Define: Mortgage

Quick Summary of Mortgage

A legal agreement that conveys the conditional right of ownership on an asset or property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan. The lender’s security interest is recorded in the register of title documents to make it public information and is voided when the loan is repaid in full.

Virtually any legally owned property can be mortgaged, although real property (land and buildings) are the most common. When personal property (appliances, cars, jewellery, etc.) is mortgaged, it is called a chattel mortgage. In case of equipment, real property, and vehicles, the right of possession and use of the mortgaged item normally remains with the mortgagor but (unless specifically prohibited in the mortgage agreement) the mortgagee has the right to take its possession (by following the prescribed procedure) at any time to protect his or her security interest.

In practice, however, the courts generally do not automatically enforce this right when it involves a dwelling house, and restrict it to a few specific situations. In the event of a default, the mortgagee can appoint a receiver to manage the property (if it is a business property) or obtain a foreclosure order from a court to take possession and sell it. To be legally enforceable, the mortgage must be for a definite period, and the mortgagor must have the right of redemption on payment of the debt on or before the end of that period. Mortgages are the most common type of debt instruments for several reasons such as lower rate of interest (because the loan is secured), straight forward and standard procedures, and a reasonably long repayment period. The document by which this arrangement is effected is called a mortgage bill of sale, or just a mortgage.

A mortgage is a method of using property (real or personal) as security for the payment of a debt.

The term mortgage (from Law French, lit. dead pledge) refers to the legal device used for this purpose, but it is also commonly used to refer to the debt secured by the mortgage, the mortgage loan.

In most jurisdictions, mortgages are strongly associated with loans secured on real estate rather than other property (such as ships), and in some cases, only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full value immediately. See mortgage loans for residential mortgage lending and commercial mortgages for lending against commercial property.

In many countries, it is normal for home purchases to be funded by a mortgage. In countries where the demand for homeownership is highest, strong domestic markets have developed, notably in Spain, the United Kingdom and the United States.

Participants And Variant Terminology

Legal systems tend to share certain concepts but vary in the terminology and jargon used.

In general terms, the main participants in a mortgage are:

Creditor

The creditor has legal rights to the debt or other obligation secured by the mortgage. That debt is often the obligation to repay the loan by the creditor (or its predecessor lender) who provided the purchase money to acquire the property mortgaged. Typically, creditors are banks, insurers, or other financial institutions that make loans available for the purpose of real estate purchases.

A creditor is sometimes referred to as the mortgagee or lender.

Debtor

The debtor is the person or entity who owes the obligation secured by the mortgage and may be multiple parties. 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 individual home-owners, landlords or businesses that are purchasing their property by way of a loan.

A debtor is sometimes referred to as the mortgagor, borrower, or obligor.

Other Participants

Due to 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. Recently, many US consumers (particularly higher-income borrowers) are choosing to work with Certified Mortgage Planners, industry experts that work closely with Certified Financial Planners to align the home finance position(s) of homeowners with their larger financial portfolio(s).

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, that is, in obtaining a legal hypothec.

In addition to borrowers, lenders, government-sponsored agencies, and private agencies, there is also a fifth class of participants who are the source of funds: life insurers, Pension Funds, etc.

Other Terminologies

Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some terms explained in brief. If a term is not explained here, it may be related to the mortgage loans rather than to the legal process.

Conveyance

The legal document that transfers ownership of unregistered land.

Disbursements

All the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.

Freehold

ownership of a property and the land.

Land Registration

A legal document that records the ownership of property and land. This is also known as a Title.

Leasehold

The ownership of the property and land for a specified period, which may be sold separately from freehold, which may be owned by another person.

Legal Charge

A legal document that records the data of the rightful owner of a property or land.

Mortgage Deed

A legal document that stated that the lender has a legal charge over the property.

Sealing Fee

A fee made when the lender releases the legal charge over the property.

Seasoned Mortgage

A mortgage that has been paid in a timely manner by the mortgagor for a period of typically no less than six months and often for more than one year. The term is associated with the secondary market, where mortgages with similar characteristics are bought and sold in bulk.

Legal Aspects

There are essentially two types of legal mortgage.

Mortgage By Demise

In a mortgage by demise, the creditor becomes the owner of the mortgaged property until the loan is repaid in full (known as “redemption”). This kind of mortgage takes the form of a conveyance of the property to the creditor, with the condition that the property will be returned on redemption.

This is an older form of legal mortgage and is less common than a mortgage by legal charge. In the UK, this type of mortgage is no longer available by virtue of the Land Registration Act 2002.

Mortgage By Legal Charge

In a mortgage by legal charge, the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.

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 property to make certain that there are no mortgages already registered on the debtor’s property, which might have a 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 common in the United States, and since 1925, it has been the usual form of mortgage in England and Wales (it is now the only form; see above).

In Scotland, the mortgage by legal charge is also known as standard security.

In Pakistan, a mortgage by legal charge is the most common way used by banks to secure financing. It is also known as a registered mortgage. After registration of the legal charge, the bank’s lien is recorded in the land register, stating that the property is under mortgage and can not be sold without obtaining a NOC (No Objection Certificate) from the bank.

Equitable Mortgage

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 or her own wish and will in order to secure the financing obtained from the bank.

In Pakistan, most of the time, a loan is secured by using two types of mortgages: registered mortgages and equitable mortgages.

History

At common law, a mortgage was a conveyance of land that, on its face, was absolute and conveyed a fee simple estate, but which was in fact conditional and would be of no effect if certain conditions were not met—usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word “mortgauge,” Law French for “dead pledge,” that is, it was absolute in form and, unlike a “live gauge,”  was not conditionally dependent on its repayment solely from raising and selling crops or livestock, or of simply giving the fruits of crops and livestock coming from the land that was mortgauged. 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 creditor, such as acceptance of crops and livestock, for repayment.

The difficulty with this arrangement was that the lender was the absolute owner of the property and could sell it or refuse to reconvey it to the borrower, who was in a weak position. Increasingly, the courts of equity began to protect the borrower’s interests, so that a borrower came to have an absolute right to insist on reconveyance on redemption. This right of the borrower is known as the “equity of redemption”.

This arrangement, whereby the mortgagee (the lender) was, on the 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 position was altered so that the mortgagor would retain ownership, but the mortgagee’s rights, such as foreclosure, the power of sale, and the right to take possession, would be protected.

In the United States, those states that have reformed the nature of mortgages in this way are 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.

Foreclosure And Non-Recourse Lending

In most jurisdictions, a lender may foreclose on the mortgaged property if certain conditions—principally, non-payment of the mortgage loan—apply. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt.

In some jurisdictions, mortgage loans are non-recourse loans; if the funds recouped from the sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt through a deficiency judgement.

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.

Mortgages In The United States

Types of Mortgage Instruments

Two types of mortgage instruments are used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.

The Mortgage

In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt.

The Deed Of Trust

A deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates 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 non-judicial sale held by the trustee. It is also possible to foreclose them through a judicial proceeding.

Most “mortgages” in California are actually deeds of trust. The effective difference is that the foreclosure process can be much faster for a deed of trust than for a mortgage, on the order of 3 months rather than a year. Because the foreclosure does not require actions by the court, transaction costs can be quite a bit less.

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, which do not create true trust arrangements.

Mortgage Lien Priority

Except in those few states in the United States that adhere to the title theory of mortgages, either a mortgage or a deed of trust will create a mortgage lien upon the title to the real property being mortgaged. 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 land is located, this attachment establishes the priority of the mortgage lien with respect to other liens on the property’s title. Liens that have been attached to the title before the mortgage lien are said to be senior to, or prior to, the mortgage lien. Those attached afterwards are said to be juniors or subordinates. The purpose of this priority is to establish the order in which lien holders are entitled to foreclose their liens in an attempt to recover their debts. If there are multiple mortgage liens on the title to a property 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.

Disclaimer

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 9th April, 2024.