About Mortgages:
This article is about the legal mechanism 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.
A mortgage is a method of using property (real or personal) as security for the
performance of an obligation, usually the payment of a debt.
The term mortgage (from old French, lit. dead pledge) refers to the legal device
used for this purpose, but it is also commonly used to refer to the debt secured
by the mortgage, the mortgage loan.
In most jurisdictions mortgages are strongly associated with loans secured on
real estate rather than other property (such as ships) and in some cases only
land may be mortgaged. Arranging a mortgage is seen as the standard method by
which individuals and businesses can purchase residential and commercial real
estate without the need to pay the full value immediately. See mortgage loan for
residential mortgage lending, and commercial mortgage for lending against
commercial property.
In many countries it is normal for home purchases to be funded by a mortgage. In
countries where the demand for home ownership is highest, strong domestic
markets have developed, notably in Spain, the United Kingdom, and the United
States.
Participants and variant terminology
Legal systems, while having some concepts in common, employ different
terminology. However, in general, a mortgage of property involves the following
parties.
Creditor
The creditor has legal rights to the debt or other obligation secured by the
mortgage. That debt is often the obligation to repay the loan by the creditor (or
its predecessor lender) who provided the purchase money to acquire the property
mortgaged. Typically, creditors are banks, insurers or other financial
institutions who make loans available for the purpose of real estate purchase.
A creditor is sometimes referred to as the beneficiary, mortgagee or lender.
Debtor
The debtor is the person or entity who owes the obligation secured by the
mortgage, and may be multiple parties. 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.
A debtor is sometimes referred to as the mortgagor, borrower, or obligor.
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.
Legal aspects
There are essentially two types of legal mortgage.
Mortgage by demise
In a mortgage by demise, the creditor becomes the owner of the mortgaged
property until the loan is repaid in full (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.
This is an older form of legal mortgage and is less common than a mortgage by
legal charge. In the UK, 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 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 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
registeration of legal charge, Bank's Lien is recorded in land register stating
that the property is under mortgage and can not be sold without obtaining NOC
(No Objection Certificate) from the Bank.
Equitable Mortgage
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
In 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 not 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.
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.
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
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.
Siteindex |
Content on this page:
Mortgage Creditor
Mortgage Debtor
other participants
Legal Aspects
Mortgage by demise
Mortage by legal charge
History
Mortgage in the United States
The deed of trust
Mortgage lien priority
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