Real Estate Mortgages
Mortgage
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This article is about the legal mechanisms 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, see Mortgage loan.
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v • d • e
A mortgage is the transfer of an interest in property (or the equivalent in law - a charge) to a lender as a security for a debt - usually a loan of money. While 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 term comes from the Old French "dead pledge," apparently meaning 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.
The cost to the borrower is measured by the annual percentage rate (APR), which is an effective annual rate of interest and fees paid by the borrower.
In many countries, though not all (Bali, Indonesia is one exception[2]), it is normal for home purchases to be funded by a mortgage. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Ireland, Spain, the United Kingdom, Australia and the United States.
Contents [hide]
1 Participants and variant terminology
2 Mortgage lender
3 Borrower
3.1 Borrowing for investment purposes
4 Other participants
5 Default on divided property
6 Legal aspects
6.1 Mortgage by demise
6.2 Mortgage by legal charge
6.3 Equitable mortgage
7 History
8 Foreclosure and non-recourse lending
9 Mortgages in the United States
9.1 Types of mortgage instruments
9.1.1 The mortgage
9.1.2 Security deed
9.1.3 The deed of trust
9.2 Mortgage lien priority
10 See also
11 Notes and references
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.
Mortgage lender
Mortgagee is a party to whom property is mortgaged, usually a lender. Mortgage provides security to the lender. Given the large sum of money involved in financing a property, a mortgage lender will usually want security for the loan that will provide a claim upon that security and will take precedence over other creditors. A mortgage accomplishes this security.
The lender loans the money and registers the mortgage with the title to the property. The borrower gives the lender the mortgage as security for the loan, receives the funds, makes the required payments and maintains possession of the property. The borrower has the right to have the mortgage discharged from the title once the debt is paid. If the mortgagor fails to repay the loan according to the conditions set forth by the lender, then the mortgagee reserves the right to foreclose on the property.
Borrower
Mortgagor is a party who mortgages property. A mortgagor 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 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.
Most buyers of real property would have difficulty saving enough money to make an outright purchase of real estate. The use of debt increases a buyer's ability to buy through a combination of down payment and debt. As a result a real estate transaction seldom occurs without buyers relying on borrowed funds.
Borrowing for investment purposes
Aside from the absence of large amount of available money, there are several reasons why an investor (including a buyer of real estate) might borrow funds. Some of these include:
To diversify investments and reduce overall risk by using only part of the available funds for any one investment. However the mortgage loan enables him to purchase more assets than he would otherwise been able to, and therefore in general increases investment risk rather than reducing it.
To invest the borrowed funds at a higher rate of interest (yield) than the borrowing rate; for example, a sum is borrowed at an annual interest rate of 7% per year and used to invest in a project that returns 10% per year. This is likely to be speculative and there is usually a possibility that the project may turn out to return less than 7% per year or to lose money.
To free up equity for other purposes; for example, a commercial enterprise may prefer to use funds to purchase inventory or equipment instead of investing only in land and buildings.
To obtain a tax benefit. In some countries (such as Canada), mortgage interest is not tax deductible, but loans made for investment purposes are.
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.
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-acre (12,000 m2) lot by mortgage then splits up the lot into three 1-acre (4,000 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 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, by virtue of the Land Registration Act 2002.