Mortgage law
A mortgage is a legal instrument of the common law which is used to create a security interest in real property held by a lender as a security for a debt, usually a mortgage loan. Hypothec is the corresponding term in civil law jurisdictions, albeit with a wider sense, as it also covers non-possessory lien.
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 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, but in the later Middle Ages was applied to all gages and reinterpreted by folk etymology to mean that the pledge ends 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 and in some jurisdictions only land may be mortgaged. A mortgage is the standard method by which individuals and businesses can purchase real estate without the need to pay the full value immediately from their own resources. See mortgage loan for residential mortgage lending, and commercial mortgage for lending against commercial property.
Participants and variant terminology
Legal systems in different countries, while having some concepts in common, employ different terminology. However, in general, a mortgage of property involves the following parties. The borrower, known as the mortgagor, gives the mortgage to the lender, known as the mortgagee.Lender/mortgagee
A mortgage lender is an investor that lends money secured by a mortgage on real estate. In today's world, most lenders sell the loans they write on the secondary mortgage market. When they sell the mortgage, they earn revenue called Service Release Premium. Typically, the purpose of the loan is for the borrower to purchase that same real estate. As the mortgagee, the lender has the right to sell the property to pay off the loan if the borrower fails to pay.The mortgage runs with the land, so even if the borrower transfers the property to someone else, the mortgagee still has the right to sell it if the borrower fails to pay off the loan.
So that a buyer cannot unwittingly buy property subject to a mortgage, mortgages are registered or recorded against the title with a government office, as a public record. The borrower has the right to have the mortgage discharged from the title once the debt is paid.
Borrower/mortgagor
A mortgagor is the borrower in a mortgage—he or she 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 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, and the parties are known as hypothecator and hypothecatee. 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. A wadset was a loan masked as a sale of land under right of reversion. The borrower conveyed by charter a fee simple estate, in consideration of a loan, to the lender who on redemption would reconvey the estate to the reverser by a second charter. The difficulty with this arrangement was that the wadsetter was absolute owner of the property and could sell it to a third party or refuse to reconvey it to the reverser, who was also stripped of his principal means of repayment and therefore in a weak position. In later years the practice—especially in Scotland and on the continent—was to execute together the wadset and a separate back-bond according the reverser an in personam right of reverter.An alternative practice imported from Norman law was the usufructory pledge of real property known as a gage of land. Under a gage the borrower conveyed possession but not ownership to the lender for an unlimited term until redemption. The gage came in two forms:
- the living gage, whereby the estate's accruing rents, profits, and crops went toward reducing the debt ;
- the dead gage, whereby the rents and profits were taken in lieu of interest but did not reduce the debt.
Late Middle Ages
By the 13th century—in England and on the continent—the gage was limited to a term of years and contained a forfeiture proviso 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, nor did they recognize that tenure could be enlarged, so by the 14th century the simple gage for years was invalid in England.The solution was to merge the latter-day wadset and gage for years into a single transaction embodied in two instruments: the absolute conveyance in fee or for years to the lender; an indenture or bond 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 or, when written, the mortgage by charter and reconveyance 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. Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have under Sir Francis Bacon 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 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 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.