Mortgage law
This article is about the legal mechanisms used
to secure the performance of obligations, including the payment of
debts, with property. For loans secured by mortgages, such as
residential housing loans, and lending practices or requirements, see Mortgage loan.
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 (or the equivalent) 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," apparently meaning that the pledge ends
(dies) either when the obligation is fulfilled or the property is taken
through foreclosure.[1]
In most jurisdictions mortgages are strongly associated with loans secured on real estate
rather than on other property (such as ships) 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.
Mortgage lender
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. The borrower, known as the mortgagor, gives the
mortgage to the lender, known as the mortgagee. 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
A mortgagor is the borrower in a mortgage—he owes the obligation
secured by the mortgage. Generally, the debtor must meet the conditions
of the underlying loan or other obligation and the conditions of the
mortgage. Otherwise, the debtor usually runs the risk of foreclosure
of the mortgage by the creditor to recover the debt. Typically the
debtors 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 terminology varies with legal
jurisdiction; see lawyer, solicitor and conveyancer.
Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help him or her source an appropriate creditor, typically by finding the most competitive loan.
The debt is, in civil law jurisdictions, referred to as hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.
History
The practice of securing land for payment of money in English law dates back to Anglo-Saxon England.The practice has been named variously as vadium mortuum by Thomas de Littleton and mortuum vadium by William Blackstone, and translated as dead pledge in English and mortgage in French.At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate,
but which was in fact conditional, and would be of no effect if certain
conditions were met – usually, but not necessarily, the repayment of a
debt to the original landowner in the form of promissory note.
The debt was absolute in form, and unlike a "live pledge" 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 mortgaged 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
creditor, such as acceptance of crops and livestock in repayment. The
difficulty with this arrangement was that the lender was absolute owner
of the property and could sell it or refuse to reconvey it to the
borrower, who was in a weak position. Increasingly the courts of equity
began to protect the borrower's interests, so that a borrower came to
have an absolute right to insist on reconveyance on redemption. 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 seventeenth 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, A acquires a 3-acre (12,000 m2) lot by mortgage then splits up the lot into three 1-acre (4,000 m2)
lots (A, B, and C), and sells lot B to X, and then lot C to Y,
retaining lot A for himself. Upon default, the mortgagee proceeds
against lot A first, the mortgagor. If foreclosure or repossession of
lot A does not fully satisfy the debt, the mortgagee proceeds against
lot B, then lot C. 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 (the lender) 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 (though it continues to be available for unregistered interests).
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 (it is now the only form for registered interests in land – see above).
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 (No Objection Certificate) from the bank.
Equitable mortgage
Equitable mortgages don't fit the criteria for a legal mortgage, but are considered mortgages under equity
(in the interests of justice) 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 (MODTD). 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..
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 (net of costs) 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.
[edit] Mortgages in the United States
[edit] Types of mortgage instruments
Two types of mortgage instruments are commonly used in the United
States: the mortgage (sometimes called a mortgage deed) and the deed of
trust.[11]
[edit] The mortgage
In all but a few 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.[citation needed]
[edit] Security deed
The deed to secure debt is a mortgage instrument used in the state of
Georgia. Unlike a mortgage, a security deed is an actual conveyance of
real property in security of a debt. Upon the execution of such a deed,
title passes to the grantee or beneficiary (usually lender), however the
grantor (debtor) 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.[12]
[edit] The deed of trust
The deed of trust is a deed by the borrower to a trustee for the
purposes of securing a debt. In most states, it also merely creates 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 non-judicial sale held by the trustee.[13] It is also possible to foreclose them through a judicial proceeding.[citation needed]
Most "mortgages" in California are actually deeds of trust.[14]
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.[citation needed]
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.[citation needed]
[edit] Mortgage lien priority: "title theory" and "lien theory"
Except in those few states in the United States that adhere to the title theory of mortgages,[15] either a mortgage or a deed of trust will create a mortgage lien
upon the title to the real property being mortgaged. 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 land is located, this attachment establishes
the priority of the mortgage lien with respect to most other liens[16] on the property's title.[17]
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.[18] The purpose of this priority is to establish the order in which lien holders are entitled to foreclose
their liens in an attempt to recover their debts. If there are multiple
mortgage liens on the title to a property 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.
