There is, however, one important distinction between these two classes of mortgages. Every mortgage imposes an obligation on the maker to fulfil the conditions named, and to make stipulated payments at definite times and places. In the case of a mortgage of Class I, failure to live up to the obligations imposed renders the concern liable to certain penalties in addition to forfeiture of title. In Class 2, however, the concern is not the maker of the mortgage, and the extent of the obligation incurred may depend in whole or in part upon the wording of the deed conveying title to the land.
Deeds of conveyance usually contain a clause, more or less broad, warranting the title to the grantee (i.e., the purchaser), and mentioning any existing liens such as mortgages, unpaid taxes, etc., which are to be paid by the grantee. If, then, after mentioning a specific mortgage, the deed merely continues with such words as, "to which this deed is subject," or prefixes the description of the mortgage by the words, "subject to the following mortgage," but does not in terms obligate the purchaser to pay that mortgage, the exact extent of the obligation assumed by him depends on the circumstances surrounding the particular transaction. Speaking generally, in default of payment of principal or interest, the holder of the mortgage has the usual recourse against the original maker of the mortgage and against the property; but should the property fail to yield a sum sufficient to pay the debt and the expenses, the holder cannot obtain a judgment against the purchaser for any deficiency.
If, however, the description of the mortgage is followed by such words as, "which mortgage is hereby assumed by the grantee," the conditions are changed. The purchaser then assumes the obligations of the original mortgagor; and should default and foreclosure ensue, the holder can obtain a judgment against him for any deficiency remaining after the foreclosure sale.
In large transactions, and especially if values fall, or if a title proves faulty, this apparently slight difference in the conditions may cause bankruptcy to one of the parties. Suppose, for example, a tract of land has been acquired without personal assumption of an existing mortgage by the purchaser, and some defect in title is discovered which renders further sale of the property difficult or impossible. The holder may then elect to convey the property to the mortgagee, who under such circumstances has no redress against him. If the value of the property depreciates to such an extent as to be worth less than the amount of the mortgage, it could again be transferred to the mortgagee, and the mortgage thereby be satisfied so far as the purchaser of the property was concerned.
On the other hand, if the grantee specifically assumed the mortgage, he would be forced to pay it even though the value of the property fell far below the amount of the mortgage. This is not an imaginary happening, as it has often been the cause of serious loss. In one instance alone, in the writer's experience, a loss of this nature amounted to over a quarter of a million dollars.
To the accountant the difference between these two classes of mortgages is the distinction between a contingent and a fixed liability, for in the first case the liability may cease to exist if the property is surrendered to the mortgagee. A discussion beyond this point would involve legal matters rather than those pertaining to accounts.