Mortgage Law

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 mortgagehe 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 hypothque, 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
practiceespecially in Scotland and on the continentwas 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 estates accruing
rents, profits, and crops went toward reducing the debt (that is, the debt was selfredeeming);

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 gageemerely seized ut de vadio as of gagecould
not bring a freeholders 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 centuryin England and on the continentthe 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 (161721)[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.

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",[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
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

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 nonrecourse 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.[
The deed of trust
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.
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.
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 nonpossessory 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.

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