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Mortgage
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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 The
repayment of a debt to the original landowner. Hence the
word "mortgage," Law French for "dead
pledge;" that is, it was absolute in form, and
unlike a "live gage", 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 mortgaged. 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 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 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 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 judgment.
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
[edit] 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.[citation needed]
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.[citation needed]
The deed of trust
The 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.[citation needed]
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 the transaction costs
can be quite a bit less.[citation needed]
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.[citation needed]
Mortgage lien priority
Except in those few states in the United States that
adhere to the title theory of mortgages,[1] 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.[2] 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.[3] 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.
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