Bernie purchases a house for $100,000.He puts $20,000 down,and borrows $80,000 from ABC Bank.ABC Bank does not record the mortgage.Bernie has expensive taste.He later goes to DEF Bank and obtains another $80,000 loan on the house.DEF records the mortgage.Bernie subsequently defaults on both mortgages.What are the rights of the banks?

Question

Quizplus · Accepted Answer

DEF Bank has a superior claim to the house because it recorded the mortgage. Recording a mortgage provides public notice of the mortgage, which gives priority to the mortgage holder over subsequent lien holders. Therefore, DEF Bank would have the right to foreclose on the house and collect the outstanding debt from the sale proceeds. However, ABC Bank would still have a claim to any remaining proceeds after DEF Bank is paid since it has a prior mortgage, but it would not have the right to take the house itself.

Bernie Purchases a House for $100,000