A
mortgage is the transfer of an interest in
property (or the equivalent in law - a charge) to a
lender as a security for a debt - usually a loan of
money. While 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.
This comes from the
Old French "dead
pledge," apparently meaning that the pledge ends (dies) 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 (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. 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—they owe 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 home-owners, 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 them
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.
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 lot by mortgage
then splits up the lot into three 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, by virtue 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 (it is now the only form
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.
History
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.
Hence the word "mortgage" (a legal term in French meaning "dead
pledge"). 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.
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, 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.
Mortgages in the United States
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.
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.
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.
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. It is also possible to foreclose them through
a judicial proceeding.
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.
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.
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, 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 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 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.
See also
Notes and references
- Davis G. (1956). The Equitable Mortgage in Kansas. Kansas
Law Review.
- Hannigan ASJ. The Imposition of Western Law Forms upon Primitive
Societies. Comparative Studies in Society and
History.
- Cocke WA. Equitable Mortgage by Deposit of Title Deeds-The
American and English Rule. The Central Law
Journal.
- Security Interests in Georgia, By Steven M. Mills of Steven M.
Mills, P.C.[1] (1999).
- See the discussion of background principles of California real
property law in Alliance Mortgage Co. v. Rothwell,
10 Cal. 4th 1226, 1235-1238 (1995).
- Exceptions include real estate tax liens and, in most states,
mechanic's
liens.
- The failure to record a previously made mortgage may, under
some circumstances, allow a subsequent mortgagee's mortgage to be
recognized as prior in right to the otherwise prior mortgage.
- Of course, the lienholders can agree among themselves to a
different priority arrangement through subordination arrangements. See, R.
Kratovil and R. Werner Modern Mortgage Law and Practice
Chs. 30 & 38 (2nd Ed. Prentice-Hall, Inc.)
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