to a buyer for cash, and
The buyer immediately leases the property back to the original owner.

If the economic reality is that the transaction is meant to secure a loan rather than to transfer ownership, courts may treat the arrangement as a disguised mortgage.

Key Term: Sale-Leaseback
A transaction where an owner sells property to another and then immediately leases it back, which may be treated as a security device if intended primarily to secure a debt.

Indicators that a sale-leaseback functions as a security device (and thus an equitable mortgage):

The lease payments are substantially equivalent to loan payments (principal plus interest) that would be due on a mortgage of similar size.
The seller-lessee has an option to repurchase the property, especially at a price far below expected market value at the option date.
The seller-lessee remains in exclusive control and use of the property and continues to bear the burdens of ownership (taxes, insurance, maintenance).
The buyer-lessor is primarily a lender or investor, not a typical purchaser of such property.

If treated as a security device:

The original owner is effectively a mortgagor; the buyer-lessor is effectively a mortgagee.
The buyer-lessor must foreclose to cut off the original owner’s equitable interest, and the owner may have redemption and other borrower protections.

On the exam, if you see an owner “selling” and then leasing back the same property, ask whether the facts suggest genuine sale or disguised loan. If the arrangement has all the hallmarks of a loan, classify it as a security device.

6. Vendor’s Lien

A vendor’s lien is an equitable lien in favor of a seller of land who has conveyed title to the buyer but has not received full payment of the purchase price and has not taken back a mortgage or deed of trust.

Key Term: Vendor’s Lien
An equitable lien arising by operation of law in favor of a seller who has transferred legal title to the buyer but remains unpaid for part or all of the purchase price.

Key features:

No separate security instrument is required; the lien arises automatically when the seller conveys title and is still owed purchase money.
The seller’s lien is for the unpaid purchase price plus any contractually owed interest.
Because the lien is equitable and may not be recorded, it is vulnerable to a bona fide purchaser who takes the property for value without notice of the lien.
Many sellers instead take an express purchase-money mortgage or deed of trust to avoid relying on an unrecorded equitable lien.

A vendor’s lien functions as a security device: it allows the seller to enforce payment against the land itself. If the buyer defaults, the seller may bring an equitable action to foreclose the lien and have the property sold to satisfy the unpaid purchase price.

Worked Example 1.1

A homeowner borrows $200,000 from a bank to buy a house, signs a promissory note, and gives the bank a mortgage on the property. The homeowner defaults on the payments. What remedy does the bank have?

Answer:
The bank may foreclose on the mortgage, typically through a judicial foreclosure sale, and apply the sale proceeds to the outstanding debt. The mortgage operates as a security device giving the bank rights against the property, not immediate ownership.

Worked Example 1.2

A buyer enters into an installment land contract to purchase a home, takes possession, and pays monthly installments for three years. The contract states that “time is of the essence” and includes a forfeiture clause allowing the seller to cancel the contract and keep all prior payments if the buyer misses a payment. The buyer then defaults. What can the seller do?

Answer:
Under the traditional rule, the seller may enforce the forfeiture clause: cancel the contract, retake possession, and keep prior payments as liquidated damages. Some modern courts, however, may limit forfeiture or require foreclosure when a substantial portion of the price has been paid, but unless the question mentions such a statute or rule, you should assume the traditional approach.

Worked Example 1.3

A property owner in financial distress conveys a deed that is absolute on its face to a lender, receiving $80,000 for property worth $200,000. The owner continues to live in the house, pays taxes and insurance, and agrees orally that he will repay the $80,000 with interest over five years, at which point the lender will reconvey the property. After two years, the owner defaults, and the lender claims outright ownership based on the deed. How is a court likely to treat this arrangement?

Answer:
A court is likely to treat the absolute deed as an equitable mortgage, because the deed was intended as security for a loan. The lender will be required to foreclose to cut off the owner’s equity, and cannot simply keep the property free and clear.

Worked Example 1.4

An owner sells her warehouse to Investor for cash and simultaneously signs a 20-year lease to remain in possession, with rent payments equal to what a mortgage payment on the same amount and interest rate would be. The lease gives Owner an option to repurchase the warehouse in 10 years for a fixed price far below its projected market value. Owner continues to pay taxes and insurance. Owner later defaults on the “rent,” and Investor seeks to evict her as a tenant without foreclosure. How should a court classify this transaction?

Answer:
The arrangement is likely to be treated as a disguised mortgage (an equitable mortgage) rather than a true sale-leaseback. The rent resembles loan payments, Owner retains the burdens and benefits of ownership, and the cheap repurchase option suggests a secured loan. Investor must foreclose as a mortgagee; he cannot simply treat Owner as a defaulting tenant and evict her without foreclosure.

Worked Example 1.5

A seller conveys Blackacre to a buyer by warranty deed for $300,000. The buyer pays $50,000 down and signs a note for the remaining $250,000, but no mortgage or deed of trust is executed. The deed is recorded. The buyer fails to pay the note. Does the seller have a security interest in Blackacre?

Answer:
Yes. The seller has an equitable vendor’s lien on Blackacre for the unpaid $250,000, even though no mortgage was executed. The lien arises by operation of law when the seller conveys title and is not fully paid. The seller may bring an equitable foreclosure action to enforce this lien, but a bona fide purchaser without notice could take free of the lien.

Worked Example 1.6

A borrower executes a deed of trust naming herself as trustor, Bank as beneficiary, and Trustee as trustee. The deed of trust grants a power of sale to Trustee. The borrower later defaults, and Trustee, following statutory notice requirements, conducts a nonjudicial foreclosure sale. The borrower argues in court that only a judicial foreclosure can cut off her rights. Is she correct?

Answer:
No. A deed of trust commonly includes a power of sale that permits the trustee to conduct a nonjudicial foreclosure sale on default, provided statutory procedures are followed. Such a sale validly terminates the borrower’s equitable interest, just like a judicial foreclosure of a mortgage.

Exam Warning

MBE questions often disguise security devices:

An absolute deed or sale-leaseback may in substance be a loan secured by land.
An installment land contract may be tested as a functional equivalent of a mortgage, especially when the buyer has built up substantial equity.

Look past the labels. Ask whether the transaction is intended to secure repayment of a debt. If so, treat it as a security device and think in terms of the protections and foreclosure rules that apply to mortgages.

Revision Tip

In a deed of trust, a neutral trustee holds legal title for the lender’s benefit and may have a power of sale, allowing nonjudicial foreclosure.
In an installment land contract, the seller keeps legal title as security until the full price is paid, and default may trigger forfeiture, though modern courts sometimes soften that result.
A vendor’s lien gives an unpaid seller an equitable security interest even when title has already passed to the buyer.

Key Point Checklist

This article has covered the following key knowledge points:

A security device uses real property as collateral for an obligation; the device’s form affects title, remedies, and borrower protections.
A mortgage creates a lien (in most states) on real property to secure a debt; the borrower keeps possession, and the lender must foreclose on default.
A deed of trust uses three parties and typically includes a trustee’s power of sale, allowing nonjudicial foreclosure when the borrower defaults.
An installment land contract lets the buyer take possession while the seller retains legal title; traditional rules allow forfeiture on default, though modern law often treats these contracts more like mortgages.
An absolute deed given as security, or a sale-leaseback that functions like a loan, may be treated as an equitable mortgage, requiring foreclosure and preserving borrower protections.
A vendor’s lien arises by operation of law when a seller conveys title but remains unpaid; it is an equitable security interest that can be foreclosed but may be cut off by a bona fide purchaser.
Purchase-money mortgages and vendor’s liens are both ways to secure the unpaid purchase price of property; purchase-money mortgages are express and recorded, while vendor’s liens are implied.
Classification of a transaction as a security device versus a true sale or lease is central to resolving MBE questions about foreclosure, forfeiture, and the borrower’s equity.

Key Terms and Concepts

Security Device
Legal Title
Equitable Title
Mortgage
Deed of Trust
Power of Sale
Installment Land Contract
Forfeiture Clause
Equitable Mortgage
Absolute Deed
Sale-Leaseback
Vendor’s Lien
Purchase-Money Mortgage

Mortgages/security devices - Types of security devices