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 (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.
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.
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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.
Borrower/mortgagor
A mortgagor is the borrower in a mortgage—he 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 (licensed) conveyancer. In
Bangladesh, 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 (e.g., Sp hipoteca, Fr hypothèque, Germ Hypothek), and the parties are
known as hypothecator (borrower) and hypothecatee (lender). A civil-law hypotheca is
exactly equivalent to an English mortgage by legal charge or American lien-theory
mortgage.
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History
In Anglo-Saxon England, when interest loans were illegal, the main method of securing
realty was by wadset (MEwedset). A wadset was a loan masked as a sale of land under
right of reversion. The borrower (reverser) conveyed by charter a fee simple estate,
in consideration of a loan, to the lender (wadsetter) 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 (gagor) conveyed
possession but not ownership to the lender (gagee) for an unlimited term until
redemption. The gage came in two forms:
the living gage (Norman vif gage, Welsh prid), whereby the estate’s accruing rents,
profits, and crops went toward reducing the debt (that is, the debt was self-
redeeming);
the dead gage (Norman mort gage, Scots deid wad), whereby the rents and profits
were taken in lieu of interest but did not reduce the debt.
The gage was unattractive for lenders because the gagor could easily eject the gagee
using novel disseisin, and the gagee—merely seized ut de vadio “as of gage”—could not
bring a freeholder’s remedies to recover possession. Thus, the unprofitable living gage fell
out of use, but the dead gage continued as the Welsh mortgage until abolished in 1922.
By the 13th century—in England and on the continent—the gage was limited to a term
of years and contained a forfeiture proviso (pactum commissorium) 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
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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 (i.e., no formal conveyance), nor did they recognize that tenure could be
enlarged, so by the 14th century the simple gage for years was invalid in England (and
Scotland and the near continent).
The solution was to merge the latter-day wadset and gage for years into a single
transaction embodied in two instruments: (1) the absolute conveyance (the charter) in
fee or for years to the lender; (2) an indenture or bond (the defeasance) 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 (aka mortgage in fee) 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.
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 (1617–21)[ 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 (borrower) would retain ownership, but the mortgagee's (lender's) rights, such
as foreclosure, the power of sale, and the right to take possession, would be protected. In
Bangladesh, those states that have reformed the nature of mortgages in this way are
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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.
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, Alice acquires a 3-acre
(12,000 m2) lot by mortgage then splits up the lot into three 1-acre (4,000 m2) lots (X,
Y, and Z), and sells lot Y to Bob, and then lot Z to Charlie, retaining lot X for herself.
Upon default, the mortgagee proceeds against lot X first, the mortgagor. If foreclosure or
repossession of lot X does not fully satisfy the debt, the mortgagee proceeds against lot
Y (Bob), then lot Z (Charlie). 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
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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 Bangladesh. 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, banks 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
In Bangladesh, 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.
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Equitable mortgage
Equitable mortgages originate in English Common Law and may lack some legal
formalities.
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. Certain transactions are recognized
therefore as mortgages by equity, which are not so recognized by common law.
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. The relatively slow,
expensive and cumbersome process of judicial foreclosure is a primary motivation for
the use of deeds of trust, because of their provisions for non-judicial foreclosures by
trustees through "power of sale" clauses.
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Characteristics of Mortgage
1. A mortgage can be affected only on immovable property, the immovable property
includes land, benefits that arise out of things attached to the earth like trees,
buildings, and machinery. But a machine which is not permanently fixed to the earth
and is shiftable from one place to another is not considered to be immovable property.
4. The property to be mortgaged must be a specific one, i.e., it can be identified by its
size, location, boundaries etc.
5. The actual possession of the mortgaged property need not always be transferred to
the mortgagee.
7. In case the mortgager fails to repay the loan, the mortgagee gets the right to recover
the debt out of the sale proceeds of the mortgaged property.
1. simple mortgage,
2. mortgage by conditional sale,
3. usufructuary mortgage,
4. english mortgage,
5. mortgage by deposit of title deeds, and
6. anomalous mortgage
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These are described below;
Simple mortgage
However, the mortgagee cannot directly sell the property. The sale must be through the
intervention of the court.
The mortgagee will have to obtain first a decree from the court for the sale of the
mortgaged property since the words used are “cause the mortgaged property to be sold”.
Mortgage by conditional sale is one where the mortgagor ostensibly sells the mortgaged
property on the condition that –
On default of payment of the mortgage money on a certain date the sale shall become
absolute, or
On such payment being made the sale shall become void, or
On such payment being made the buyer shall transfer the property to the seller.
Usufructuary mortgage
A usufructuary mortgage is one where the mortgagor delivers or agrees to deliver the
possession of the mortgaged property to the mortgagee and authorizes him –
English Mortgage
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The mortgagor makes a personal promise to repay the mortgage money on a certain
day.
The property mortgaged is transferred to the mortgagee absolutely. The mortgagee,
therefore, is entitled to take immediate possession of the property. He/She may, under
certain circumstances sell the mortgaged property without the intervention of the
court.
The transfer is subject to this condition that the mortgagee will re-transfer the
property to the mortgagor upon making payment of the mortgage money as agreed.
Anomalous mortgage
A mortgage other than any of the mortgages explained so far. Is an anomalous mortgage.
Such a mortgage includes a mortgage formed by the combination of two or more types
of mortgages as explained above.
It may, therefore, take various forms depending upon custom, local usage, or contract.
On the basis of the transfer of title to the mortgaged property, mortgages are divided
into types namely:
1. Legal Mortgage
2. Equitable Mortgage
Legal Mortgage
In a legal mortgage, the legal title to the property is transferred in favor of mortgagee by
a deed.
The deed is to be registered when the principal money is Rs.100 or more.
On repayment of the loan, the legal title is retransferred to the mortgagor.
The method of creating charge is expensive as it involves registration charges and stamp
duty.
Equitable Mortgage
An equitable mortgage is affected by delivery of documents of title to the property to the
mortgagee.
The mortgagor through Memorandum of deposit undertakes to grant a legal mortgage
if he fails to pay the mortgage money.
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Advantages
Disadvantages
If the mortgagor fails to repay, the mortgagee must get a decree for the sale of the
property. Getting a degree is expensive and time-consuming.
The borrower may hold the title deeds not on his own account, but in the capacity
of a trustee. If an equitable charge is created, the claim of the beneficiary under the
trust will prevail over the equitable mortgage.
There is the risk of subsequent legal mortgage in favor of another party. If the
equitable mortgagee parts with the security, even for a short period, the debtor may
create a second legal mortgage over the same property.
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b. Right of Foreclosure
c. Right to Sale
Certain forms of mortgage provide a right to sue for sale by intervention of courts.
Simple mortgage, Mortgage by deposit of title-deeds, and English Mortgage, transfers the
right of the mortgaged property to be sold by an order of the court. Order XXXIV Rule
14 mandates two conditions for a suit under Order XXXIV Rule 15 for sale of mortgaged
property, they are – that such claim must arise out of the mortgage, and that the
mortgagee must be allowed to bring a suit for enforcing his mortgage. English mortgage
is the only mortgage that vests with the mortgagee has the power of sale without
intervention of courts. However, this power of private sale is limited to only three
instances. The first being where the parties to an English Mortgage are not Hindus,
Mohammedans, Buddhists or any gazette sect. Therefore, this form of mortgage applies
mainly to companies.
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Charge
It should be noted that in a mortgage there is a charge but a charge is never a mortgage.
Charge does not create any interest in the property. Charge is an agreement in which
an immovable property is given as security against a debt without transferring any
interest in the property. For example: A posses certain immovable property and executes
an agreement in favour of B to pay a fixed amount of money annually out of the rents
of that property. B has charge on that immovable property.
i. There should be two parties for the creation of charge i.e., the creator of charge
and the holder of charge.
ii. The subject – matter of charge may be any present or future asset of the
borrower.
iii. The intention of the borrower to create a charge on specific asset or property is
to provide security for the repayment of any debt with interest.
iv. A charge should to be entered through an agreement made in the favour of lender
of the money.
As in most common law jurisdictions, the two kinds of charge that can be created over
assets are (i) fixed charge, and (ii) floating charge. A fixed charge can be created only
over an asset that is ascertainable, whether present or in future. A floating charge is
usually created on all the assets of the debtor, whether in existence or in the future,
ascertainable or not, and crystallises (i.e. becomes fixed) on such assets as are in
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existence at the time of occurrence of an event of crystallisation. The document creating
the charge would typically set out the events of crystallisation but a failure to repay the
debt or the debtor ceasing to carry on its business would invariably constitute a
crystallisation event. From the time of creation of charge until crystallisation, the debtor
has the right to use the assets and deal with them in the ordinary course of business
as if such assets are unencumbered, to the extent that it may also have a right to
dispose of the assets, if it so agreed between the parties. In a charge, there is no creation
of interest in the property. The Apex Court observed this by holding, “…in the case of a
charge there is no transfer of property or any interest therein, but only the creation of
a right of payment out of the specified property, a mortgage effectuates transfer of
property or an interest therein. No particular form of words is necessary to create a
charge and all that is necessary is that there must be a clear intention to make a
property security for payment of money in present.” Hence, a charge is a right of payment
out of a property, without any transfer of interest.
Illustrations
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The mortgage
The deed of trust is a conveyance of title made by the borrower to a trustee (not the
lender) for the purposes of securing a debt. In lien-theory states, it is reinterpreted as
merely imposing 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 foreclosed by a nonjudicial
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
instruments 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 so-called deed to secure debt is a security instrument used in the state of Georgia.
Unlike a mortgage, a security deed is an actual conveyance of real property - without
equity of redemption - in security of a debt. Upon the execution of such a deed, title
passes to the grantee or beneficiary (usually lender), however the grantor (borrower)
maintains equitable title to use and enjoy the conveyed land subject to compliance with
debt obligations.
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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.
In Bangladesh, more states are lien-theory states than are title-theory states. In title-
theory states, a mortgage continues to be a conveyance of legal title to secure a debt,
while the mortgagor still retains equitable title. In lien-theory states, mortgages and
deeds of trust have been redesigned so that they now impose a nonpossessory lien on
the title to the mortgaged property, while the mortgagor still holds both legal and
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 laws of the state in
which the mortgaged property 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 lienholders are entitled
to foreclose their liens in order to recover their debts. If a property's title has multiple
mortgage liens 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.
Conclusion
Mortgages, along with the Mortgage note, 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.
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