mortgage

Mortgage

A legal document by which the owner (i.e., the buyer) transfers to the lender an interest in real estate to secure the repayment of a debt, evidenced by a mortgage note. When the debt is repaid, the mortgage is discharged, and a satisfaction of mortgage is recorded with the register or recorder of deeds in the county where the mortgage was recorded. Because most people cannot afford to buy real estate with cash, nearly every real estate transaction involves a mortgage.

The party who borrows the money and gives the mortgage (the debtor) is the mortgagor; the party who pays the money and receives the mortgage (the lender) is the mortgagee. Under early English and U.S. law, the mortgage was treated as a complete transfer of title from the borrower to the lender. The lender was entitled not only to payments of interest on the debt but also to the rents and profits of the real estate. This meant that as far as the borrower was concerned, the real estate was of no value, that is, "dead," until the debt was paid in full—hence the Norman-English name "mort" (dead), "gage" (pledge).

The mortgage must be executed according to the formalities required by the laws of the state where the property is located. It must describe the real estate and must be signed by all owners, including non-owner spouses if the property is a homestead. Some states require witnesses as well as acknowledgement before a Notary Public.

The mortgage note, in which the borrower promises to repay the debt, sets out the terms of the transaction: the amount of the debt, the mortgage due date, the rate of interest, the amount of monthly payments, whether the lender requires monthly payments to build a tax and insurance reserve, whether the loan may be repaid with larger or more frequent payments without a prepayment penalty, and whether failing to make a payment or selling the property will entitle the lender to call the entire debt due.

State courts have devised varying theories of the legal effect of mortgages: Some treat the mortgage as a conveyance of the title, which can be defeated on payment of the debt; others regard it as a lien, entitling the borrower to all of the rights of ownership, as long as the terms of the mortgage are observed. In California a deed of trust to a trustee who holds title for the lender is the preferred security instrument.

At Common Law, if the borrower failed to pay the debt in full at the appointed time, the borrower suffered a complete loss of title, however long and faithfully the payments had been made.

Courts of Equity, which were originally ecclesiastical courts, had the authority to decide cases on the basis of moral obligation, fairness, or justice, as distinguished from the law courts, which were bound to decide strictly according to the common law. Equity courts softened the harshness of the common law by ruling that the debtor could regain title even after default, but before it was declared forfeited, by paying the debt with interest and costs. This form of relief is known as the equity of redemption.

Nowadays, nearly all states have enacted statutes incorporating the equity of redemption, and many also have enacted periods of redemption, specifying lengths of time within which the borrower may redeem. Although some debtors, or mortgagors, are able to avoid foreclosure through the equity of redemption, many are not, because redeeming means coming up with the balance of the mortgage plus interest and costs, something that a financially troubled debtor might not be able to accomplish. However, because foreclosure upends the agreement between mortgagor and mortgagee and creates burdens for both parties, lenders are often willing to work with debtors to help them through a period of temporary difficulty. Debtors who run into problems meeting their mortgage obligations should speak to their lender about developing a plan to avert foreclosure.

Failure to redeem results in foreclosure of the borrower's rights in the real estate, which is then sold by the county sheriff at a public fore-closure sale. At a foreclosure sale, the lender is the most frequent purchaser of the property.

If the bid at the sale is less than the debt, even if it is for fair market value, the lender may be granted a deficiency judgment for the balance of the debt against the debtor, with the right to resort to other assets or income for its collection.

Often other creditors bid at the sale to protect their interest as judgment creditors, second mortgagees, or mechanic's lien claimants. All such persons must be notified of the foreclosure suit and must be given a right to bid at the sale to protect their claims. Similar protections are afforded transactions involving deeds of trust.

A fixed-rate mortgage carries an interest rate that will be set at the inception of the loan and will remain constant for the length of the mortgage. A 30-year mortgage will have a rate that is fixed for all 30 years. At the end of the 30th year, if payments have been made on time, the loan is fully paid off. To a borrower, the advantage is that the rate will remain constant, and the monthly payment will remain the same throughout the life of the loan. The lender is taking the risk that interest rates will rise and that it will carry a loan at below-market interest rates for some or part of the 30 years. Because of this risk, there is usually a higher interest rate on a fixed-rate loan than the initial rate and payments on adjustable rate or balloon mortgages. If the rates fall, homeowners may pay off the loan by refinancing the house at the then-lower interest rate.

An adjustable-rate mortgage (ARM) provides a fixed initial interest rate and a fixed initial monthly payment for a short period of time. With an ARM, after the initial fixed period, which can be anywhere from six months to six years, both the interest rate and the monthly payments adjust on a regular basis to reflect the then-current market interest. Some ARMs may be subject to adjustment every three months, while others may be adjusted once per year. Moreover, some ARMs limit the amount that the rates may change. While an ARM usually carries a lower initial interest rate and a lower initial monthly payment, the purchaser is taking the risk that rates may rise in the future.

An alternative form of financing, usually a last resort for those who do not qualify for other mortgages, is called owner financing or owner carryback. The owner finances or "carries" all or part of the mortgage. Owner financing often involves balloon mortgage payments, as the monthly payments are frequently interest-only. A balloon mortgage has a fixed interest rate and a fixed monthly payment, but after a fixed period of time, such as five or ten years, the whole balance of the loan becomes due at once, meaning that the buyer must either pay the balloon loan off in cash or refinance the loan at current market rates.

A home-equity loan is usually used by homeowners to borrow some of the equity in the home. This may raise the monthly housing payment considerably. More and more lenders are offering home-equity lines of credit. The interest might be tax-deductible because the debt is secured by a home. A home-equity line of credit is a form of revolving credit secured by a home. Many lenders set the credit limit on a home-equity line by taking a percentage of the home's appraised value and subtracting from that the balance owed on the existing mortgage. In determining the credit limit, the lender will also consider other factors to determine the homeowner's ability to repay the loan. Many home-equity plans set a fixed period during which money may be borrowed. Some lenders require payment in full of any outstanding balance at the end of the period.

Home-equity lines of credit usually have variable, rather than fixed, interest rates. The variable rate must be based on a publicly available index such as the prime rate published in major daily newspapers or a U.S. Treasury bill rate. The interest rate for borrowing under the home-equity line will change in accordance with the index. Most lenders set the interest rate at the value of the index at a particular time plus a margin, such as 3 percentage points. The cost of borrowing is tied directly to the value of the index. Lenders sometimes offer a temporarily discounted interest rate for a home-equity line. This is a rate that is unusually low and that may last for a short introductory period of merely a few months.

The costs of setting up a home-equity line of credit typically include a fee for a property appraisal, an application fee, fees for attorneys, title search, mortgage preparation and filing fees, property and title insurance fees, and taxes. There also might be recurring maintenance fees for the account, or a transaction fee every time there is a draw on the credit line. It might cost a significant amount of money to establish the home-equity line of credit, although interest savings often justify the cost of establishing and maintaining the line.

The federal Truth in Lending Act, 15 U.S.C.A. §§ 1601 set. seq., requires lenders to disclose the important terms and costs of their home-equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. If the home involved is a principal dwelling, the Truth in Lending Act allows three days from the day the account was opened to cancel the credit line. This right allows the borrower to cancel for any reason by informing the lender in writing within the three-day period. The lender then must cancel its security interest in the property and return all fees.

A second mortgage provides a fixed amount of money that is repayable over a fixed period. In most cases, the payment schedule calls for equal payments that will pay off the entire loan within the loan period. A second mortgage differs from a home-equity loan in that it is not a line of credit, but rather a more traditional type of loan. The traditional second-mortgage loan takes into account the interest rate charged plus points and other finance charges. The annual percentage rate for a home-equity line of credit is based on the periodic interest rate alone. It does not include points or other charges.

A reverse mortgage works much like a traditional mortgage, only in reverse. It allows homeowners to convert the equity in a home into cash. A reverse mortgage permits retired homeowners who own their home and have paid all of their mortgage to borrow against the value of their home. The lender pays the equity to the homeowner in either payments or a lump sum. Unlike a standard home-equity loan, no repayment is due until the home is no longer used as a principal residence, a sale of the home, or the death of the homeowner.

A deed of trust is similar to a mortgage, with one important exception: If the borrower breaches the agreement to pay off the loan, the foreclosure process is typically much quicker and less complicated than the formal mortgage-foreclosure process. While a mortgage involves a relationship between the borrower/homeowner and the bank/lender, a deed of trust involves the homeowner, the lender, and a title insurance company. The title insurance company holds legal title to the real estate until the loan is paid in full, at which time the company transfers the property title to the homeowner.

Subdivision or condominium-development mortgages that cover a large tract of land are blanket mortgages. A blanket mortgage makes possible the sale of individual lots or units, with the proceeds applied to the mortgage, and partial release of the mortgage recorded to clear the title for that lot or unit.

Construction mortgages need special treatment depending on state construction-lien law. Often the loan proceeds are placed in escrow with title insurance companies to make certain that the mortgage remains a first lien, with priority over contractors' construction liens.

Open-end mortgages make possible additional advances of money from the lender without the necessity of a new mortgage.

The time of repayment may be extended by a recorded extension of mortgage. Other real estate may be added to the mortgage by a spreading agreement. Mortgaged real estate may be sold, with the buyer taking either "subject to" or by "assuming" the mortgage. In the former case, the buyer acknowledges the existence of the mortgage and, upon default, may lose the title. By assuming the mortgage, the buyer promises to repay the debt and may be personally liable for a deficiency judgment if the sale brings less than the debt.

Lenders regularly assign mortgages to other investors. Assignments with recourse are guarantees by the one who assigns the mortgage that that party will collect the debt; those Without Recourse do not contain such guarantees. Assignments with recourse usually involve lower-risk properties or those of relatively stable or rising value. Assignments without recourse tend to involve riskier properties. Mortgages assigned without recourse are often sold at a price discounted well below their market value.

Before the Great Depression of the 1930s, most mortgages were "straight" short-term mortgages, requiring payments of interest and lump-sum principal, with the result that when incomes dropped, many borrowers lost their properties. That risk is minimized today because commercial lenders take fully amortized mortgages, in which part of the periodic payment applies first to interest and then to principal, with the balance reduced to zero at the end of the term.

Several agencies of the federal government have assisted the mortgage market by infusion of capital and by guarantees of repayment of mortgages. The Federal Housing Administration made possible purchases of real estate at low interest rates and with low down payments. The Veterans Affairs Department (VA) also guarantees home loans to certain veterans on favorable terms. Both agencies contributed greatly to the growth of the housing market after World War II. During the late 1950s, private corporations began insuring repayment of conventional mortgages.

The Government National Mortgage Association (Ginnie Mae), created by the U.S. government in 1968, makes possible trading in mortgages by investors by guaranteeing mortgage-backed Securities.

The Federal National Mortgage Association (Fannie Mae) is a private corporation, chartered by the U.S. government, that bolsters the supply of funds for home mortgages by buying mortgages from banks, insurance companies, and savings and loans.

Inflation in the 1970s made long-term fixed-rate mortgages less attractive to lenders. In response, lenders devised three types of mortgage loans that enable the rate of interest to vary in case of rises in rates: the variable-rate mortgage, graduated-payment mortgage, and the adjustable-rate mortgage. These mortgages are offered at initial interest rates that are somewhat lower than those for 20- to 30-year fixed-rate mortgages.

Home-equity loans are typically second mortgages to the holder of the first mortgage, advancing funds based on a percentage of the owner's equity; that is, the amount by which the value of the real estate exceeds the first mortgage balance.

Cross-references

Amortization.

mortgage

n. a document in which the owner pledges his/her/its title to real property to a lender as security for a loan described in a promissory note. Mortgage is an old English term derived from two French words "mort" and "gage" meaning "dead pledge." To be enforceable the mortgage must be signed by the owner (borrower), acknowledged before a notary public, and recorded with the County Recorder or Recorder of Deeds. If the owner (mortgagor) fails to make payments on the promissory note (becomes delinquent) then the lender (mortgagee) can foreclose on the mortgage to force a sale of the real property to obtain payment from the proceeds, or obtain the property itself at a sheriff's sale upon foreclosure. However, catching up on delinquent payments and paying costs of foreclosure ("curing the default") can save the property. In some states the property can be redeemed by such payment even after foreclosure. Upon payment in full the mortgagee (lender) is required to execute a "satisfaction of mortgage" (sometimes called a "discharge of mortgage") and record it to clear the title to the property. A purchase-money mortgage is one given by a purchaser to a seller of real property as partial payment. A mortgagor may sell the property either "subject to a mortgage" in which the property is still security and the seller is still liable for payment, or the buyer "assumes the mortgage" and becomes personally responsible for payment of the loan. Under English common law a mortgage was an actual transfer of title to the lender, with the borrower having the right to occupy the property while it was in effect, but non-payment ended the right of occupation. Today only Connecticut, Maine, New Hampshire, North Carolina, Rhode Island and Vermont cling to the common law, and other states using mortgages treat them as liens on the property. More significantly, 14 states use a "deed of trust" (or "trust deed") as a mortgage. These states include: California, Illinois, Texas, Virginia, Colorado, Georgia, Alaska, Arizona, Idaho, Mississippi, Missouri, Montana, North Carolina and West Virginia. Under the deed of trust system title is technically given to a trustee to hold for the lender who is called a beneficiary. (See: deed of trust, trust deed, foreclosure, notice of default, judicial foreclosure)

mortgage

In relation to land in England and Wales, a legal mortgage of freehold land is effected by means of a demise subject to a proviso for cesser on redemption; in relation to leaseholds, the mortgage as effected by a sub-demise. An alternative form, provided for by Section 851 of the Law of Property Act 1925, is a charge by deed expressed to be by way of legal mortgage. Since the Law of Property (Miscellaneous Provisions) Act 1989, the creation of an equitable mortgage requires to be in writing and can, it would seem, no longer be effected merely by deposit of title deeds. To secure protection against bona fide purchasers, equitable mortgagees should ensure that their mortgages are protected by registration as a land charge (where the title is not subject to the Land Registration Acts) or as a charge where the title is so subject.

In Scotland the word is used non-technically to describe the lending relationship in relation to heritage. The legal documentation in Scotland is by way of a STANDARD SECURITY.

There is a UK Mortgage Code setting out the framework of the relationships involved and providing for rules on advertising and service levels. A similar European Code exists.

MORTGAGE, contracts, conveyancing. Mortgages are of several kinds: as the concern the kind of property, mortgaged, they are mortgages of lands, tenements, and, hereditaments, or of goods and chattels; as they affect the title of the thing mortgaged, they are legal and equitable.
     2. In equity all kinds of property; real or personal, which are capable of an absolute sale, may be the subject of a mortgage; rights in remainder and reversion, franchises, and choses in action, may, therefore, be mortgaged; But a mere possibility or expectancy, as that of an heir, cannot. 2 Story, Eq. Jur. Sec. 1021; 4 Kent, Com. 144; 1 Powell, Mortg. 17, 23; 3 Meri. 667.
     3. A legal mortgage of lands may be described to be a conveyance of lands, by a debtor to his creditor, as a pledge and security for the repayment of a sum of money borrowed, or performance of a covenant; 1 Watts, R. 140; with a proviso, that such conveyance shall be void on payment of the money and interest on a certain day, or the performance of such covenant by the time appointed, by which the conveyance of the land becomes absolute at law, yet the, mortgagor has an equity of redemption, that is, a right in equity on the performance of the agreement within a reasonable time, to call for a re-conveyance of the land. Cruise, Dig. t. 15, c. 1, s. 11; 1 Pow. on Mortg. 4 a, n.; 2 Chip. 100; 1 Pet. R. 386; 2 Mason, 531; 13 Wend. 485; 5 Verm. 532; 1 Yeates, 579; 2 Pick. 211.
     4. It is an universal rule in equity that once a mortgage, always a mortgage; 2 Cowen, R. 324; 1 Yeates, R. 584; every attempt, therefore, to defeat the equity of redemption, must fail. See Equity of Redemption.
     5. As to the form, such a mortgage must be in writing, when it is intended to convey the legal title. 1 Penna. R. 240. It is either in one single deed which contains the whole contract -- and which is the usual form -- or, it is two separate instruments, the one containing an absolute conveyance, and the other a defeasance. 2 Johns. Ch. Rep. 189; 15 Johns. R. 555; 2 Greenl. R. 152; 12 Mass. 456; 7 Pick. 157; 3 Wend, 208; Addis. 357; 6 Watts, 405; 3 Watts, 188; 3 Fairf. 346; 7 Wend. 248. But it may be observed in general, that whatever clauses or covenants there are in a conveyance, though they seem to import an absolute disposition or conditional purchase, yet if, upon the whole, it appears to have been the intention of the parties that such conveyance should be a mortgage only, or pass an estate redeemable, a court of equity will always so construe it. Vern. 183, 268, 394; Prec Ch. 95; 1 Wash. R 126; 2 Mass. R. 493; 4 John. R. 186; 2 Cain. Er. 124.
     6. As the money borrowed on mortgage is seldom paid on the day appointed, mortgages have now become entirely subject to the court of chancery, where it is an established rule that the mortgagee holds the estate merely as a pledge or security for the repayment of his money; therefore a mortgage is considered in equity as personal estate.
     7. The mortgagor is held to be the real owner of the land, the debt being considered the principal, and the land the accessory; whenever the debt is discharged, the interest of the mortgagee in the lands determines of course, and he is looked on in equity as a trustee for the mortgagor.
     8. An equitable mortgage of lands is one where the mortgagor does not convey regularly the land, but does some act by which he manifests his determination to bind the same for the security of a debt he owes. An agreement in writing to transfer an estate as a security for the repayment of a sum of money borrowed, or even a deposit of title deeds, and a verbal agreement, will have the same effect of creating an equitable mortgage. 1 Rawle, Rep. 328; 5 Wheat. R. 284; 1 Cox's Rep. 211. But in Pennsylvania there is no such a thing as an equitable mortgage. 3 P. S. R. 233. Such an agreement will be carried into execution in equity against the mortgagor, or any one claiming under him with notice, either actual or constructive, of such deposit having been made. 1 Bro. C. C. 269; 2 Dick. 759; 2 Anstr. 427; 2 East, R. 486; 9 Ves. jr. 115; 11 Ves. jr. 398, 403; 12 Ves. jr. 6, 192; 1 John. Cas. 116; 2 John. Ch. R. 608; 2 Story, Eq. Jur. Sec. 1020. Miller, Eq. Mortg. passim.
     9. A mortgage of goods is distinguishable from a mere pawn. 5 Verm. 532; 9 Wend. 80; 8 John. 96. By a grant or conveyance of goods in gage or mortgage, the whole legal title passes conditionally to the mortgagee, and if not redeemed at the time stipulated, the title becomes absolute at law, though equity will interfere to compel a redemption. But, in a pledge, a special property only passes to the pledgee, the general property remaining in the pledger. There have been some cases of mortgages of chattels, which have been held valid without any actual possession in the mortgagee; but they stand upon very peculiar grounds and may be deemed exceptions to the general rule. 2 Pick. R. 607; 5 Pick. R. 59; 5 Johns. R. 261; Sed vide 12 Mass. R. 300; 4 Mass. R. 352; 6 Mass. R. 422; 15 Mass. R. 477; 5 S. & R. 275; 12 Wend. 277: 15 Wend. 212, 244; 1 Penn. 57. Vide, generally,, Powell on Mortgages; Cruise, Dig. tit. 15; Viner, Ab. h.t.; Bac. Ab. h.t., Com. Dig. h.t.; American Digests, generally, h.t.; New, York Rev. Stat. p. 2, c. 3; 9 Wend. 80; 9 Greenl. 79; 12 Wend. 61; 2 Wend. 296; 3 Cowen, 166; 9 Wend. 345; 12 Wend. 297; 5 Greenl. 96; 14 Pick. 497; 3 Wend. 348; 2 Hall, 63; 2 Leigh, 401; 15 Wend. 244; Bouv. Inst. Index, h.t.
    10. It is proper to, observe that a conditional sale with the right to repurchase very nearly resembles a mortgage; but they are distinguishable. It is said that if the debt remains, the transaction is a mortgage, but if the debt is extinguished by mutual agreement, or the money advanced is not loaned, but the grantor has a right to refund it in a given time, and have a reconveyance, this is a conditional sale. 2 Edw. R. 138; 2 Call, R. 354; 5 Gill & John. 82; 2 Yerg. R. 6; 6 Yerg. R. 96; 2 Sumner, R. 487; 1 Paige, R. 56; 2 Ball & Beat. 274. In cases of doubt, however, courts of equity will always lean in favor of a mortgage. 7 Cranch, R. 237; 2 Desaus. 564.
    11. According to the laws of Louisiana a mortgage is a right granted to the creditor over the property of his debtor, for the security of his debt, and gives him the power of having the property seized and sold in default of payment. Civ. Code of Lo. art. 3245.
    12. Mortgage is conventional, legal or judicial. 1st. The conventional mortgage is a contract by which a person binds the whole of his property, or a portion of it only, in favor of another, to secure the execution of some engagement, but without divesting himself of the possession. Civ. Code, art. 3257.
    13.-2d. Legal mortgage is that which is created by operation of law: this is also called tacit mortgage, because it is established by the law, without the aid of any agreement. Art. 3279. A few examples will show the nature of this mortgage. Minors, persons interdicted, and absentees, "have a legal mortgage on the property of their tutors and curators, as a security for their administration; and the latter have a mortgage on the property of the former for advances which they have made. The property of persons who, without being lawfully appointed curators or tutors of minors, &c., interfere with their property, is bound by a legal mortgage from the day on which the first act of interference was done.
    14.-3d. The judicial mortgage is that resulting from judgments, whether these be rendered on contested cases or by default, whether they be final or provisional, in favor of the person obtaining them. Art. 3289.
    15. Mortgage, with respect to the manner in which it binds the property, is divided into general mortgage, or special mortgage. General mortgage is that which binds all the property, present or future, of the debtor. Special mortgage is that which binds only certain specified property. Art. 3255.
    16. The following objects are alone susceptible of mortgage: 1. Immovables, subject to alienation, and their accessories considered likewise as immovable. 2. The usufruct of the same description of property with its accessories during the time of its duration. 3. Slave's. 4. Ships and other vessels. Art. 3256.