Mortgage law


A mortgage is a security interest in
real property held by a lender as a security for a debt, usually a loan of
money. A mortgage in itself is not a debt, it is the lender’s security for a
debt. It is a transfer of an interest in land from the owner to the mortgage
lender, on the condition that this interest will be returned to the owner
when the terms of the mortgage have been satisfied or performed. In other words,
the mortgage is a security for the loan that the lender makes to the borrower.
The word is a Law French term meaning “dead pledge,” originally only referring
to the Welsh mortgage, but in the later Middle Ages was applied to all gages and
reinterpreted by folk etymology to mean that the pledge ends either when the
obligation is fulfilled or the property is taken through foreclosure.
In most jurisdictions mortgages are strongly associated with loans secured
on real estate rather than on other property and in some jurisdictions only
land may be mortgaged. A mortgage is the standard method by which individuals and
businesses can purchase real estate without the need to pay the full value
immediately from their own resources. See mortgage loan for residential
mortgage lending, and commercial mortgage for lending against commercial
property. Participants and variant terminology
Legal systems in different countries, while having some concepts in common,
employ different terminology. However, in general, a mortgage of property
involves the following parties. The borrower, known as the mortgagor, gives
the mortgage to the lender, known as the mortgagee.
=Lender/mortgagee=A mortgage lender is an investor that
lends money secured by a mortgage on real estate. In today’s world, most
lenders sell the loans they write on the secondary mortgage market. When they
sell the mortgage, they earn revenue called Service Release Premium.
Typically, the purpose of the loan is for the borrower to purchase that same
real estate. As the mortgagee, the lender has the right to sell the
property to pay off the loan if the borrower fails to pay.
The mortgage runs with the land, so even if the borrower transfers the property
to someone else, the mortgagee still has the right to sell it if the borrower
fails to pay off the loan. So that a buyer cannot unwittingly buy
property subject to a mortgage, mortgages are registered or recorded
against the title with a government office, as a public record. The borrower
has the right to have the mortgage discharged from the title once the debt
is paid.=Borrower/mortgagor=
A mortgagor is the borrower in a mortgage—he owes the obligation secured
by the mortgage. Generally, the borrower must meet the conditions of the
underlying loan or other obligation in order to redeem the mortgage. If the
borrower fails to meet these conditions, the mortgagee may foreclose to recover
the outstanding loan. Typically the borrowers will be the individual
homeowners, landlords, or businesses who are purchasing their property by way of
a loan.=Other participants=
Because of the complicated legal exchange, or conveyance, of the
property, one or both of the main participants are likely to require legal
representation. The agent used for conveyancing varies based on the
jurisdiction. In the English-speaking world this means either a general legal
practitioner, i.e., an attorney or solicitor, or in jurisdictions
influenced by English law, including South Africa, a conveyancer. In the
U.S., real estate agents are the most common. In civil law jurisdictions
conveyancing is handled by civil law notaries.
Because of the complex nature of many markets the borrower may approach a
mortgage broker or financial adviser to help him or her source an appropriate
lender, typically by finding the most competitive loan.
The debt instrument is, in civil law jurisdictions, referred to by some form
of Latin hypotheca, and the parties are known as hypothecator and hypothecatee.
A civil-law hypotheca is exactly equivalent to an English mortgage by
legal charge or American lien-theory mortgage.
History =Anglo-Saxon and Anglo-Norman law=
In Anglo-Saxon England, when interest loans were illegal, the main method of
securing realty was by wadset. A wadset was a loan masked as a sale of land
under right of reversion. The borrower conveyed by charter a fee simple estate,
in consideration of a loan, to the lender who on redemption would reconvey
the estate to the reverser by a second charter. The difficulty with this
arrangement was that the wadsetter was absolute owner of the property and could
sell it to a third party or refuse to reconvey it to the reverser, who was
also stripped of his principal means of repayment and therefore in a weak
position. In later years the practice—especially in Scotland and on
the continent—was to execute together the wadset and a separate back-bond
according the reverser an in personam right of reverter.
An alternative practice imported from Norman law was the usufructory pledge of
real property known as a gage of land. Under a gage the borrower conveyed
possession but not ownership to the lender for an unlimited term until
redemption. The gage came in two forms: the living gage, whereby the estate’s
accruing rents, profits, and crops went toward reducing the debt;
the dead gage, whereby the rents and profits were taken in lieu of interest
but did not reduce the debt. The gage was unattractive for lenders
because the gagor could easily eject the gagee using novel disseisin, and the
gagee—merely seized ut de vadio “as of gage”—could not bring a freeholder’s
remedies to recover possession. Thus, the unprofitable living gage fell out of
use, but the dead gage continued as the Welsh mortgage until abolished in 1922.
=Late Middle Ages=By the 13th century—in England and on
the continent—the gage was limited to a term of years and contained a forfeiture
proviso providing that if after the term the debt was not repaid, title was
forfeited to the lender, i.e., the term of years would expand automatically into
a fee simple. This is known as a shifting fee and was sufficient after
1199 to entitle the gagee to bring an action for recovery. However, the royal
courts increasingly did not respect shifting fees since there was no livery
of seisin, nor did they recognize that tenure could be enlarged, so by the 14th
century the simple gage for years was invalid in England.
The solution was to merge the latter-day wadset and gage for years into a single
transaction embodied in two instruments: the absolute conveyance in fee or for
years to the lender; an indenture or bond reciting the loan and providing
that if it was repaid the land would reinvest in the borrower, but if not the
lender would retain title. If repaid on time, the lender would reinvest title
using a reconveyance deed. This was the mortgage by conveyance or, when written,
the mortgage by charter and reconveyance and took the form of a feoffment,
bargain and sale, or lease and release. Since the lender did not necessarily
enter into possession, had rights of action, and covenanted a right of
reversion on the borrower, the mortgage was a proper collateral security. Thus,
a mortgage was on its face an absolute conveyance of a fee simple estate, but
was in fact conditional, and would be of no effect if certain conditions were
met. The debt was absolute in form, and
unlike a gage was not conditionally dependent on its repayment solely from
raising and selling crops or livestock or simply giving the crops and livestock
raised on the gaged land. The mortgage debt remained in effect whether or not
the land could successfully produce enough income to repay the debt. In
theory, a mortgage required no further steps to be taken by the lender, such as
acceptance of crops and livestock in repayment.
=Renaissance and after=However, if the borrower was a single
day late in repaying the debt, he forfeited his land to the lender while
still remaining liable for the debt. Increasingly the courts of equity began
to protect the borrower’s interests, so that a borrower came to have under Sir
Francis Bacon an absolute right to insist on reconveyance on redemption
even if past due. This right of the borrower is known as the equity of
redemption. This arrangement, whereby the lender was
in theory the absolute owner, but in practice had few of the practical rights
of ownership, was seen in many jurisdictions as being awkwardly
artificial. By statute the common law’s position was altered so that the
mortgagor would retain ownership, but the mortgagee’s rights, such as
foreclosure, the power of sale, and the right to take possession, would be
protected. In the United States, those states that have reformed the nature of
mortgages in this way are known as lien states. A similar effect was achieved in
England and Wales by the Law of Property Act 1925, which abolished mortgages by
the conveyance of a fee simple. Since the 17th century, lenders have not
been allowed to carry interest in the property beyond the underlying debt
under the equity of redemption principle. Attempts by the lender to
carry an equity interest in the property in a manner similar to convertible bonds
through contract have been therefore struck down by courts as “clogs”, but
developments in the 1980s and 1990s have led to less rigid enforcement of this
principle, particularly due to interest among theorists in returning to a
freedom of contract regime. Default on divided property
When a tract of land is purchased with a mortgage and then split up and sold, the
“inverse order of alienation rule” applies to decide parties liable for the
unpaid debt. When a mortgaged tract of land is split
up and sold, upon default, the mortgagee first forecloses on lands still owned by
the mortgagor and proceeds against other owners in an ‘inverse order’ in which
they were sold. For example, Alice acquires a 3-acre lot by mortgage then
splits up the lot into three 1-acre lots, and sells lot Y to Bob, and then
lot Z to Charlie, retaining lot X for herself. Upon default, the mortgagee
proceeds against lot X first, the mortgagor. If foreclosure or
repossession of lot X does not fully satisfy the debt, the mortgagee proceeds
against lot Y, then lot Z. The rationale is that the first purchaser should have
more equity and subsequent purchasers receive a diluted share.
Legal aspects Mortgages may be legal or equitable.
Furthermore, a mortgage may take one of a number of different legal structures,
the availability of which will depend on the jurisdiction under which the
mortgage is made. Common law jurisdictions have evolved two main
forms of mortgage: the mortgage by demise and the mortgage by legal charge.
=Mortgage by demise=In a mortgage by demise, the mortgagee
becomes the owner of the mortgaged property until the loan is repaid or
other mortgage obligation fulfilled in full, a process known as “redemption”.
This kind of mortgage takes the form of a conveyance of the property to the
creditor, with a condition that the property will be returned on redemption.
Mortgages by demise were the original form of mortgage, and continue to be
used in many jurisdictions, and in a small minority of states in the United
States. Many other common law jurisdictions have either abolished or
minimised the use of the mortgage by demise. For example, in England and
Wales this type of mortgage is no longer available in relation to registered
interests in land, by virtue of section 23 of the Land Registration Act 2002.
=Mortgage by legal charge=In a mortgage by legal charge or
technically “a charge by deed expressed to be by way of legal mortgage”, the
debtor remains the legal owner of the property, but the creditor gains
sufficient rights over it to enable them to enforce their security, such as a
right to take possession of the property or sell it.
To protect the lender, a mortgage by legal charge is usually recorded in a
public register. Since mortgage debt is often the largest debt owed by the
debtor, banks and other mortgage lenders run title searches of the real estate
property to make certain that there are no mortgages already registered on the
debtor’s property which might have higher priority. Tax liens, in some
cases, will come ahead of mortgages. For this reason, if a borrower has
delinquent property taxes, the bank will often pay them to prevent the lienholder
from foreclosing and wiping out the mortgage.
This type of mortgage is most common in the United States and, since the Law of
Property Act 1925, it has been the usual form of mortgage in England and Wales.
In Scotland, the mortgage by legal charge is also known as Standard
Security. In Pakistan, the mortgage by legal
charge is most common way used by banks to secure the financing. It is also
known as registered mortgage. After registration of legal charge, the bank’s
lien is recorded in the land register stating that the property is under
mortgage and cannot be sold without obtaining an NOC from the bank.
=Equitable mortgage=Equitable mortgages don’t fit the
criteria for a legal mortgage, but are considered mortgages under equity
because money was lent and security was promised. This could arise because of
procedural or paperwork issues. Based on this definition, there are numerous
situations which could lead to an equitable mortgage. As of 1961, English
law required the consent of the court before the equitable mortgagee was
allowed to sell. When the borrower deposits a title deed with the lender,
it has historically created an equitable mortgage in England, but the creation of
an equitable mortgage by such a process has been less certain in the United
States. In an equitable mortgage the lender is
secured by taking possession of all the original title documents of the property
and by borrower’s signing a Memorandum of Deposit of Title Deed. This document
is an undertaking by the borrower that he/she has deposited the title documents
with the bank with his own wish and will, in order to secure the financing
obtained from the bank. Certain transactions are recognized therefore as
mortgages by equity, which are not so recognized by common law.
Foreclosure and non-recourse lending In most jurisdictions, a lender may
foreclose on the mortgaged property if certain conditions – principally,
non-payment of the mortgage loan – apply. Subject to local legal
requirements, the property may then be sold. Any amounts received from the sale
are applied to the original debt. In some jurisdictions mainly in the
United States, mortgage loans are non-recourse loans: if the funds
recouped from sale of the mortgaged property are insufficient to cover the
outstanding debt, the lender may not have recourse to the borrower after
foreclosure. In other jurisdictions, the borrower remains responsible for any
remaining debt, through a deficiency judgment. In some jurisdictions, first
mortgages are non-recourse loans, but second and subsequent ones are recourse
loans. Specific procedures for foreclosure and
sale of the mortgaged property almost always apply, and may be tightly
regulated by the relevant government. In some jurisdictions, foreclosure and sale
can occur quite rapidly, while in others, foreclosure may take many months
or even years. In many countries, the ability of lenders to foreclose is
extremely limited, and mortgage market development has been notably slower. The
relatively slow, expensive and cumbersome process of judicial
foreclosure is a primary motivation for the use of deeds of trust, because of
their provisions for non-judicial foreclosures by trustees through “power
of sale” clauses. Mortgages in the United States
=Types of security interests in realty Three types of security over real
property are commonly used in the United States: the title mortgage, lien
mortgage, and deed of trust. In the United States, these security
instruments proceed off of debt instruments drawn up in the form of
promissory notes and which are known variously as mortgage notes, lender’s
notes, or real estate lien notes. The mortgage
A mortgage is a security interest in realty created by a written instrument
that either conveys legal title or hypothecates title by way of a
non-possessory lien to a lender for the performance under the terms of a
mortgage note. In slightly less than half of states, a mortgage creates a
lien on the title to the mortgaged property. Foreclosure of that lien
almost always requires a judicial proceeding declaring the debt to be due
and in default and ordering a sale of the property to pay the debt. Many
mortgages contain a power of sale clause, also known as nonjudicial
foreclosure clause, making them tantamount to a deed of trust. Most
“mortgages” in California are actually deeds of trust. The effective difference
is that the foreclosure process can be much faster for a deed of trust than for
a mortgage, on the order of 3 months rather than a year. Because the
foreclosure does not require actions by the court the transaction costs can be
quite a bit less. The deed of trust
The deed of trust is a conveyance of title made by the borrower to a trustee
for the purposes of securing a debt. In lien-theory states, it is reinterpreted
as merely imposing a lien on the title and not a title transfer, regardless of
its terms. It differs from a mortgage in that, in many states, it can be
foreclosed by a nonjudicial sale held by the trustee through a power of sale. It
is also possible to foreclose them through a judicial proceeding.
Deeds of trust to secure repayments of debts should not be confused with trust
instruments that are sometimes called deeds of trust but that are used to
create trusts for other purposes, such as estate planning. Though there are
superficial similarities in the form, many states hold deeds of trust to
secure repayment of debts do not create true trust arrangements.
Security deed The so-called deed to secure debt is a
security instrument used in the state of Georgia. Unlike a mortgage, a security
deed is an actual conveyance of real property – without equity of redemption
– in security of a debt. Upon the execution of such a deed, title passes
to the grantee or beneficiary, however the grantor maintains equitable title to
use and enjoy the conveyed land subject to compliance with debt obligations.
Security deeds must be recorded in the county where the land is located.
Although there is no specific time within which such deeds must be filed,
the failure to timely record the deed to secure debt may affect priority and
therefore the ability to enforce the debt against the subject property.
=Title theory vs. lien theory=In the United States, slightly more
states are title-theory states than are lien-theory states. In title-theory
states, a mortgage continues to be a conveyance of legal title to secure a
debt, while the mortgagor still retains equitable title. In lien-theory states,
mortgages and deeds of trust have been redesigned so that they now impose a
non-possessory lien on the title to the mortgaged property, while the mortgagor
still holds both legal and equitable title.
Priority The lien is said to attach to the title
when the mortgage is signed by the mortgagor and delivered to the mortgagee
and the mortgagor receives the funds whose repayment the mortgage secures.
Subject to the requirements of the recording laws of the state in which the
mortgaged property is located, this attachment establishes the priority of
the mortgage lien with respect to most other liens on the property’s title.
Liens that have attached to the title before the mortgage lien are said to be
senior to, or prior to, the mortgage lien. Those attaching afterward are said
to be junior or subordinate. The purpose of this priority is to establish the
order in which lienholders are entitled to foreclose their liens in order to
recover their debts. If a property’s title has multiple mortgage liens and
the loan secured by a first mortgage is paid off, the second mortgage lien will
move up in priority and become the new first mortgage lien on the title.
Documenting this new priority arrangement will require the release of
the mortgage securing the paid-off loan. Assignment
Mortgages, along with the Mortgage note, may be assigned to other parties. Some
jurisdictions hold that the assignment of the note implies the assignment of
the mortgage, while others contend it only creates an equitable right.
See also Hypothec
Loan servicing Trust deed
Bridge financing Financing
Fixed-rate mortgage Promissory note
Loan origination Subprime lending
Mortgage calculator Refinancing
Foreign currency mortgage Americans for Fairness in Lending
National Mortgage News Mortgage insurance
Collateralized mortgage obligation – CMO Subprime mortgage crisis
MortgageLoan Notes and references

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