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Mortgage law

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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.
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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," originally only referring to the Welsh mortgage (see below), but in the later Middle Ages was applied to all gages and reinterpreted by folk etymology to mean 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. 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 (licensed) conveyancer. In the United States, 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 (e.g., Sp hipoteca, Fr hypothèque, Germ Hypothek), and the parties are known as hypothecator (borrower) and hypothecatee (lender). 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 (ME wedset).[2] A wadset was a loan masked as a sale of land under right of reversion. The borrower (reverser) conveyed by charter a fee simple estate, in consideration of a loan, to the lender (wadsetter) 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 (gagor) conveyed possession but not ownership to the lender (gagee) for an unlimited term until redemption. The gage came in two forms:

  • the living gage (Norman vif gage, Welsh prid), whereby the estate’s accruing rents, profits, and crops went toward reducing the debt (that is, the debt was self-redeeming);
  • the dead gage (Norman mort gage, Scots deid wad), whereby the rents and profits were taken in lieu of interest but did not reduce the debt.[3]

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.[4] 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 (pactum commissorium)[5] 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 (i.e., no formal conveyance), nor did they recognize that tenure could be enlarged,[6] so by the 14th century the simple gage for years was invalid in England (and Scotland and the near continent[7]).

The solution was to merge the latter-day wadset and gage for years into a single transaction embodied in two instruments: (1) the absolute conveyance (the charter) in fee or for years to the lender; (2) an indenture or bond (the defeasance) 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 (aka mortgage in fee) or, when written, the mortgage by charter and reconveyance[8] 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.[6] Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have under Sir Francis Bacon (1617–21)[9] 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 (borrower) would retain ownership, but the mortgagee's (lender'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.[10]

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 (12,000 m2) lot by mortgage then splits up the lot into three 1-acre (4,000 m2) lots (X, Y, and Z), 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 (Bob), then lot Z (Charlie). The rationale is that the first purchaser should have more equity and subsequent purchasers receive a diluted share.

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).

In a mortgage by legal charge or technically "a charge by deed expressed to be by way of legal mortgage",[11] 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,[11] 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.[12]

In Pakistan, the mortgage by legal charge is most common way used by banks to secure the financing.[citation needed] 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

See also: Security interest § Types of security

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.[13] As of 1961, English law required the consent of the court before the equitable mortgagee was allowed to sell.[14] 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.[15]

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.[citation needed] Certain transactions are recognized therefore as mortgages by equity, which are not so recognized by common law.

Foreclosure and non-recourse lending

See also: Strategic default

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,[16] 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.[17] 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 (traditionally a deed) 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.[citation needed] 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.[18] 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]

The deed of trust

Main article: deed of trust (real estate)

The deed of trust is a conveyance of title made by the borrower to a trustee (not the lender) 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.[19] It is also possible to foreclose them through a judicial proceeding.[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]

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 (usually lender), however the grantor (borrower) 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.[20]

Title theory vs. lien theory

In the United States, slightly more states are title-theory states than are lien-theory states.[21] 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.[22] 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[23] on the property's title.[24] 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.[25] 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

Wikimedia Commons has media related to Mortgages.
Look up mortgage law in Wiktionary, the free dictionary.

Notes and references

  1. ^ Coke, Edward. Commentaries on the Laws of England. [I]f he doth not pay, then the Land which is put in pledge upon condition for the payment of the money, is taken from him for ever, and so dead to him upon condition, &c. And if he doth pay the money, then the pledge is dead as to the Tenant
  2. ^ Jones, Leonard Augustus (1904). A treatise on the law of mortgages of real property, Volume 1 (sixth ed.). Indianapolis, Indiana: Bobbs-Merrill. p. 178.. Link, p. 178, at Google Books
  3. ^ Berman, Constance (1995). "Gage". In Kibler, William W. (ed.). Medieval France: An Encyclopedia. New York: Garland. p. 380.
  4. ^ McNall, Christopher (2009). "Mortgage: English Common law". In Katz, Stanle N. (ed.). Oxford International Encyclopedia of Legal History. Vol. 2. Oxford, England: Oxford University Press. p. 188.
  5. ^ A Roman-Dutch legal term; Scots law has pactum legis commissoriæ (in pignoribus).
  6. ^ a b The Jersey Law Commission, Consultation Paper: Security on Immovable Property, (8), [pdf], p. 2.
  7. ^ In Scots law and on the continent, the prohibition against pacta commissoria is due to the reintroduction of Roman law.
  8. ^ McNall 2009, p. 188
  9. ^ Lord Chancellor and head of the Court of Chancery from 1617 to 1621. McNall 2009, p. 189
  10. ^ Shanker, Morris G. (2003). "Will Mortgage Law Survive?". Case Western Reserve Law Review. 54 (1): 69–102.
  11. ^ "Nemo Loans Jargon Buster". Nemo Personal Finance Ltd. Retrieved 2009-02-10.
  12. ^ Davis, G. (1956). "The Equitable Mortgage in Kansas" (PDF). University of Kansas Law Review. 5: 114–122.
  13. ^ Hannigan ASJ. The Imposition of Western Law Forms upon Primitive Societies. Comparative Studies in Society and History.
  14. ^ Cocke, William Archer (1882). "Equitable Mortgage by Deposit of Title Deeds-The American and English Rule". The Central Law Journal. 15: 46–50.
  15. ^ Ghent, Andra C. and Kudlyak, Marianna, Recourse and Residential Mortgage Default: Evidence from U.S. States. Review of Financial Studies, Sept. 2011. The authors classify 11 states as nonrecourse.
  16. ^ Kratovil, Robert; Werner, R. (1988). Real Estate Law (9th ed.). Prentice-Hall, Inc. Sec 20.09. ISBN 0-13-763343-2. {{cite book}}: Unknown parameter |nopp= ignored (|no-pp= suggested) (help)
  17. ^ See the discussion of background principles of California real property law in Alliance Mortgage Co. v. Rothwell, 10 Cal. 4th 1226, 1235–1238 (1995).
  18. ^ Kratovil, Robert; Werner, R. (1988). Real Estate Law (9th ed.). Prentice-Hall, Inc. Sec 20.09(b). ISBN 0-13-763343-2. {{cite book}}: Unknown parameter |nopp= ignored (|no-pp= suggested) (help)
  19. ^ Security Interests in Georgia, By Steven M. Mills of Steven M. Mills, P.C.[1] (1999).
  20. ^ http://title.grabois.com/index.html
  21. ^ U.S. Bank v. Ibanez, Massachusetts Supreme Judicial Court, SJC-10694, January 7, 2011, page 12. See Bank Stocks Slump On Foreclosure Ruling, New York Times Dealbook.
  22. ^ Exceptions include real estate tax liens and, in most states, mechanic's liens.
  23. ^ 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.
  24. ^ 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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