Mortgage
Encyclopedia
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," 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.
. 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.
of the mortgage by the creditor to recover the debt. Typically the debtors will be the individual homeowners, landlords, or businesses who are purchasing their property by way of a loan.
, solicitor
and conveyancer
.
Because of the complex nature of many markets the debtor may approach a mortgage broker
or financial adviser
to help him or her 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.
and mortuum vadium by William Blackstone
, and translated as dead pledge in English and mortgage in French. 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 in the form of promissory note
.
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.
Since the seventeenth 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 bond
s 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.
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 3 acres (12,140.6 m²) lot by mortgage then splits up the lot into three 1 acres (4,046.9 m²) 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.
jurisdictions have evolved two main forms of mortgage: the mortgage by demise and the mortgage by legal charge.
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).
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, bank
s 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 for registered interests in land 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.
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.
In some jurisdictions mainly in the United States, 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.
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. 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. 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.
by a non-judicial sale held by the trustee through a "power of sale". 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 instrument
s 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 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.
upon the title to the real property being mortgaged, while the mortgagor still holds both legal and equitable title. In title theory states, a mortgage is a transfer of legal title to secure a debt, while the mortgagor still retains equitable title.
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.
, 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.
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
in real property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
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
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
for the loan that the lender makes to the borrower.
The word is a Law French
Law French
Law French is an archaic language originally based on Old Norman and Anglo-Norman, but increasingly influenced by Parisian French and, later, English. It was used in the law courts of England, beginning with the Norman Conquest by William the Conqueror...
term meaning "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
.
In most jurisdictions mortgages are strongly associated with loans secured on real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
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
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
for residential mortgage lending, and commercial mortgage
Commercial mortgage
A commercial mortgage is a mortgage loan made using commercial real estate as collateral to secure repayment.A commercial mortgage is similar to a residential mortgage, except the collateral is a commercial building or other business real estate, not residential property. In addition, commercial...
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 PremiumService Release Premium
A Service Release Premium is the payment received by a lending institution, such as a bank or retail mortgage lender, on the sale of a closed mortgage loan to the secondary mortgage market...
. 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
Land registration
Land registration generally describes systems by which matters concerning ownership, possession or other rights in land can be recorded to provide evidence of title, facilitate transactions and to prevent unlawful disposal...
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 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 foreclosureForeclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
of the mortgage by the creditor to recover the debt. Typically the debtors 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 terminology varies with legal jurisdiction; see lawyerLawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
, solicitor
Solicitor
Solicitors are lawyers who traditionally deal with any legal matter including conducting proceedings in courts. In the United Kingdom, a few Australian states and the Republic of Ireland, the legal profession is split between solicitors and barristers , and a lawyer will usually only hold one title...
and conveyancer
Conveyancer
In Commonwealth countries, a conveyancer is a specialist lawyer who specialises in the legal aspects of buying and selling real property, or conveyancing. A conveyancer can also be a solicitor, licensed conveyancer, or a fellow of the Institute of Legal Executives.In the United Kingdom,...
.
Because of the complex nature of many markets the debtor may approach a mortgage broker
Mortgage broker
A mortgage broker acts as an intermediary whose brokers mortgage loans on behalf of individuals or businesses.Traditionally, banks and other lending institutions have sold their own products. However as markets for mortgages have become more competitive, the role of the mortgage broker has become...
or financial adviser
Financial adviser
A financial adviser, is a professional who renders financial services to individuals, businesses and governments. This can involve investment advice, which may include pension planning, and/or advice on life insurance and other insurances such as income protection insurance, critical illness...
to help him or her source an appropriate creditor, typically by finding the most competitive loan.
The debt is, in civil law
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
jurisdictions, referred to as hypothecation
Hypothecation
Hypothecation is the practice where a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral, but it is "hypothetically" controlled by the creditor in that he has the right to seize possession if the borrower defaults...
, which may make use of the services of a hypothecary to assist in the hypothecation.
History
The practice of securing land for payment of money in English law dates back to Anglo-Saxon England. The practice has been named variously as vadium mortuum by Thomas de LittletonThomas de Littleton
Sir Thomas de Littleton was an English judge and legal writer.-Early life:He was born, it is supposed, at Frankley Manor House, Worcestershire, England in about 1407. Littleton’s surname was that of his mother, who was the sole daughter and heiress of Thomas de Littleton, Lord of Frankley. She...
and mortuum vadium by William Blackstone
William Blackstone
Sir William Blackstone KC SL was an English jurist, judge and Tory politician of the eighteenth century. He is most noted for writing the Commentaries on the Laws of England. Born into a middle class family in London, Blackstone was educated at Charterhouse School before matriculating at Pembroke...
, and translated as dead pledge in English and mortgage in French. At common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple
Fee simple
In English law, a fee simple is an estate in land, a form of freehold ownership. It is the most common way that real estate is owned in common law countries, and is ordinarily the most complete ownership interest that can be had in real property short of allodial title, which is often reserved...
estate
Estate (law)
An estate is the net worth of a person at any point in time. It is the sum of a person's assets - legal rights, interests and entitlements to property of any kind - less all liabilities at that time. The issue is of special legal significance on a question of bankruptcy and death of the person...
, 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 in the form of promissory note
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
.
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
Equity of redemption
The equity of redemption refers to the right of a mortgagor in law to redeem his property once the liability secured by the mortgage has been discharged.-Overview:...
".
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
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
, 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
Lien
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
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 seventeenth century, lenders have not been allowed to carry interest in the property beyond the underlying debt under the equity of redemption
Equity of redemption
The equity of redemption refers to the right of a mortgagor in law to redeem his property once the liability secured by the mortgage has been discharged.-Overview:...
principle. Attempts by the lender to carry an equity interest in the property in a manner similar to convertible bond
Convertible bond
In finance, a convertible note is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price. It is a hybrid security with debt- and equity-like features...
s 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
Freedom of contract
Freedom of contract is the freedom of individuals and corporations to form contracts without government restrictions. This is opposed to government restrictions such as minimum wage, competition law, or price fixing...
regime.
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 3 acres (12,140.6 m²) lot by mortgage then splits up the lot into three 1 acres (4,046.9 m²) 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 lawCommon law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. Many other common law jurisdictions have either abolished or minimised the use of the mortgage by demise. For example, in England and Wales
England and Wales
England and Wales is a jurisdiction within the United Kingdom. It consists of England and Wales, two of the four countries of the United Kingdom...
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
Land Registration Act 2002
The Land Registration Act 2002 is an Act of the Parliament of the United Kingdom which repealed and replaced previous legislation governing land registration, in particular the Land Registration Act 1925, which governed an earlier, though similar, system...
(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", 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, bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s 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
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
and wiping out the mortgage.
This type of mortgage is most common in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and, since the Law of Property Act 1925
Law of Property Act 1925
The Law of Property Act 1925 is a statute of the United Kingdom Parliament. It forms part of an interrelated programme of legisation introduced by Lord Chancellor Lord Birkenhead between 1922 and 1925. The programme was intended to modernise the English law of real property...
, it has been the usual form of mortgage in England and Wales
England and Wales
England and Wales is a jurisdiction within the United Kingdom. It consists of England and Wales, two of the four countries of the United Kingdom...
(it is now the only form for registered interests in land see above).
In Scotland
Scotland
Scotland is a country that is part of the United Kingdom. Occupying the northern third of the island of Great Britain, it shares a border with England to the south and is bounded by the North Sea to the east, the Atlantic Ocean to the north and west, and the North Channel and Irish Sea to the...
, the mortgage by legal charge is also known as Standard Security.
In Pakistan
Pakistan
Pakistan , officially the Islamic Republic of Pakistan is a sovereign state in South Asia. It has a coastline along the Arabian Sea and the Gulf of Oman in the south and is bordered by Afghanistan and Iran in the west, India in the east and China in the far northeast. In the north, Tajikistan...
, 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.
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, mortgage loans are non-recourse
Nonrecourse debt
Non-recourse debt or a non-recourse loan is a secured loan that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the...
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
Deficiency judgment
A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full. The availability of a deficiency judgment depends on whether the lender has a recourse or nonrecourse...
. 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.
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 lienLien
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
on the title to the mortgaged property. Foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
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. 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. 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 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 foreclosedForeclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
by a non-judicial sale held by the trustee through a "power of sale". 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 instrument
Trust instrument
A trust instrument is an instrument in writing executed by a settlor used to constitute a trust...
s 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 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.
"Title theory" and "lien theory"
In the United States, some states are "title theory" states while most are "lien theory" state. In lien theory states, a mortgage or a deed of trust will create a mortgage lienLien
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
upon the title to the real property being mortgaged, while the mortgagor still holds both legal and equitable title. In title theory states, a mortgage is a transfer of legal title to secure a debt, while the mortgagor still retains 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 lawsRecording (real estate)
The vast majority of states in the United States employ a system of recording legal instruments that affect the title of real estate as the exclusive means for publicly documenting land titles and interests. This system differs significantly from land registration systems, such as the Torrens...
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
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
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.
Assignment
Mortgages, along with the Mortgage noteMortgage note
In the US a mortgage note is a promissory note associated with a specified mortgage loan; it is a written promise to repay a specified sum of money plus interest at a specified rate and length of time to fulfill the promise...
, may be assigned
Assignment (law)
An assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee...
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
- HypothecHypothecHypothec is a mortgage in Roman and Scots law, in other words, a legal right over a debtor's property that however remains in the debtor's possession....
- Loan servicingLoan servicingLoan servicing is the process by which a mortgage bank or subservicing firm collects the timely payment of interest and principal from borrowers...
- Trust deedTrust deed (real estate)In real estate in the United States, a trust deed or deed of trust is a deed wherein legal title in real property is transferred to a trustee, which holds it as security for a loan between a borrower and lender...
- Bridge financingBridge financingBridge financing is a method of financing, used to maintain liquidity while waiting for an anticipated and reasonably expected inflow of cash. Bridge financing is commonly used when the cash flow from a sale of an asset is expected after the cash outlay for the purchase of an asset...
- Financing
- Fixed rate mortgageFixed rate mortgageA fixed-rate mortgage is a mortgage loan first developed by the Federal Housing Administration where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float." Other forms of mortgage loan include interest only...
- Promissory notePromissory noteA promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
- Loan originationLoan originationLoan origination is the process by which a borrower applies for a new loan, and a lender processes that application. Origination generally includes all the steps from taking a loan application through disbursal of funds . Loan servicing generally covers everything after disbursing the funds until...
- Subprime lendingSubprime lendingIn finance, subprime lending means making loans to people who may have difficulty maintaining the repayment schedule...
- Mortgage calculatorMortgage CalculatorMortgage calculators are used to help a current or potential real estate owner determine how much they can afford to borrow on a piece of real estate...
- RefinancingRefinancingRefinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political...
- Foreign currency mortgageForeign currency mortgageA foreign currency mortgage is a mortgage which is repayable in a currency other than the currency of the country in which the borrower is a resident...
- Americans for Fairness in LendingAmericans for Fairness in LendingAmericans for Fairness in Lending is a non-profit organization designed to draw attention to what it calls abuses by the lending industry in America...
- National Mortgage NewsNational Mortgage NewsNational Mortgage News is a weekly newspaper covering the mortgage sector in the United States. Its editorial director is Mark Fogarty, and its publisher is Tim Murphy. National Mortgage News is owned by SourceMedia.-History:...
- Mortgage insuranceMortgage insuranceMortgage insurance is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer...
- Collateralized mortgage obligationCollateralized mortgage obligationA collateralized mortgage obligation is a type of financial debt vehicle that was first created in 1983 by the investment banks Salomon Brothers and First Boston for U.S. mortgage lender Freddie Mac. A collateralized mortgage obligation (CMO) is a type of financial debt vehicle that was first...
- CMO - Subprime mortgage crisisSubprime mortgage crisisThe U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....