Priority, Subordination, and Transfer of Mortgaged Property

Chapters 31 and 32 followed a parcel from contract to deed. They answered whether a conveyance occurred. This chapter answers a different family of questions, and they are the questions that dominate real-estate finance: when several persons hold interests in the same land, in what order do those interests rank; how may that order be rearranged by agreement or by equity; and what happens when the property, the debt, or the lien is transferred to someone else.

Nine concepts recur throughout the chapter and must be kept distinct. Priority is the rank of an interest against other interests. Validity is whether the interest exists at all. Enforceability is whether it may be asserted against the obligor. Perfection is the step, chiefly in personal-property law, that makes an interest effective against third parties. Recording is the act of depositing an instrument in the public records. Ownership of the debt is the economic entitlement to the payment stream. Ownership of the mortgage interest is the entitlement to the security. Servicing authority is a contractual agency to collect and administer. Standing to enforce is the procedural entitlement of a particular claimant to obtain a judgment or a foreclosure decree. Nearly every persistent error in this field consists of collapsing two of these nine into one.

1. Priority is relational, not absolute. An interest is never simply “senior”; it is senior to a particular competing interest under a particular jurisdiction's rules.
2. The common-law baseline is first in time, first in right. Recording acts modify that baseline; they do not abolish it, and they govern only claimants who satisfy their terms.
3. Recording acts come in three families. Race, notice, and race-notice statutes protect different claimants and demand different proof.
4. Notice may be actual, record, or inquiry. Constructive notice is the genus that includes record notice and, in most States, inquiry notice charged from possession or from references in recorded instruments.
5. An instrument outside the chain of title generally imparts no record notice. Wild deeds and wild mortgages are recorded but undiscoverable by a standard index search, and most jurisdictions treat them as unrecorded for notice purposes.
6. Purchase-money mortgages frequently enjoy a special priority. The mortgage that finances the acquisition may outrank interests attaching through the purchaser, but the rule is statutory and decisional, varies among States, and is not universal or absolute.
7. Vendor and third-party purchase-money mortgages may not rank equally. Where both exist and no agreement governs, many authorities prefer the vendor.
8. Future advances raise a distinct question: whether each advance takes the mortgage's original priority. The classical answer distinguished obligatory from optional advances; modern statutes commonly protect advances up to a stated maximum recorded amount.
9. Statutory liens may relate back. Mechanics' and materialmen's liens frequently take priority from commencement of work or first delivery rather than from filing, which is why construction lenders police the start of work.
10. A modification that increases the burden on the security may lose priority to the extent of the increase. The Restatement approach subordinates the modification, not the whole mortgage.
11. Refinancing does not necessarily forfeit priority. Equitable subrogation and the replacement doctrine may place the new lender in the discharged lender's rank, but only up to the amount actually used to discharge the prior debt.
12. Subrogation gives the new lender the old priority; it does not manufacture a better one. Any increase in principal, and any advance beyond the discharged obligation, ordinarily ranks junior to intervening interests.
13. Subordination is a contract about rank. It can be complete or partial, immediate or automatic upon stated conditions, and it binds only those who agree or who take with notice.
14. Subordination ordinarily does not improve an intervening lienholder's position. The classic solution preserves the intervening claimant's expected recovery and confines the swap to the two consenting parties, which is what produces circular-priority problems.
15. Leases and mortgages rank by ordinary priority rules unless altered by agreement. A senior lease survives foreclosure of a junior mortgage; a junior lease is ordinarily extinguished, which is the practical reason for non-disturbance agreements.
16. A grantee who takes subject to a mortgage does not thereby become personally liable for the debt. The land remains security; the grantee's exposure is loss of the land, not a deficiency judgment.
17. A grantee who assumes the mortgage promises to pay it. The mortgagee may ordinarily enforce that promise as a third-party beneficiary or by subrogation to the mortgagor's rights.
18. Assumption ordinarily converts the original mortgagor into a surety, but does not release the mortgagor. Release requires the mortgagee's agreement, that is, a novation.
19. A due-on-sale clause is an acceleration right, not a restraint that voids the conveyance. Its enforcement is governed today chiefly by federal law and its enumerated exceptions.
20. The mortgage follows the debt. The security is an incident of the obligation, so the transfer of the obligation ordinarily carries the security, and an assignment of the security alone accomplishes little.
21. Who owns the debt and who may enforce it are different questions. Under UCC Article 3, the person entitled to enforce a note may be a holder, a nonholder in possession with the rights of a holder, or a person entitled to enforce a lost or destroyed instrument, and need not be the economic owner.
22. Article 9 governs the sale of promissory notes. A sale of a note is a transaction within Article 9, and attachment of a security interest in a note automatically attaches to the mortgage securing it.
23. Failure to record an assignment does not invalidate the assignment between assignor and assignee. Recording protects the assignee against certain third parties and shapes the record chain; it is not the transfer.
24. Servicing is agency, not ownership. A servicer collects, applies, and administers on behalf of the owner of the debt under a contract that may be transferred without transferring the loan.
25. Securitization is a series of ordinary transfers. It does not pay the borrower's debt, extinguish the mortgage, or create a hidden fund; where it creates a legal question, that question is one of transfer, authority, and enforcement, analyzed under ordinary law.

1. Distinguish priority, validity, enforceability, perfection, recording, ownership of the debt, ownership of the mortgage, servicing authority, and standing.
2. Apply race, notice, and race-notice statutes to competing mortgages and to mortgage-versus-deed contests.
3. Classify notice as actual, record, or inquiry, and evaluate chain-of-title defects such as wild instruments and late recording.
4. Analyze purchase-money mortgage priority, including vendor and third-party financing and competition with pre-existing judgment liens.
5. Distinguish obligatory from optional future advances and apply maximum-indebtedness and construction-lending rules.
6. Evaluate the priority of mechanics' liens, judgment liens, and governmental liens against a recorded mortgage.
7. Determine when a modification of a senior mortgage subordinates the modification to an intervening interest.
8. Apply equitable subrogation and the replacement doctrine to refinancing with intervening liens, and identify the limits of each.
9. Draft and analyze subordination agreements, including partial subordination and circular-priority resolution.
10. Analyze lease-versus-mortgage priority and the operation of subordination, non-disturbance, and attornment agreements.
11. Distinguish a conveyance subject to a mortgage from an assumption, and trace the resulting liability of each party.
12. Apply suretyship principles to the original mortgagor after assumption, including discharge by material modification.
13. Explain the operation and limits of due-on-sale clauses and the exceptions under the Garn–St. Germain Act.
14. Analyze transfers of the note under UCC Article 3 and sales of notes under UCC Article 9.
15. Evaluate a foreclosure claimant's entitlement to enforce, distinguishing ownership, possession, indorsement, and recording.
16. Examine a title chain for mortgage priority, including assignments, releases, modifications, and lien filings.
17. Correct the common misconceptions surrounding recording, assignment, servicing, MERS, and securitization.

• Restatement (Third) of Property: Mortgages §§ 5.4, 7.1–7.6 (Am. L. Inst. 1997) (transfer of the obligation and security; priority, modification, replacement, and subrogation)
• Uniform Commercial Code §§ 3-104, 3-201 to 3-207, 3-301 to 3-309 (negotiability, negotiation, indorsement, persons entitled to enforce, lost instruments)
• Uniform Commercial Code §§ 9-109, 9-203, 9-308, 9-607 (scope over sales of promissory notes; attachment and the mortgage as an incident; automatic perfection; enforcement)
• Garn–St. Germain Depository Institutions Act of 1982, 12 U.S.C. § 1701j-3 (preemption of state limits on due-on-sale enforcement and enumerated exempt transfers)
• State recording acts (race, notice, and race-notice statutes) and state mortgage-recording provisions
• State mechanics'- and materialmen's-lien statutes, including relation-back provisions
• State judgment-lien and docketing statutes
• State future-advance and maximum-indebtedness mortgage statutes
• Carpenter v. Longan, 83 U.S. (16 Wall.) 271 (1872)
• 11 U.S.C. §§ 506, 544, 547 (cited only where the priority analysis requires it)

• Grant S. Nelson, Dale A. Whitman, Ann M. Burkhart & R. Wilson Freyermuth, Real Estate Finance Law (6th ed. 2015)
• Leonard A. Jones, A Treatise on the Law of Mortgages of Real Property (8th ed. 1928)
• 2 William Blackstone, Commentaries on the Laws of England *157–*159 (1766) (the common-law mortgage and the equity of redemption)
• 4 James Kent, Commentaries on American Law *135–*195 (1830) (American mortgage doctrine and assignment)
• A. W. B. Simpson, A History of the Land Law ch. 9 (2d ed. 1986)
• John Baker, An Introduction to English Legal History ch. 17 (5th ed. 2019)
• F. W. Maitland, Equity: A Course of Lectures (rev. ed. 1936) (the equitable jurisdiction over security)
• Patton and Palomar on Land Titles §§ 561–620 (3d ed.) (searching mortgage records and assignments)
• Powell on Real Property chs. 37–38 (mortgages, priority, and transfer)
• Restatement (First) of Restitution and Unjust Enrichment materials on subrogation, as adopted in the mortgage context

A mortgage is a security device. It gives the mortgagee the right to have the land sold, or in title-theory States to hold title until discharge, in order to satisfy an obligation. Because a single parcel may be burdened by many such rights, together with liens arising by operation of law and interests that are not security at all, the law must supply an order in which those claims are satisfied out of the land.

Priority answers only that question. It does not determine whether an interest exists, whether it is enforceable against the obligor, or how much is owed. A junior mortgage is a perfectly valid mortgage; it is simply paid second. An unrecorded mortgage may be fully enforceable against the mortgagor while being subordinate, or even void, as against a protected purchaser. Keeping these axes separate is the whole discipline of the subject.

Priority is also relational and pairwise. A court determines that A outranks B, and that B outranks C, and only then constructs an order. Where those pairwise determinations do not compose into a linear order, a circular-priority problem arises, and the court must resolve it by a distributional rule rather than by a simple ranking. Section 33.20 examines that situation.

The common-law baseline is temporal. Between two interests in the same land, the earlier prevails, because the grantor could not convey twice what was conveyed once, and because a mortgagor who has already encumbered the land can encumber only what remains. The maxim prior tempore, potior jure states the proposition; equity applied it as between equal equities, adding that where the equities are equal, the law prevails.

The rule has two respectable justifications. It is administrable, since dates are ordinarily ascertainable. And it protects reliance, because a lender who takes a first mortgage after a search would otherwise be exposed to defeat by an interest created afterward.

But the temporal rule proved intolerable in a market of secret conveyances. A purchaser or lender could not discover interests that existed only in the parties' desks. The recording acts responded, and every modern American priority problem begins with the temporal rule and then asks whether a recording statute displaces it.

The medieval mortgage was a conveyance. The mortgagor conveyed the fee to the mortgagee upon condition that the estate would revest on payment at the day. Strict application forfeited the land for a day's delay, and Chancery's intervention created the equity of redemption, the mortgagor's right to redeem after default. From that intervention grew the corollary that clogs on the equity of redemption are void, and, in time, the modern understanding that the mortgage is security rather than ownership.

Blackstone described the transaction in conveyancing terms; Kent, writing for an American bar administering a recording system, already treated the mortgage as an incident of the debt. Maitland's account of the equitable jurisdiction explains why the transformation occurred in Chancery rather than at law, and Simpson and Baker trace the doctrinal consequences within the land law.

The transformation matters directly to this chapter. If the mortgage is a conveyance of title, an assignment of the mortgage is a conveyance and the recording system treats it as such. If the mortgage is an incident of a debt, the debt is the principal thing, the security follows it, and recording an assignment becomes a protective and evidentiary act rather than the operative transfer. American law took the second path, which is precisely what Carpenter v. Longan announced in 1872 and what the Restatement (Third) of Property: Mortgages restated more than a century later.

Priority problems reward method. The following sequence is used throughout the chapter, and the worked illustrations in Section 33.32 apply it step by step. It is a sequence of questions, not a formula, and the answer to one question frequently changes the relevance of the next.

1. Identify every claimed interest in the parcel, including nonconsensual liens and non-security interests such as leases and easements.
2. Fix the date each interest was created, distinguishing creation from recording.
3. Determine whether and when each interest was recorded, and in which index it would be found.
4. Identify the jurisdiction's recording statute and classify it as race, notice, or race-notice.
5. Ask whether the later claimant is within the statute's protected class at all.
6. Determine whether that claimant gave value.
7. Determine what notice the claimant had: actual, record, or inquiry.
8. Ask whether any special priority rule applies before applying the recording act mechanically.
9. Examine purchase-money status, both vendor and third-party.
10. Examine statutory and governmental liens, with attention to relation-back provisions.
11. Examine future advances, distinguishing obligatory from optional and checking maximum-indebtedness recitals.
12. Ask whether any mortgage was modified, replaced, refinanced, released, or reinstated.
13. Ask whether equitable subrogation or the replacement doctrine applies, and to what amount.
14. Identify any subordination agreement and determine its scope and beneficiaries.
15. Compose the resulting order, testing whether it is linear or circular.

Part XI develops the recording system in general. This section applies it to mortgages, where the recurring contest is not between two deeds but between a mortgage and a later mortgage, or between a mortgage and a deed, or between a mortgage and a lien arising by operation of law.

A recording act protects a defined class of later claimants against earlier unrecorded interests. Mortgagees for value are within the protected class in every American jurisdiction, either because the statute names them or because “purchaser” is construed to include a purchaser of a lien interest. A donee is not a purchaser for value; a judgment creditor's position varies by State, and in many jurisdictions a judgment lienor is not a protected purchaser because the lien was not acquired in reliance on the record.

The three families differ in what the later claimant must prove. A race statute asks only who recorded first. A notice statute asks whether the later claimant took without notice, and does not require the later claimant to record in order to prevail against the earlier interest, though recording is essential against subsequent claimants. A race-notice statute requires both the absence of notice and prior recording.

Two consequences follow for mortgage practice. First, in a race-notice State a lender that closes without recording promptly assumes a real risk even though its mortgage is valid; the gap between closing and recording is the interval in which priority is lost. Second, in a notice State the earlier unrecorded mortgagee is not saved by recording late, because the later claimant's rights were fixed when it took without notice.

Notice is the pivot of the notice and race-notice systems. Actual notice is subjective knowledge, however obtained, including knowledge acquired from a title report, a conversation, or a prior transaction. Record notice is the notice charged from instruments properly recorded and discoverable within the searcher's chain of title. Constructive notice is the broader legal category of notice imputed regardless of knowledge; record notice is one species of it, and inquiry notice is another.

Inquiry notice arises when the claimant is aware of a fact that would prompt a reasonable person to investigate. Two triggers recur. The first is possession inconsistent with the record: a tenant in occupancy, or a grantee in possession under an unrecorded deed, ordinarily charges a purchaser or lender with notice of whatever inquiry of the occupant would have revealed. The second is a reference in a recorded instrument to another transaction, such as a recital that the conveyance is subject to a lease or an option; the reference charges notice of the terms that reasonable inquiry would disclose.

Notice must be measured at the moment the claimant acquires its interest and gives value. Notice acquired afterward does not retroactively defeat protection, though a lender that learns of a competing claim before disbursing further advances may lose priority for the later advances, as Section 33.11 explains.

Imputed notice completes the picture. Knowledge of an agent acting within the scope of the agency is ordinarily imputed to the principal, so that a closing agent's knowledge of an unrecorded interest may be attributed to the lender it represents.

Recording protects only if the instrument can be found. In a grantor-grantee index system, the searcher runs the grantor index forward from a known owner and the grantee index backward from the present owner. An instrument executed by someone who is not, at the time of recording, within that chain is a wild instrument: physically recorded but practically invisible.

The mortgage analogue is common. A mortgage granted by a person who acquires title only later, and recorded before that acquisition, will not be found by a searcher who begins with the grantor's acquisition date. Many jurisdictions therefore hold that such an early-recorded mortgage imparts no record notice, notwithstanding estoppel by deed as between the original parties, a point developed in Chapter 32.

Late recording produces the mirror problem. A mortgage recorded after the mortgagor has conveyed away the land appears in the index under a name that a searcher has already stopped following. Jurisdictions divide on whether a searcher must run the grantor index forward beyond the date of the grantor's conveyance out.

Name variations, entity mergers, misspellings, and transposed initials defeat searches even when the recorder has done everything correctly. Some States apply idem sonans to charge notice from a phonetically equivalent name; others, particularly with computerized indexes, are stricter. A misindexed instrument raises a further division of authority: some States charge notice because the instrument was delivered for recording, others do not because it was not findable.

A protected claimant under a notice or race-notice act must give value. A lender that disburses loan proceeds gives value; a lender that takes a mortgage as security for a pre-existing debt, without new consideration, forbearance, or a binding extension, may not, and in many jurisdictions is therefore unprotected against an earlier unrecorded interest.

The shelter rule permits a person who takes from a protected purchaser to succeed to that protection, even with notice, so that the protected purchaser's ability to convey what it acquired is not impaired. The rule does not assist a person who created the defect and later reacquires the property.

Value must be given before notice. A lender that has committed to lend but has not yet disbursed, and learns of a competing interest, is protected as to sums already advanced and, in most jurisdictions, as to sums it remains legally obligated to advance, but is exposed as to purely optional advances made after notice. That distinction is the bridge to future-advance doctrine in Section 33.11.

A purchase-money mortgage secures an obligation incurred to acquire the very land encumbered. Two forms exist. In a vendor purchase-money mortgage the seller takes back a mortgage for part of the price. In a third-party purchase-money mortgage an institutional lender advances the acquisition funds and takes a mortgage at the closing.

The doctrinal justification for special priority is instantaneous seisin. The purchaser's title and the mortgage arise in the same transaction, and the purchaser is treated as never having held the land free of the security. A judgment lien or other interest that attaches to whatever the purchaser owns therefore attaches to an estate already encumbered. The Restatement (Third) of Property: Mortgages states the rule in these terms and gives the purchase-money mortgage priority over interests attaching through the mortgagor.

The rule is not universal and not absolute. It is a rule about interests arising through the purchaser; it does not defeat interests already burdening the land in the seller's hands, such as a prior mortgage the buyer takes subject to, an existing easement, or a recorded restriction. Its application to pre-existing judgment liens against the purchaser varies among States, and some States have narrowed or codified it. And in every jurisdiction the purchase-money mortgagee must still record to protect itself against subsequent purchasers and lenders; instantaneous seisin resolves a contest with liens attaching through the buyer, not the recording-act contest with a later bona fide claimant.

Where a vendor and a third-party lender both take purchase-money mortgages in the same transaction and no agreement addresses rank, many authorities prefer the vendor, on the reasoning that the vendor parted with the land itself. Others treat the two as ranked by recording. Because the question is genuinely unsettled, the transactional answer is invariable: the parties record an express subordination or intercreditor agreement rather than litigate the default rule.

A judgment lien attaches by statute, ordinarily upon docketing in the county where the land lies, and reaches the debtor's interest as it then exists. It is a creature of statute in every particular: what it attaches to, when it attaches, how long it lasts, and how it is renewed. Because the judgment creditor did not extend credit in reliance on the record, many States exclude judgment creditors from the class protected by the recording act, with the consequence that an unrecorded mortgage may outrank a later-docketed judgment lien.

Real-property tax liens and assessments generally take priority over private liens by force of statute, including mortgages recorded earlier, because the taxing power would otherwise depend on private lending order. Federal tax liens follow their own regime, with priority ordinarily dating from filing of notice, subject to statutory protections for certain purchasers, holders of security interests, mechanics' lienors, and judgment lien creditors, and to specific rules for disbursements made after the lienor acquires knowledge of the filing.

Other statutory claims, including municipal utility liens, nuisance-abatement liens, and homeowners-association assessment liens, are likewise creatures of statute, and their rank against a recorded mortgage must be read from the statute or the recorded declaration. Chapter 24 examined association liens in the common-interest context, including the split-lien structures adopted in many States.

A future-advance mortgage secures not only the sum advanced at closing but sums to be advanced later. The priority question is whether each later advance takes the rank of the original recording or the rank of the date it was made. Construction lending, revolving credit, and home-equity lines all depend on the answer.

The classical common-law rule distinguished obligatory from optional advances. An obligatory advance, one the lender is contractually bound to make on stated conditions, relates back to the mortgage's original priority even if the lender knows of an intervening lien, because the lender has no power to withhold it. An optional advance, one the lender may decline, takes priority as of the date of advance if the lender had notice of the intervening interest when it advanced, and relates back if it did not.

The distinction is easy to state and hard to apply. Loan documents routinely condition disbursement on the absence of default, on satisfactory inspection, or on the lender's reasonable satisfaction, and courts have divided over whether such conditions convert an obligatory commitment into an optional one.

Modern statutes in many States have displaced the inquiry. The common pattern gives all advances the priority of the recorded mortgage provided the mortgage states that it secures future advances and, frequently, states a maximum principal amount. Under these statutes the intervening lienholder's remedy is to bargain with the senior lender rather than to defeat later advances by giving notice. Because the statutory patterns differ materially, the applicable statute must be read; the common-law distinction survives where no statute governs.

Dragnet or cross-collateralization clauses raise a related but distinct question. A dragnet clause purports to secure all present and future obligations of the mortgagor to the lender, including unrelated debts. Courts construe such clauses narrowly, frequently limiting them to obligations of the same class or those the parties reasonably contemplated, and some States restrict them by statute, particularly in consumer transactions.

A construction mortgage is a future-advance mortgage with an unusual risk profile: the collateral does not yet exist in the form the lender is underwriting, and every dollar advanced increases the value of the very property that the mechanics'-lien claimants will pursue. The lender therefore controls disbursement through a draw schedule, inspections, lien waivers, and, frequently, a funds-control or title-company disbursing arrangement.

Two protective devices recur. The first is recording and, where permitted, commencing work only after recording, so that the mortgage predates any relation-back date for liens. The second is the collection of conditional and unconditional lien waivers at each draw, so that the pool of potential claimants is documented and reduced as work proceeds.

Where the statute measures lien priority from the visible commencement of work on the site, even the clearing of the land or delivery of materials may fix a relation-back date earlier than the mortgage's recording. That is why construction lenders require a pre-closing inspection and an affidavit of no commencement, and why title insurers issue coverage against liens for work begun before recording only after such an inspection.

Mechanics'-lien statutes secure the claims of those whose labor and materials improve the land. They exist in every State and are alike only in purpose. The critical variable for priority is the date from which the lien is measured. Some statutes date the lien from the individual claimant's first work or delivery. Others date every lien on the project from the visible commencement of the improvement, so that a subcontractor arriving in month nine shares the priority of the excavator who broke ground in month one. Still others date the lien from recording of the claim, which subordinates it to intervening recorded interests.

The consequence for a construction mortgage is direct. Under a first-visible-work statute, a mortgage recorded after a bulldozer has cleared the site may be junior to every lien on the project, notwithstanding that the lien claims are filed months later.

Statutory compliance is strict. Preliminary notices, deadlines for filing the claim, deadlines for suit, and the required contents of the notice are conditions of the lien in most States. A claimant who misses them has a contract claim against whoever hired it and no lien at all. Conversely, a lender that ignores lien filings during a project may find that its remaining advances fund a building it will share with the trades.

A senior mortgagee and a mortgagor may modify their bargain. They may extend maturity, change the interest rate, capitalize arrears, alter amortization, or advance additional principal. When a junior interest exists, the modification raises a question of fairness: the junior lender priced its position against a senior obligation of a known size and shape.

The Restatement (Third) of Property: Mortgages adopts a proportionate response. A modification that materially prejudices the junior interest is subordinated to that interest to the extent of the modification; the senior mortgage retains its original priority for the original obligation. The junior lienholder is thus protected against enlargement without being handed a windfall promotion over the entire senior debt.

Applying that standard requires asking whether the change increases the burden on the security. An increase in principal or interest rate ordinarily does. A pure extension of maturity ordinarily does not prejudice a junior lender and may benefit it, since it postpones foreclosure. Capitalizing accrued interest is an intermediate case and is analyzed as an increase to the extent it enlarges the sum that must be paid before the junior interest is reached.

The transactional response, as always, is consent. A senior lender contemplating a material modification obtains a subordination or consent agreement from the junior lienholder and records it, converting an uncertain doctrinal question into a documented one.

Refinancing is the ordinary event that makes priority difficult. A homeowner with a first mortgage of $200,000 and an intervening judgment lien of $30,000 borrows $200,000 from a new lender, which pays off the first mortgage and receives a mortgage of its own. If priority followed recording dates mechanically, the judgment lien would be promoted to first position by an event that did not change its economic expectation in the slightest, and the new lender, which merely stepped into the shoes of the old, would fall to second.

The Restatement addresses this through the replacement doctrine: a senior mortgage that is replaced by a new mortgage retains its priority as against intervening interests, except to the extent that the replacement materially prejudices the holder of the intervening interest or is made with that holder's consent to a different rank. The classic instance of material prejudice is an increase in the principal amount or in the interest rate, and to that extent the new mortgage ranks junior.

Two boundaries deserve emphasis. First, the doctrine preserves the old rank; it does not create a new one. If the discharged mortgage had a balance of $180,000, the replacement lender's senior position is $180,000, and the excess advanced ranks behind the intervening lien. Second, the doctrine operates against interests that existed when the replacement occurred; it says nothing about interests arising afterward, which are governed by ordinary recording rules.

Equitable subrogation reaches the same practical result by a different route. A person who pays a debt secured by a mortgage, at the debtor's request or to protect its own interest, and who is not a mere volunteer, may be subrogated to the position of the paid mortgagee. The doctrine is restitutionary: it prevents the unjust enrichment of an intervening lienholder who would otherwise be advanced without consideration.

The persistent litigated issue is the effect of the new lender's knowledge of the intervening lien. Three positions exist in American law. The strictest denies subrogation to a lender with actual knowledge, on the ground that a lender who knew and lent anyway assumed the risk. An intermediate position denies subrogation only where the lender's conduct amounts to culpable negligence, distinguishing constructive from actual knowledge. The Restatement adopts the most permissive position: subrogation is available even to a lender with actual knowledge of the intervening interest, provided the intervening holder is not materially prejudiced, because that holder receives exactly the position it bargained for.

Jurisdictions genuinely divide, and the division is not merely academic. In a State following the strict rule, a refinancing lender whose title search disclosed a junior judgment and which nonetheless closed may find itself second. In a Restatement jurisdiction the same lender is subrogated to the extent of the payoff.

Prejudice is the constant limit in every version of the doctrine. Subrogation is denied, or limited, where the intervening lienholder's position would be worse than before: where the new loan is larger, bears a higher rate, has a longer term that delays the junior's realization, or where the junior lienholder has changed position in reliance on the release of the senior mortgage.

Subrogation must also be distinguished from its neighbors. It is not subordination, which is contractual. It is not assignment, since the paid mortgage is discharged of record and the subrogee's claim rests in equity. And it is not a defense to the borrower's obligation; the borrower owes the new lender under the new note regardless of how the priority contest with the junior lienholder is resolved.

Subordination is the contractual rearrangement of rank. A senior lienholder agrees that its interest shall be junior to an interest that would otherwise be junior to it. Nothing in the recording acts prevents this; priority is a private entitlement, and its holder may give it away.

The agreement must identify the subordinating lien, the benefited lien, and the extent of the subordination with precision. A subordination to “a construction loan not exceeding $4,000,000, bearing interest at not more than a stated rate, maturing not later than a stated date” is enforceable and predictable. A subordination to “any future financing obtained by the owner” has been held too indefinite in some jurisdictions and, where enforced, exposes the subordinating party to unlimited dilution.

Subordination may be complete or partial. It may be immediate, effective on recording, or automatic, operating by its own terms when stated conditions occur, as in a lease that provides that the tenant's estate shall be automatically subordinate to any future mortgage of the fee. Automatic clauses are ordinarily paired with the non-disturbance protections examined in Section 33.19, because a tenant that subordinates without non-disturbance has agreed to be extinguished.

Subordination agreements should be recorded. Recording is not what makes the agreement effective between the parties, but it puts subsequent searchers on notice of the rearranged order and prevents a later purchaser of the subordinated lien from claiming to have taken without notice.

Subordination between two parties cannot, consistently with principle, improve the position of a third. Suppose three liens on a parcel worth $300,000: A for $100,000, recorded first; B for $100,000, recorded second; C for $150,000, recorded third. Without more, A, then B, then C. Now A subordinates to C. A is junior to C; C is junior to B by recording; B is junior to A. The ranking is circular.

The prevailing solution, sometimes called partial subordination or the subrogation approach, gives C the dollars A would have received, but only those dollars. A's $100,000 slot is paid to C first. B is then paid its $100,000 from the next dollars, exactly as it expected. C's remaining $50,000 claim is paid, if at all, from what is left, and A takes what remains of its own former slot after C is satisfied out of it.

Applying this to $300,000: C receives $100,000 out of A's slot; B receives $100,000; C receives its remaining $50,000; A receives $50,000. B has neither gained nor lost by an agreement to which it was not a party, which is the point of the rule.

The alternative, sometimes described as complete subordination, simply reverses A and C and pays C, then B, then A. It is easier to state and harder to justify, because it can hand B a windfall or a loss depending on the numbers. Drafters avoid the question by specifying in the agreement itself the dollar mechanics of the subordination and by obtaining the intervening lender's consent where its position is affected.

Chapters 25 through 27 treated the leasehold as an estate. Priority determines what becomes of that estate when the fee is foreclosed. Ordinary rules apply: a lease that predates the mortgage is senior, and foreclosure of the junior mortgage does not disturb the tenant, though the purchaser takes the reversion subject to the lease. A lease made after the mortgage is junior, and foreclosure ordinarily extinguishes it, terminating both the tenant's estate and the landlord's rent stream.

Each party finds the default unattractive in some market. A lender does not want to be bound to a below-market lease made after its loan; it also does not want to lose a creditworthy anchor tenant whose rent supports the building's value. A tenant that has invested in improvements cannot accept extinguishment on a landlord default it cannot control.

The subordination, non-disturbance, and attornment agreement resolves all three questions in one instrument. The tenant subordinates its leasehold to the mortgage. The lender agrees that, so long as the tenant is not in default, foreclosure will not disturb the tenant's possession. The tenant agrees to attorn to the purchaser at foreclosure, recognizing it as landlord and thereby preserving the lease and the rent. The document is ordinarily recorded, or a memorandum of it is recorded, so that the arrangement binds successors.

Non-disturbance without attornment leaves the purchaser with a tenant it cannot compel to recognize it. Attornment without non-disturbance leaves the tenant subject to extinguishment at the lender's election. The three provisions are drafted together because each is incomplete alone.

Easements, real covenants, and equitable servitudes are interests in land, and their contest with a mortgage is resolved by the same recording principles. A servitude created and recorded before the mortgage survives foreclosure; the purchaser takes subject to it. A servitude granted by the mortgagor after the mortgage is ordinarily extinguished by foreclosure of the senior mortgage, because the mortgagor could not burden the estate already pledged.

Two qualifications matter in practice. First, a mortgagee may consent to and subordinate to a servitude, and lenders routinely do so for utility easements, access easements, and declarations creating common-interest communities under Chapter 24; the consent is recorded so that the servitude survives foreclosure. Second, easements arising by implication, necessity, or prescription are not recorded and may nonetheless bind a foreclosure purchaser under the doctrines developed in Chapter 21, subject to the inquiry-notice principles of Section 33.6.

A servitude that is extinguished as against the foreclosure purchaser is not thereby erased between the original parties, and the beneficiary's remedies against the grantor for breach of covenant survive. The point is a specific application of the general lesson that priority determines rank against a particular claimant, not existence.

A mortgagor may ordinarily convey the mortgaged land. The mortgage is a lien or a defeasible title, not a prohibition on alienation, and a conveyance in violation of a loan covenant is still a conveyance. What varies is the transferee's relationship to the debt.

A grantee who takes subject to an existing mortgage takes the land burdened by the lien but makes no promise to pay the obligation. The consequences are precise. The mortgagee may foreclose and sell the land if the debt is unpaid. The grantee may lose the property. But the grantee is not personally liable, and no deficiency judgment may be entered against it, because it never promised to pay.

The grantee nonetheless has a strong practical incentive to pay, since its equity in the property is extinguished by foreclosure. Where the grantee paid only the equity, the price reflecting the outstanding balance, the arrangement is economically sound: the grantee has bought the owner's position and the risk of the lien.

The mortgagor, by contrast, remains fully liable on the note. Conveyance does not discharge a contractual obligation, and the mortgagor whose grantee stops paying faces both foreclosure of the land it no longer owns and a deficiency claim against itself.

An assuming grantee promises to pay the mortgage debt. The promise is ordinarily made in the deed, in a separate assumption agreement, or in an assumption approved by the lender. Its effect is to add an obligor.

The mortgagee may enforce the promise. Most jurisdictions reach this result by treating the mortgagee as an intended third-party beneficiary of the grantee's promise to the mortgagor; others reach it by subrogating the mortgagee to the mortgagor's contract rights against the grantee. Under either theory the mortgagee may sue the assuming grantee for a deficiency.

The original mortgagor is not released. Absent an agreement by the mortgagee to substitute obligors, the mortgagor remains liable on the note, and its recourse is against the grantee that promised to pay.

Successive transfers complicate the pattern. If A assumes and later conveys to B, who takes subject to the mortgage, A remains liable on its assumption and B is not personally liable. If B also assumes, the mortgagee has three obligors: the original mortgagor, A, and B. If, however, a grantee takes subject to and then conveys to a grantee who assumes, courts divide over whether the mortgagee may enforce the later assumption, because the intermediate grantee owed nothing and so, on one view, received no benefit to pass along.

After an assumption, the relationship among the three parties changes shape. As between the mortgagor and the assuming grantee, the grantee is the principal obligor and the mortgagor is a surety: the grantee should pay, and the mortgagor pays only if the grantee does not. The land is the primary fund, the grantee is the primary obligor, and the mortgagor stands behind.

The mortgagee is bound to respect that structure once it has notice of the assumption. Under general suretyship principles, a creditor that materially modifies the principal obligation without the surety's consent, or that releases the principal or impairs the collateral, discharges the surety to the extent of the resulting prejudice. Applied here, a mortgagee that grants the assuming grantee an extension of time or increases the interest rate, without the mortgagor's consent, may discharge the mortgagor in whole or in part.

The mortgagor may also have affirmative rights: exoneration, to compel the grantee to pay before the mortgagor is called upon; reimbursement, if the mortgagor pays; and subrogation to the mortgagee's security if the mortgagor satisfies the debt.

Release of the original mortgagor requires the mortgagee's assent. A novation is a three-party agreement by which the mortgagee accepts the grantee as obligor and discharges the mortgagor. It requires an existing valid obligation, agreement of all parties, extinguishment of the old obligation, and a valid new one. Nothing less will do: an assumption between mortgagor and grantee, however emphatic, cannot release the mortgagor from a contract to which the mortgagee is a party, and a lender's mere acceptance of payments from the grantee is ordinarily held insufficient to establish a novation.

A due-on-sale clause permits the lender to accelerate the entire balance upon transfer of the property, or of an interest in it, without the lender's consent. Lenders use the clause for two reasons: to police the credit quality and stewardship of the person in possession, and to prevent an assumption of a below-market loan when rates rise.

Its enforceability was contested through the 1970s. Several state courts, treating the clause as a restraint on alienation, refused enforcement absent proof that the transfer impaired the lender's security or increased the risk of default. Lenders regarded that jurisprudence as a serious impairment of portfolio value in a period of rising interest rates.

Congress resolved the conflict in the Garn–St. Germain Depository Institutions Act of 1982, codified at 12 U.S.C. § 1701j-3, which preempts state law restrictions and provides that a lender may enforce a due-on-sale clause according to its terms, subject to enumerated exceptions.

The exceptions are principally consumer and family protections applicable to loans secured by residential real property containing fewer than five dwelling units. They include, among others, the creation of a lien subordinate to the lender's and not relating to a transfer of occupancy rights, a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety, the grant of a leasehold of three years or less without an option to purchase, a transfer to a relative resulting from the borrower's death, a transfer to a spouse or child who will occupy the property, a transfer resulting from a decree of dissolution of marriage or legal separation where the spouse becomes an owner and occupies, and a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of occupancy rights. The statute must be read for its precise terms and for the regulations implementing it; the list here identifies the categories, not their full conditions.

Two consequences are frequently misunderstood. First, the clause creates a right to accelerate; it does not make the deed void. A conveyance in breach transfers title, and the grantee owns land subject to an accelerated debt and a possible foreclosure. Second, the lender may waive the clause, expressly or by conduct, and many lenders decline to enforce where the loan is at or above market rate. Acceleration is an election, not an automatic event.

The mortgage secures an obligation. The obligation is ordinarily evidenced by a promissory note, and the note is the principal thing. That relationship supplies the transfer rules.

Carpenter v. Longan held that the note and the mortgage are inseparable, the note being essential and the mortgage an incident; an assignment of the note carries the mortgage with it, while an assignment of the mortgage alone is a nullity. The Court also held that a bona fide purchaser of a negotiable note takes the mortgage free of equities the maker might assert against the payee, because the incident follows the principal.

The Restatement (Third) of Property: Mortgages § 5.4 restates the modern rule. A transfer of the obligation transfers the mortgage unless the parties agree otherwise. A transfer of the mortgage without the obligation is ineffective, in the sense that the assignee of the bare mortgage acquires nothing it can enforce for its own account; some formulations treat the mortgage as held for the benefit of the owner of the debt, others treat the transfer as a nullity, and States differ.

The doctrinal basis is not a slogan. The mortgage exists to secure payment; a person who holds security for a debt owed to someone else has security for nothing, and enforcement would produce a foreclosure whose proceeds belong to a stranger to the action. The rule follows from what a security interest is.

The rule has limits. Parties may by agreement separate the mortgage from the debt for a limited purpose, most commonly by designating a nominee to hold record title to the mortgage as agent for the noteholder. Whether such a separation is effective, and what the nominee may do, is a question of state law and of the authority actually conferred; the rule that the mortgage follows the note does not answer it by itself.

Whether Article 3 governs a mortgage note depends on whether the note is a negotiable instrument. Section 3-104 requires an unconditional promise to pay a fixed amount of money, payable to bearer or to order, payable on demand or at a definite time, and containing no undertaking beyond those permitted. Standard residential notes are commonly drafted to satisfy the definition; commercial notes with extensive covenants, variable formulas, or references incorporating other agreements frequently do not, and are transferred as ordinary contract rights by assignment.

For a negotiable note, transfer occurs by negotiation. An order instrument is negotiated by indorsement and delivery; a bearer instrument, including one indorsed in blank, by delivery alone. An indorsement in blank makes the note payable to bearer; a special indorsement names the transferee.

Section 3-301 identifies who may enforce: the holder of the instrument, a nonholder in possession with the rights of a holder, and a person entitled to enforce a lost, destroyed, or stolen instrument under § 3-309 or a payment-mistake claimant under § 3-418(d). The provision states explicitly that a person may be entitled to enforce although not the owner of the instrument. That single sentence disposes of a great deal of confusion.

Holder in due course status under § 3-302 is a further question, relevant to defenses rather than to entitlement. A transferee that takes for value, in good faith, and without notice of specified problems takes free of most of the maker's defenses. A transferee that fails those tests may still enforce, subject to defenses.

Transfer without indorsement has consequences worth stating. Under § 3-203, delivery for the purpose of giving the transferee the right to enforce vests the transferor's rights in the transferee, and the transferee acquires a specifically enforceable right to an unqualified indorsement; but until indorsement, the transferee is not a holder and must prove the transaction to establish its status as a nonholder in possession with the rights of a holder.

Lost notes are governed by § 3-309, which permits enforcement by a person who was entitled to enforce when loss of possession occurred, or who acquired ownership from such a person, provided the loss was not by transfer or lawful seizure, the location cannot reasonably be determined, and the court affords the obligor adequate protection against double liability.

Article 9 applies not only to security interests in promissory notes but to outright sales of them. Section 9-109(a) brings sales of promissory notes within the Article's scope, and the drafters did so deliberately, because the market treats sales and secured loans against notes interchangeably and both require a public-record answer to competing claims.

Two provisions do the essential work for mortgage practice. Section 9-203(g) provides that the attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in that security interest or lien. That is the Article 9 statement of the follows-the-debt rule, and it operates automatically, without a separate assignment of the mortgage. Section 9-308(e) adds the perfection counterpart: perfection of a security interest in the right to payment perfects a security interest in the supporting mortgage.

The consequence is that the buyer of a mortgage note that files a financing statement, or that perfects by possession of the note, has an Article 9 answer to competing claimants to the note, and its interest in the mortgage rides along. It does not thereby acquire a recorded assignment of the mortgage in the real-property records, and the two systems answer different questions: the real-property records govern claims to the land, and Article 9 governs claims to the note.

Article 9 also supplies enforcement machinery in § 9-607, which permits a secured party to enforce the obligations of the account debtor and, upon a proper record, to be treated as entitled to record an assignment of the mortgage and to enforce it nonjudicially in appropriate cases. The section is drafted narrowly and does not displace state foreclosure law.

Recording an assignment of a mortgage serves three functions. It maintains a visible chain in the real-property records so that a searcher can identify the current lienholder. It protects the assignee against a subsequent purchaser of the same mortgage from the same assignor, in States whose recording acts reach assignments. And it protects the assignee against the mortgagor who, without notice of the assignment, pays the original mortgagee, though in many States actual notice to the mortgagor is what matters and recording alone does not compel a payor to search.

What recording does not do is transfer anything. As between assignor and assignee the transfer is complete on assignment and, where a negotiable note is involved, on negotiation of the note. An unrecorded assignment is a valid assignment.

Partial assignments raise a rank problem of their own. Where a mortgagee assigns part of the debt and retains the rest, and the security is insufficient, three approaches appear in the cases: pro rata sharing between assignor and assignee; priority to the assignee, on the theory that the assignor impliedly warranted the sufficiency of what it sold; and priority in the order of assignment where there are several assignees. Participation agreements in commercial lending displace the default by contract, allocating payments, control, and enforcement rights among the lead lender and participants.

Successive assignments of the same mortgage by a dishonest assignor present the classic competing-claimants problem. Where a negotiable note exists, the answer ordinarily turns on possession and negotiation of the note, so the assignee that took the note prevails over one that took only a recorded paper assignment. Where the obligation is not negotiable, the contest is governed by Article 9's priority rules for competing interests in the note and by the recording act as applied to assignments. In either case the practical lesson for a purchaser of mortgage loans is the same: obtain the original note, properly indorsed, and record the assignment.

A modern residential mortgage loan may be originated by one entity, sold to an aggregator, deposited into a trust, serviced by a fourth party, and administered by a trustee with a custodian holding the notes. Each of those transactions is an ordinary legal act: a sale of a note, an assignment, a delivery to a custodian, an agency for servicing. Securitization is the aggregate name for a sequence of ordinary transfers; it is not a distinct legal doctrine.

The roles must be kept distinct. The owner of the debt is entitled to the economic return. The person entitled to enforce is determined by Article 3 for a negotiable note. The mortgagee of record is whoever appears in the real-property records, which may be an originator, an assignee, or a nominee. The servicer is an agent with contractual authority to collect, apply payments, communicate with the borrower, and in many agreements to conduct foreclosure in the name of the owner or trustee. The trustee holds for certificateholders under a pooling and servicing agreement. The custodian holds documents.

Where a nominee system is used to hold record title to mortgages as agent for the noteholder, the doctrinal questions are ordinary ones: whether the nominee held the interest as agent, whether it had authority to assign, and whether the assignee is the person entitled to enforce the note. Courts across the country have addressed those questions with conventional agency and mortgage law, and the answers have varied with state law and with the record made in the particular case. A nominee arrangement is not, in itself, a defect in the mortgage.

Several propositions circulated outside the professional literature should be identified as wrong. Securitization does not pay the borrower's debt; the trust bought the loan, it did not satisfy it. It does not extinguish the mortgage; the security follows the obligation into the trust. It does not create an account from which the borrower may draw. It does not, standing alone, produce a title defect, because the borrower's title is unaffected by transfers of the lender's interest. And it does not deprive the owner of the debt of enforcement rights, though it may raise a genuine question of who holds the note and with what authority.

That genuine question is worth stating precisely, because it is the legitimate core of an otherwise unreliable literature. When a foreclosing claimant appears, the borrower may properly ask whether that claimant is a person entitled to enforce the note under § 3-301, whether the mortgage came to it with the debt, and whether an agent acting in its name had authority. Those are ordinary questions of evidence and authority, and they are answered under Article 3, Article 9, agency law, and state foreclosure procedure, not by any theory that securitization dissolves obligations.

The transactions treated in Parts VI and VII are easily confused because each is described in ordinary speech as “selling the mortgage” or “transferring the loan.” The following table separates them by what actually moves.

Priority cannot be determined from a mortgage document. It is determined from a search, because the document says nothing about what else has been recorded, what liens have attached by operation of law, and what agreements have rearranged rank.

A competent examination for mortgage priority proceeds through the records in a defined order and reduces the results to a table of interests with dates. Recording dates and times matter: where two instruments are recorded the same day, the recorder's time stamp and sequence number may decide the contest, and some States apply a same-day rule that treats simultaneously recorded instruments as of equal rank or as ordered by the transaction's logic.

1. Run the grantor-grantee indexes to establish the chain of title and each owner's period of ownership.
2. Search the mortgage or deed-of-trust records against each owner for the period of ownership, and forward where the jurisdiction requires.
3. Search assignments of each mortgage to identify the record lienholder and any gaps in the assignment chain.
4. Search releases and satisfactions, and confirm that each release corresponds to a recorded mortgage and was executed by the record holder.
5. Identify modification, consolidation, extension, and spreader agreements, which may change amount, term, or the property covered.
6. Read each mortgage for future-advance language, a maximum principal amount, dragnet clauses, and due-on-sale provisions.
7. Search subordination agreements and intercreditor agreements, and read their scope.
8. Search judgment dockets for each owner and for name variants, and check the lien's duration and any renewals.
9. Search state and federal tax liens, including filings against similar names.
10. Search mechanics'-lien filings and, on new construction, inspect the site and obtain an affidavit as to commencement of work.
11. Search lis pendens, pending foreclosure filings, receiverships, and bankruptcy filings.
12. Check leases and memoranda of lease, and any recorded SNDAs.
13. Verify name variations, entity mergers, name changes, and trustee successions.
14. Reconcile recording dates and times for same-day instruments.
15. Reduce the findings to a dated schedule of interests before drawing any conclusion about rank.

1. “The first mortgage recorded always wins.” Only in a pure race jurisdiction, and even there only against interests within the statute. Notice and race-notice statutes add requirements, and purchase-money priority, relation-back of statutory liens, subrogation, and subordination all displace recording order.
2. “An unrecorded mortgage is void.” It is valid and enforceable against the mortgagor and against anyone who is not protected by the recording act. Recording addresses priority against third parties, not existence.
3. “A mortgage assignment must be recorded to be valid.” The assignment is effective between assignor and assignee without recording. Recording protects against certain third parties, maintains the record chain, and may be required as a procedural step in foreclosure.
4. “Selling the note cancels the debt.” A sale substitutes an owner. The borrower owes the same amount to a different party, and payment to the former owner after notice of the transfer is at the borrower's risk.
5. “The mortgage cannot be transferred.” It is transferred routinely, as an incident of the obligation it secures.
6. “The note and mortgage can never be separated in any sense.” The maxim means that the mortgage passes with the debt and that a bare assignment of the mortgage gives the assignee nothing to enforce for itself. Parties may nonetheless arrange for a nominee or agent to hold record title to the mortgage for the noteholder, and the effect of such arrangements is a question of state law and actual authority.
7. “A servicer must own the debt.” Servicing is an agency created by contract. Ownership and servicing frequently reside in different entities, and either may change without the other.
8. “Only the original lender can enforce a mortgage.” Any person entitled to enforce the note under § 3-301, holding the mortgage as its incident, may enforce, subject to state foreclosure requirements.
9. “Securitization extinguishes the mortgage.” It transfers the loan. The security follows the obligation, and the borrower's duty is unchanged.
10. “A borrower becomes debt-free when the loan enters a trust.” The trust purchased the loan; it did not satisfy it. No fund is created for the borrower's benefit.
11. “MERS automatically invalidates a mortgage.” A nominee arrangement is analyzed under ordinary agency and mortgage law. Outcomes have turned on state law and on the authority shown in the particular case, not on the mere existence of a nominee.
12. “Taking subject to a mortgage means assuming the debt.” It means the opposite. The grantee risks the land; it does not promise to pay and is not exposed to a deficiency.
13. “Assumption releases the original borrower.” It adds an obligor. Release requires the mortgagee's agreement in a novation.
14. “A due-on-sale clause makes the conveyance void.” It gives the lender a right to accelerate. Title passes; the debt may become due.
15. “Refinancing always loses the original priority.” Equitable subrogation and the replacement doctrine frequently preserve the discharged mortgage's rank, up to the amount used to discharge it, subject to jurisdictional variation and prejudice.
16. “Subrogation lets the new lender leapfrog for the full new loan.” It preserves the old rank only. Any increase in principal ordinarily ranks behind the intervening interest.
17. “A subordination agreement simply swaps two liens.” It rearranges rank between its parties. A nonconsenting intervening lienholder is neither promoted nor demoted, which is why partial subordination and circular-priority analysis exist.
18. “A mortgage modification can never affect priority.” A modification that materially prejudices a junior interest is ordinarily subordinated to that interest to the extent of the prejudicial change.
19. “Recording proves who owns the note.” The real-property records show recorded interests in land. Ownership of a negotiable instrument is established by the instrument, its indorsements, and possession, together with the transfer documents.
20. “Possession of a copy of the mortgage establishes the right to enforce.” Entitlement to enforce a negotiable note depends on possession of the instrument, or on lost-instrument status, not on custody of the security document.
21. “A judgment lien always outranks a later purchase-money mortgage.” In most jurisdictions the purchase-money mortgage prevails over liens attaching through the purchaser, subject to statutory variation.
22. “A mechanics' lien filed after the mortgage is necessarily junior.” Many statutes date the lien from commencement of work or first delivery, so a later-filed lien may relate back ahead of the mortgage.

Priority is the ordering of claims against a single parcel. The common law ordered them by time; the recording acts reordered them by reference to recording, value, and notice; and a series of special rules, purchase-money priority, future-advance relation back, statutory lien relation back, modification subordination, replacement, and equitable subrogation, reorders them again where mechanical application of the recording act would produce an unjust or commercially unworkable result. Private agreement, in the form of subordination and intercreditor documents, can rearrange rank once more, though only among those who consent.

Transfer raises a parallel set of questions, and the chapter has insisted on keeping three transfers apart. Transfer of the land moves ownership and leaves the lien in place; whether the transferee owes the debt depends entirely on whether it promised to pay. Transfer of the debt moves the obligation and carries the mortgage with it, because the security is an incident of what it secures. Transfer of servicing moves nothing but an agency. The nine concepts introduced at the outset, validity, enforceability, perfection, recording, priority, ownership of the debt, ownership of the mortgage, servicing authority, and standing, are the analytical instruments for keeping these transactions distinct, and the misconceptions catalogued above are almost uniformly the product of merging two of them.

The chapter has also drawn on the architecture built earlier in this Volume. The estates and future interests of Chapters 8 through 15 determine what can be mortgaged and what a foreclosure sale conveys. The concurrent-ownership rules of Chapters 16 through 20 determine whose interest a mortgage granted by one cotenant encumbers. The servitudes of Chapters 21 through 24 and the leaseholds of Chapters 25 through 27 supply the non-security interests whose survival or extinguishment priority determines. The land-use controls of Chapters 28 through 30 constrain what the foreclosure purchaser may do with what it buys. And the conveyancing doctrines of Chapters 31 and 32 supply the instruments whose recording the whole priority system presupposes.

What remains is realization. Priority determines who is paid, and in what order, out of the proceeds of a sale; it does not conduct the sale. The next chapter, Foreclosure and Redemption, takes up the procedures by which the security is converted into money: judicial and power-of-sale foreclosure, the parties who must be joined and the consequence of omitting a junior lienholder, the conduct and confirmation of the sale, the application of proceeds according to the priorities established here, deficiency judgments and the anti-deficiency statutes that restrict them, and the statutory and equitable rights of redemption that descend from the Chancery intervention with which this chapter's history began.

• Restatement (Third) of Property: Mortgages §§ 5.4, 7.1–7.6 (Am. L. Inst. 1997), with the accompanying comments and reporters' notes
• Grant S. Nelson, Dale A. Whitman, Ann M. Burkhart & R. Wilson Freyermuth, Real Estate Finance Law chs. 5, 9 (6th ed. 2015)
• Grant S. Nelson & Dale A. Whitman, Adopting Restatement Mortgage Subrogation Principles: Saving Billions of Dollars for Refinancing Homeowners, 2006 B.Y.U. L. Rev. 305
• Leonard A. Jones, A Treatise on the Law of Mortgages of Real Property §§ 458–520, 736–820 (8th ed. 1928) (assignment and priority in the classical American law)
• 4 James Kent, Commentaries on American Law *135–*195 (1830)
• Uniform Commercial Code, Permanent Editorial Board Report on Application of the UCC to Selected Issues Relating to Mortgage Notes (2011)
• Patton and Palomar on Land Titles §§ 561–620 (3d ed.) (examination of mortgage records and assignments)
• A. W. B. Simpson, A History of the Land Law ch. 9 (2d ed. 1986) (the mortgage and the equity of redemption)
• John Baker, An Introduction to English Legal History ch. 17 (5th ed. 2019)
• F. W. Maitland, Equity: A Course of Lectures (rev. ed. 1936)