Rethinking Future Advance Mortgages: A Brief for the Restatement Approach

Abstract

In many land financing transactions it is commercially advantageous to enter into a present mortgage even though a significant portion of the loan funds is not to be advanced to the mortgagor until some future date. The most common examples are construction loans and other loans to improve real property, in which most or all of the funds are advanced in installments as work progresses and the property increases in value. Another illustration is the “home equity” loan, usually a junior mortgage in which the parties contemplate a series of future advances to fund a variety of the mortgagor’s personal financing needs.

Despite the usefulness of mortgages to secure future advances, problems related to the priority of such advances have long proved perplexing to courts, legislatures, and commentators. The traditional common law approach to these problems, which distinguishes between obligatory and optional advances, has proved inadequate and should be discarded. We will describe this approach and analyze its deficiencies. In its place, we will propose an alternative approach that is embodied in a tentative draft of the Restatement (Third) of Property – Security (Mortgages), which accords all future advances the priority of the original mortgage, but under which the mortgagor may give the mortgagee a notice terminating the effect of the mortgage’s future advances clause. We believe the Restatement solution will work fairly and efficiently for all parties and will facilitate the flow of mortgage funds for worthwhile purposes.

Keywords: future advance mortgage, future advances, Restatement (Third) of Property – Security (Mortgages), construction loans, home equity loans