Mortgages
A mortgage is a method of
using property (real or personal) as
security for the payment of a debt.
The term mortgage (from Law 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 tend to share certain concepts
but vary in the terminology and jargon used.
In general terms the main
participants in a mortgage are:
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) that provided the purchase money to
acquire the property mortgaged. Typically,
creditors are banks, insurers or other
financial institutions that make loans
available for the purpose of real estate
purchase.
A creditor is sometimes
referred to as the 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
Due to 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 conveyer.
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 to assist
in the hypothecation.
Other terminologies
Like any other legal system, the mortgage
business sometimes uses confusing jargon.
Below are some terms explained in brief. If
a term is not explained here it may be
related to the mortgage loans rather than to
the legal process.
Conveyance
The legal document that transfers ownership
of unregistered land.
Disbursements
All the fees of the solicitors and
governments, such as stamp duty, land
registry, search fees, etc.
Freehold
The ownership of a property and the land.
Land Registration
A legal document that records the ownership
of a property and land. This is also known
as a Title.
Leasehold
The ownership of the property and land for a
specified period, which may be sold
separately from freehold, which may be owned
by another person.
Legal Charge
A legal document which records data for the
rightful owner of property, or land.
Mortgage Deed
A legal document which stated the lender has
a legal charge over the property.
Sealing Fee
A fee made when the lender releases the
legal charge over the property.
Seasoned mortgage
A mortgage which has been paid in a timely
manner by the mortgagor for a period of
typically no less than six months, and often
for more than one year. The term is
associated with the secondary market, where
mortgages with similar characteristics are
bought and sold in bulk.
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, 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
may, 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 lien holder
from foreclosing and wiping out the
mortgage.
This type of mortgage is
common in the United States and, since 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, 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 borrowers 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.
In Pakistan most of the
time a loan is secured by using two ways of
mortgage, Registered Mortgage along with
Equitable Mortgage.
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 not met
--- usually, but not necessarily, the
repayment of a debt to the original
landowner. Hence the word "mortgage," Law
French for "dead pledge;" that is, it was
absolute in form, and unlike a "live gage",
was not conditionally dependent on its
repayment solely from raising and selling
crops or livestock, or of simply giving the
fruits of crops and livestock coming from
the land that was mortgaged. 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, for repayment.
The difficulty with this
arrangement was that the lender was absolute
owner of the property and could sell it, or
refuse to re-convey 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
re-conveyance on redemption. This right of
the borrower is known as the "equity of
redemption".
This arrangement, whereby
the mortgagee (the lender) was on 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
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 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 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.
Property law
Part of the common law
series
Acquisition of property
Gift • Adverse possession • Deed
Lost, mislaid, and abandoned property
Alienation • Bailment • License
Estates in land
Allodial title • Fee simple • Fee tail
Life estate • Defeasible estate
Future interest • Concurrent estate
Leasehold estate • Condominiums
Conveyance of interests in land
Bona fide purchaser • Torrens title
Estoppels by deed • Quitclaim deed
Mortgage • Equitable conversion
Action to quiet title
Limiting control over future use
Restraint on alienation
Rule against perpetuities
Rule in Shelley's Case
Doctrine of worthier title
Non-possessory interest in land
Easement • Profit
Covenant running with the land
Equitable servitude
Related topics
Fixtures • Waste • Partition
Riparian water rights
Lateral and subjacent support
Assignment • Nemo dat
Other areas of the common law
Contract law • Tort law
Wills and trusts
Criminal Law • Evidence
