Monday, May 29, 2006
Equity Of Redemption
Understanding the reasons why banks view real estate foreclosures as recourses of last resort.
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A mortgage is an interest in land created by a contract, not a loan. More specifically, a mortgage is a type of security for a debt. Although almost all mortgage agreements contain a promise to repay a debt, a mortgage is not a debt by and in itself. 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. This right of the borrower to repay the lender once the terms of the mortgage contract are fully satisfied is known, at law, as equity of redemption.
Mortgage Law originated in the English feudal system in approximately the 12th century A.D. In the early part of the English feudal period, the legal effect of a mortgage was to convey to the lender both the title of an interest in land and the actual possession of the land. This conveyance was absolute, subject only to the lender’s promise to re-convey the property to the borrower, if the specified sum of the underlying debt was repaid by the date set out in the mortgage contract. If the borrower failed to comply with the terms, the interest in land became the lender’s, and the borrower had no further claim or recourse to the property.
Because the law at that time did not recognize an agreement as security for a debt, the land and possession of it had to be transferred to the lender, so as to provide him with security. There were two types of mortgages: a vivum vadium (Latin for ‘live pledge’), in which the income from the land was used by the lender to repay the debt, and a mortuum vadium (Latin for ‘dead pledge’), where the lender kept the income and the debtor had to raise funds elsewhere. The ‘live pledge’ was acceptable at law, but the ‘dead pledge’ offended the prevailing laws against usury, as well as Canonic laws.
So much, therefore, for the more or less partisan misinformation of consumer advocates, who believe that governments created mortgages to enrich themselves at the expenses of the poor.
Mortgages were treated differently at common law than by the courts of equity. Common law took the view that mortgages, like any other contract, had to be performed exactly according to their terms. This meant, that if the borrower was even one day late in making a payment, the interest in land was forfeited to the lender and yet the borrower was still liable for the debt.
The courts of equity, on the other hand, altered both the relationship of the parties to the mortgage contract as well as the remedies available in case of default. These courts recognized that the mortgage was only security for a loan and, therefore, they limited the lender’s right only to the interest on the loan, and further required him to make a full accounting of all income from the land while he was in possession.
Because of this equitable interpretation of the courts, the lender no longer received an actual advantage from possession of the land. Possession, in other words, was of value only if the borrower did not honor the contract. With this legal development, furthermore, the borrower was vested with the right, in essence, to possession of the land and to full use of its income to pay interest and to raise principal for debt repayment.
Finally, the courts of equity also changed the rights of a borrower who did not repay on time, through the development of what nowadays is referred to as The Doctrine Of The Equity Of Redemption. This doctrine allows the borrower the right to repay the debt and regain the property even after the contractual date for repayment has lapsed.
Because of this, furthermore, the Courts want to be fully satisfied that the lender, in fact, has offered all possible remedies and venues of redemption to the borrower prior to granting an Order Absolute Of Foreclosure. As this involves considerable legal expenses on the part of the lender, cost of man/hour, interest accrued that may not be recoverable in its entirety as well as cost of opportunity, lenders view foreclosure as the recourse of very last resort available to them.
Luigi Frascati
Real Estate Chronicle
