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Home > Journals > Michigan Law Review > MLR > Volume 38 > Issue 4 (1940)

 

Abstract

In transactions under the Home Owners' Loan Act it is customary for the holder of the mortgage on the property on which a new loan is sought to agree with the H. O. L. C. to accept in full settlement of his claim bonds of the H. O. L. C. of a face value often times less than the amount of the obligation secured by the old mortgage. However, not infrequently the mortgagee also exacts from the home owner a collateral agreement under which the home owner gives him a new second mortgage on the property as security for an undertaking to pay the balance of the old obligation or some part thereof or to cover the difference between the face value and the market value of the bonds received. Whether he may lawfully do this is a question that has been presented for decision to the courts of at least fifteen states. Of interest, therefore, is the decision of the Supreme Court of California in the case of McAllister v. Drapeau, in which the court, by reversing the decision of the district court of appeals erases from the judicial slate the single dissent from the proposition that such collateral agreements are unenforceable unless there is proper disclosure to the H. O. L. C. of the existence of the agreement. The writer wishes to consider (1) the bases for holding that such collateral agreements are unenforceable; (2) whether the home owner can sue for affirmative relief in regard to the collateral agreement; and (3) the effect of disclosure to the H. O. L. C. of the existence of the collateral agreement.

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