conveyances and incumbrances. And the mortgagee is entitled to rely upon it and to make such advances without regard to what other incumbrances may afterward be put upon it." [Italics ours.] The holding appears to be irrespective of notice.

Cases have held that a limit to such advances need not be stated in the mortgage; see Willis, Groos cases, supra, and also the Freiberg case: "[A mortgage which on its face] gives information as to the extent and purpose *** so that any one interested may by ordinary diligence ascertain the amount of the incumbrance, whether the extent of the advances be limited or not *** will prevail over supervening claims *** as to all advances made within the terms (Italics ours.)

A validly established homestead, however, is incapable of being mortgaged in Texas except for certain purposes: see Article 16, Section 50, Constitution: “* * * no mortgage, trust deed, or other lien on the homestead shall ever be valid, except for purchase money therefor, or improvements made thereon, as hereinbefore provided The words "never be valid" have been interpreted to mean "void," Hall v. Jennings, 104 SW 489, and Inge v. Cain, 65 Texas 75. In King v. Plainview National Farm Loan Assn., 100 SW (2d) 434, reversed on other grounds, 132 Texas 481, 122 SW (2d) 1060, the court held that any attempt to create a lien or mortgage on a homestead to secure a debt, regardless of the method or form used, except for the things provided by the constitution, is a nullity. The homestead right cannot be waived, Bayless v. Guthrie, 235 SW 843. For definition of homestead, see Section 51, Article 16, Constitution.

A mortgage, therefore, would be valid and superior to the claim of homestead only for the purchase price (Denni v. Elliott, 60 Texas 337; Floyd v. Hammond, 268 SW 146), for taxes (Firardeau v. Perkins, 59 CA 552, 126 SW 633, writ of error refused), or for work or materials for improvements (International Building and Loan Assn. v. Barker, 16 CA 676, 39 SW 317). It would appear that an open-end form could be used for such purposes, but that in every instance where money is disbursed the association must purchase the vendor's lien, tax lien or mechanics' liens as the case may be, and advance no amount in excess of that actually used for proper purposes. Dallas Building and Loan Assn. v. Henry, 98 SW (2d) 1030; Building and Loan Assn. of Dakota v. Logan, 33 SW 1088. In Blair v. Guaranty Savings, Loan and Inv. Co., 54 CA 443, 118 SW 608, where a husband and wife executed a mortgage to secure a loan for the purpose of taking up or extending vendor's lien notes and a mechanic's lien, with the understanding that these were to be assigned to the mortgagee, and that the notes and lien were so assigned together with the superior title of the vendor, it was held that the mortgagee became subrogated to all the rights arising from these liens and was vested with superior title.

Utah-Probably majority rule

By decision. About the only case involving optional future advances is Stockyards National Bank v. Bragg, 67 Utah 60, 245 P. 966, where the validity of optional advances was upheld. The case is inconclusive, however, as the facts were based on advances of a character more or less "necessary" to preserve the security of the mortgage.

Vermont-Majority rule

By statute. Placed in the banking statute, but apparently applying to all mortgage lenders, Section 8756 of Vermont Statutes gives first lien status to mortgages written to secure a present debt and any future advances to the extent of the "full amount of debt directly created between the parties, due to the mortgagee at any given time ***." Statute provides that "a subsequent mortgage on the same premises shall be inferior to the first mortgage unless the second mortgagee in writing notifies the first mortgagee of the incidence of his mortgage, in which case indebtedness created by the mortgagor to the first mortgagee subsequent to such notice shall be inferior to the lien of the second mortgage." The statute appears to define "actual notice" as "notice in writing" and makes even more definite the holdings in Patch & Co. v. First National Bank, 90 Vt. 4, 96 A 423, where the court said that "something more than a mere knowledge in the mortgagee of such subsequent interest" is necessary, and in McDaniels v. Colvin, 16 Vt. 300, 42 Am. Dec. 512, where the court said, "The persons interested in limiting the further advances must give notice; but the first mortgagee is not bound to search the records from day to day to learn whether his mortgagor has made any further incumbrances, or whether any attachments have been made, or to ascertain that of which notice must be given him by the persons interested."

A fair construction of the statute, together with the decisions in Lamoille County Savings Bank v. Belden, 90 Vt. 535, and Keyes v. Bump, 59 Vt. 391, 9 A 598, would indicate that there is no top limit on the amount of such future advances. Prudence, however, would recommend that a top limit be stated in the mortgage.

Virginia-Majority rule

By decision. The leading case is Alexandria Savings Institution v. Thomas, 29 Gratt 483, where the court said: "Where it is optionary with the mortgagee whether he will make the future advances * * *, he will be affected by any subsequent lien or encumbrance which is brought to his knowledge before the advance is made *** But if without notice of the second encumbrance, he acts under his mortgage, he will be protected and take precedence accordingly." The court didn't specifically decide the import of record notice: "Whether the recording of the second mortgage or encumbrance is of itself notice to the first mortgagee, or whether he can be affected only by express notice *** there is much diversity of opinion." It has been held, however, that the recording statutes are for the purpose of giving "constructive" notice to subsequent parties, and Michie, in Section 42, Mortgages, Virginia and West Virginia is as follows: "The that the law both in Virginia and West Virginia is as follows: "The holder of a duly recorded deed of trust to secure future advances is affected only by actual notice of a lien subsequently acquired on the property, and for all advances made by him under his deed of trust and within its terms before receiving actual notice of a subsequent lien, his deed of trust is a valid and prior security."

There is little question that Michie's statement of the law in Virginia is correct, although it must be said that no case can be found in Virginia in which the question of notice by recordation to a mortgagee in a mortgage to secure optional future advances has been directly raised. See also on this subject note in 6 Virginia Law Review 280.

The Alexandria case also held it to be well settled that a mortgage "to protect future loans is perfectly valid, although it does not state the amount intended to be secured." It is recommended, however, that the intent to secure optional future advances be fully set out, as well as a maximum limit to the advances, in view of the court's later language: "As a general rule, it would be better for the [mortgage] in all cases, accurately to define the nature and extent of the obligations for which it is given."

Washington-Majority rule

By decision. The leading case is Elmendorf-Anthony Co. v. Dunn, 10 Wash. (2d) 29, 116 P (2d) 253, 138 ALR 558. Although the court applied "optional" advance rules to future advances made by the mortgagee to preserve the security, the decision, together with that in Cedar v. Roche Fruit Co., 16 Wash. (2d) 663, 134 P (2d) 437, serves to state the rule as to optional future advances in Washington: "The following conclusion * * * may be regarded as furnishing the prevailing rule: When [such a] mortgage reasonably states the purpose for which it is given, its record is a constructive notice to subsequent purchasers and encumbrancers; they are thereby put upon an inquiry to ascertain what advances or liabilities have been made or incurred. The record of a subsequent mortgage or conveyance, or the docketing of a subsequent judgment, is not a constructive notice of its existence to such prior mortgagee. The prior mortgage, therefore, duly recorded, has a preference over subsequent recorded mortgages or conveyances, or subsequent docketed judgments, not only for advances previously made, but also for advances made after their recording or docketing, without notice thereof." [Italics ours.] See also The Seattle case (Wash. 1909) 170 F. 284, where the court said, "By the decided weight of authority *** and we so hold, such future advances, although optional, are within the lien of the mortgage, and prior to that of a second incumbrance, if they were made without actual notice of the second incumbrance, and the recording of a second mortgage does not import notice to the first mortgagee." [Italics ours.1

In an obiter dictum, the court used even stronger language in the ElemendorfAnthony case: "We would be inclined to view the rights of the first mortgagee relative to advances made pursuant to an optional clause in a construction contract, even after notice of a junior encumbrance, as superior to such junior encumbrance." (Italics ours.) The court, however, held that actual notice on the part of the prior mortgagee did impair the priority of later "optional" advances, quoting "almost universal weight of authority" as holding that actual notice defeated the priority.

The leading case serves to point out that the mortgagee should specifically provide for future advances (see also Inland Trading Co. v. Edgecombe, 57 Wash. 257, 106 P 768), and although there is authority to the effect that a limit need not be stated in the mortgage (Carey v. Herrick, 146 Wash. 233, 263 P. 190), it is recommended that a maximum limit to the advances be set out in the mortgage. See Tesdahl v. Collins, 97 P (2d) 649, 2 Wash. (2d) 76: "The debt must be capable of identification, and the amount thereof must be ascertainable."

West Virginia-Majority rule

By decision. In the governing case of Hall v. Williamson Grocery Co., 69 W. Va. 761, 72 SE 780, the actual notice rule was clearly enunciated as the law in West Virginia.

No limit need be set on advances-it is sufficient that the mortgage disclose that it is to stand as security for such indebtedness as may arise.

Wisconsin-Majority rule

By decision. The rule was set out in Wisconsin Planing Mill Co. v. Schuda, 72 Wis. 277, where the court said, "A mortgage *** to secure future advances *** becomes a lien upon the mortgaged premises from the time of the execution and recording of such mortgage, and, if it is recorded before the commencement of the building, it will take precedence of liens for [labor and materials used]." The court didn't distinguish between obligatory or optional advances, and expressly rejected the doctrine that the lien of the advances accrued only as of the time the advances were made, and then only for the actual sum advanced. In Provident Loan and Building Assn. v. Carter, 107 Wis. 383, 83 NW 655, it was held that since the recording act was applicable only to subsequent purchasers and incumbrancers, the record of a second mortgage was not notice to a prior mortgagee who, after the recording of the second mortgage, but without actual notice thereof, made a second loan to the mortgagor upon the security. In Duster v. McCamus, 14 Wis. 307, it was held that the record of a subsequent mortgage is not notice to a prior mortgagee of the equities of the subsequent mortgage; but to bind him "he must have actual notice, or sufficient information to put him on inquiry."

Section 215.22 (7), Wisconsin Statutes, provides that mortgages securing mortgage loans made by building and loan associations "shall have priority over all liens, except tax and assessment liens, upon the mortgaged premises and the buildings and improvements thereon, which shall be filed subsequent to the recording of such mortgage." Such Section 215.22(1) indirectly authorizes advances and additional loans on the same security, the statute buttresses the the holding in the above cases as to savings and loan optional advance loans.

It is recommended that the mortgage clearly recite the intent to secure advances on its face (see Estate of Dunlap, 184 Wis. 345) and also that a maximum limit to such advances be set out.

Wyoming-Probably majority rule

There are no cases directly in point. In Walter v. Kressman, 169 P 3, 25 Wyo. 292, where conflicting mortgages were in issue, the court allowed the amounts actually advanced, stating: "Believing that the law sustains this position under all the circumstances of this complicated case, this court has determined the question of rank of mortgages, not upon the question of the earlier advances, or the prior date of execution, recording [etc.], but upon broad grounds of equity."

Section 66-206, Wyoming Laws, provides: "Every such mortgage, when otherwise duly executed, shall be deemed and held a good and sufficient mortgage in fee to secure the payment of the moneys therein specified ***"' Section 66-116 provides "Each and every mortgage *** shall be notice to and take precedence of any subsequent purchaser *** from the time of [its] delivery *** for record." In First National Bank v. Citizens State Bank, 11 Wyo. 32 (involving the priority of an extended mortgage over an intervening lien), the court said: "The thing secured is the debt, and so long as the debt can be traced, whatever form it may assume, the security remains good as security for the debt."

OTHER PROBLEMS

52

Sometimes the matter of estoppel enters into the question of the priority of the optional future advance. For example, in a recent Oklahoma case it was held that where a mortgage recited that it secured optional future advances, but,

52 Garey v. Rufus Lillard Co., 165 P (2d) 344, 196 Okla. 421 (1946).

after other liens had attached to the mortgaged property, the mortgagee lent additional sums to the mortgagor and took second and third mortgages on the property, the mortgagee could not exclude the intervening liens on the theory that the subsequent loans constituted future advances under the first mortgage, but that they would be deemed to have been additional loans made upon the security of the second and third mortgages, which would be treated as junior incumbrances. A similar holding was made in Ohio.63 It thus seems that an attempt to bolster an open-end provision with extra arrangements might have exactly the opposite effect. The lender making an open-end mortgage must intrepidly depend upon it exclusive of other mortgage arrangements.

An Arkansas case has held that if an open-end mortgage provides for future advances to the mortgagor, the mortgage will not cover advances made to a grantee of the mortgagor." This pitfall can be obviated by use of proper terminology in the mortgage document.

The Veterans' Administration has recognized the value and advantages to be gained from the open-end mortgage and has made provision for such advances. In each case the lender must secure a "prior approval" from the VA for the amount of each supplemental advance, and a new application and appraisal will ordinarily be required. The procedure and available guaranty entitlement for such open-end advances are set out in Regulation 36.4355, along with provisions for separate additional loans for property improvements." The FHA regulations apparently do not contemplate open-end advances, although it is to be hoped that eventually these mortgages too can receive the open-end benefits.

LEGISLATION

Although it would probably be better to depend on the common law, we know of no objection to clarifying the situation by statute if it is desired. The greatest care should be given to the drafting of such a statute, however (witness the various and sometimes strange results of some of the state statutes set out above), and in some cases several statutes may be needed for complete clarity. In some states where the legislature has full sovereign power unrestricted by constitutional provision, one law will probably suffice. In others, perhaps it will be necessary to amend the recording laws, mortgage laws, and the statutes relating to the various financial institutions. Homestead laws may have to be examined.

If clarifying legislation is desired, we recommend the following text, which is based generally on the present South Carolina and Montana statutes. Although the language covers all types of mortgagees, perhaps it will be desired to amend only the savings and loan law, or other particular laws:

"Any interest in real property capable of being transferred may be mortgaged to secure existing debts or obligations, to secure debts or obligations created simultaneously with the execution of the mortgage, to secure future advances necessary to protect the security, and to secure future advances to be made at the option of the parties up to a total amount stated in the mortage, and all such debts, obligations, and future advances shall, from the time the mortgage is filed for record as provided by law, be secured by such mortgage equally with, and have the same priority over the rights of all persons who subsequent to the recording of such mortgage acquire any rights in or liens upon the mortgaged real estate, as the debts and obligations secured thereby at the time of the filing of the mortgage for record; except that (1) the mortgagor or his successor in title is hereby authorized to file for record, and the same shall be recorded, a notice limiting the amount of optional future advances secured by such mortgage to not less than the amount actually advanced at the time of such filing, provided a copy of such filing is also filed with the mortgagee, and (2) if any optional future advance shall be made by the mortgagee to the mortgagor or his successor in title after written notice of any mortgage, lien or claim against such real property which is junior to such mortgage, then the amount of such advance shall be junior to such mortgage, lien or claim of which such written notice was given."

Where a later chattel mortgage was taken in support of an advance made by a mortgagee who held an open-end mortgage, it was held that to be covered by the open-end mortgage, the mortgagee "must rely on the mortgage" in making the later loan. Second National Bank of Warren v. Boyle et al., 99 NE (2d) 474 (Ohio 1951). See contra, Northampton National Bank v. Holland, 126 Pa. Super, 597, 190 A 483.

Walker v. Whitmore, 165 Ark. 276, 262 SW 678. See contra, In re Great Lakes, 8 F. (2d) 96 (Pa.). See also VA Solicitor's Opinion No. 156-49, April 26, 1949, and TB 4A-55; also Regs. 36.4511 and 36.4503, as amended July 7, 1953.

Mr. PATMAN. The open-end provision has some appeal, I will admit, and it would save the high interest rate there.

Mr. MASON. Yes; it would.

Mr. PATMAN. Because the borrower who has some equity could use that instead of resorting to this title I provision to pay the 9.7 percent, couldn't he?

Mr. MASON. Yes; he could.

Mr. PATMAN. Now, on the secondary mortgage market, how will that affect ordinary Joe Doaks down, say, in Texarkana, Tex.? He wants to get financing for a home. How will he do it under this provision of the bill if it becomes law?

Mr. MASON. Well, the reason, as we see it, why Joe Doaks in Texarkana, or probably some smaller town than Texarkana

Mr. PATMAN. Well, that is not a very large town.

Mr. MASON. But Texarkana does have mortgage facilities, probably, but there are hundreds and hundreds of towns where there are not mortgage facilities. There is a national bank there which cannot tie up its capital in long-term mortgage loans. This bank could take this loan and dispose of it to the secondary market, and thereby pull funds for this borrower into the area.

Mr. PATMAN. I know, but I wish you would tell me this: We will take the X National Bank, for instance, that wants to help Joe Doaks. Mr. MASON. That is right.

Mr. PATMAN. And he wants a $9,600 mortgage. He wants to handle that. He wants to get that much on his home. How will X National Bank help him? How will it proceed?

Mr. MASON. It will make the loan to Mr. Doaks, and then will have a place to dispose of that loan so that it can stay within the provisions of the banking act and not have its funds tied up.

Mr. PATMAN. When you say that it has a place to dispose of it, where is that place?

Mr. MASON. The secondary mortgage market, the Federal National Mortgage Association.

Mr. PATMAN. Would it be set up here in Washington?

Mr. MASON. That is my understanding of the bill; yes, sir.

Mr. PATMAN. Who will operate this secondary mortgage market? Mr. MASON. It would be operated by a new Federal Mortgage Marketing Association, as I understand the bill.

Mr. PATMAN. Who will be the head man? Who will run it? Who will operate it?

Mr. MASON. Well, it is operated by the president of the bank doing the actual operation of it, and, of course, it is under the Housing and Home Financing Agency's wing.

Mr. PATMAN. Will the officials be public officials or will they be private officials?

Mr. MASON. Oh, yes.

Mr. PATMAN. They will be public officials?

Mr. MASON. Yes, sir. And appointed by the President.

Mr. PATMAN. Will the obligations be guaranteed by the Government,

directly or indirectly?

Mr. MASON. I wouldn't think so.

Mr. PATMAN. Well, who is going to pay them?

Mr. MASON. No; they are not.