Saturday, April 15, 2006
Fundamentals of Mortgage Law
Mortgages are not loans.
A mortgage is an interest in land created by a contract, not a loan. Although almost all mortgage agreements contain a promise to repay a debt, a mortgage is not a debt by and in itself. It can be better characterized as evidence of a debt. More importantly, a mortgage is a transfer of a legal or equitable interest in land, on the condition sine qua non that the interest will be returned when the terms of the mortgage contract are performed. A mortgage agreement usually transfers the interest in the borrower’s land to the lender. However, the transfer has a condition attached: if the borrower performs the obligations of the mortgage contract, the transfer becomes void. This is the reason why the borrower is allowed to remain on title as the registered owner. In practicality, he retains possession of the land but the lender holds the right to the interest in said land.
In essence, therefore, a mortgage is a conveyance of land as a security for payment of the underlying debt or the discharge of some other obligation for which it is given. In a mortgage contract, the borrower is called ‘mortgagor’ and the lender ‘mortgagee’.
The History of Mortgage Law
Mortgage Law originated in the English feudal system as early as the 12th century. At that time the effect of a mortgage was to legally convey both the title of the interest in land and possession of the land to the lender. This conveyance was ‘absolute’, that is subject only to the lender’s promise to re-convey the property to the borrower if the specified sum was repaid by the specified date.
If, on the other hand, the borrower failed to comply with the terms, then the interest in land automatically became the lender’s and the borrower had no further claims or recourses at law. There were, back in feudal England, basically two kinds of mortgages: ‘ad vivum vadium’, Latin for ‘a live pledge’ in which the income from the land was used by the borrower to repay the debt, and ‘ad mortuum vadium’, Latin for ‘a dead pledge’ where the lender was entitled to the income from the land and the borrower had to raise funds elsewhere to repay the debt. Whereas at the beginning only ‘live pledges’ were legal and ‘dead pledges’ were considered an infringement of the laws of usury and of religious teachings, by the 14th century only dead pledges remained and were all very legal and very religious. And, apparently, they are still very religious in the 21st century.
Express Contractual Terms of a Mortgage
Following is an analysis of the clauses contained in most mortgage contracts. It should be emphasized, however, that the wording varies from contract to contract, and that the types of clauses change to conform to the particular types of securities mortgaged.
[ ] Redemption
When the mortgagor fulfills his obligations under the contract, the mortgage will be void and the mortgagee will be bound to reconvey the legal interest to the mortgagor.
[ ] Transferability
All the covenants made by the mortgagor will be binding upon him, his heirs, executors and administrators. This is the case whether the legal interest his held by the mortgagee, or by the mortgagee’s heirs, executors, administrators or assignees.
[ ] Personal Covenant
The contractual promise made by the borrower is his personal covenant. Because of this, it does not run with the land, so that the lender can sue the borrower on his personal covenant even in the eventuality that the borrower has sold the interest in land to someone else who has assumed the mortgage. In practicality, this means that until the original mortgage contract is valid, in full force and effect the original mortgagor is always liable.
[ ] Title Integrity
The mortgagor confirms and guarantees that he is the owner in fee simple and holds all rights and powers that such ownership entails, including the right to convey the land to the mortgagee.
[ ] Free and Clear
This is the very essence of the security for the debt: the title must be free and clear of all encumbrances (subject to certain statutory rights, such as taxation), so that conveyance can take place. Upon conveyance, the interest is transferred to the lender while the borrower retains possession. But on default, the borrower will deliver also possession to the lender subject to any encumbrance in priority. This can be a tax lien or, in the case of default on a second mortgage, a first mortgage.
[ ] Further Assurances
In the event of default, the mortgagor promises to do all that is necessary to allow the lender to obtain title of the property.
[ ] Prior Encumbrances
Except for statutory encumbrances, the mortgagor must make a declaration of any and all charges that have priority over the mortgage being contracted, otherwise the lender expects and has the right to be registered in first priority.
[ ] Insurance
The mortgage covenants to either keep the buildings located on said land insured at all times or, in the alternative, to provide a cash bond covering the replacement cost of said buildings.
[ ] Release of all Claims
The borrower gives up any claims he may have against the lender with respect to the property, except the borrower’s right to demand reconveyance when the underlying debt is repaid.
[ ] Acceleration on Default
Acceleration is a proviso stipulating the on default the principal and interest of the underlying debt will both become due and payable forthwith at the option of the mortgagee.
[ ] Quiet Possession
A stipulation that, until default, the mortgagor shall have quiet possession of said lands.
[ ] Omnibus Clause
In default of any payment of money to be paid by the mortgagor under the terms of the mortgage contract, the mortgagee may pay the same and the amount so paid shall be added forthwith to the principal debt secured by the contract and carrying interest at the same rate stipulated by the contract.
[ ] Repairs
The mortgagor has a duty and an obligation to keep the lands and the buildings thereon in good conditions and in a reasonable state of repair and, furthermore, he will not abandon or commit waste anywhere on the mortgaged property. This clause is intended to safeguard the value of the lender’s security.
[ ] Advances
The mortgagee shall not be bound to advance any part of the money intended to be secured by the mortgage contract. For example, where part of the money has been advanced and subsequently a builder’s lien is filed against the land, the lender will require the lien to be removed before advancing further funds. Note that builder’s liens have priority over mortgages.
[ ] Sale Clause
Also known as ‘Due on Sale’ the mortgagor agrees to pay, at the option of the mortgagee, all principal and interest of the underlying debt upon sale of the property. This clause effectively prevents the mortgage from being assumed by anyone unacceptable to the lender. Obviously, the other option of the lender is not to call the loan if the mortgagor sells to a Buyer acceptable to the lender. In the absence of this clause, the mortgage is always assumable.
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