Tuesday, May 30, 2023

Fundamentals of Mortgage Law

A mortgage is an interest in land created by a contract, not a loan., Although almost all mortgage agreements contain a promise to repay the loan, the mortgage itself is not a loan. This can be better characterized as evidence of debt. More importantly, a mortgage is a transfer of a legal or equitable interest in land, provided that sign qualification non That the interest will be returned on completion of the terms of the mortgage contract. A mortgage agreement usually transfers the borrower’s interest in the land to the lender. However, the transfer has a condition attached: If the borrower fulfills the obligations of the mortgage contract, the transfer becomes void. This is why the borrower is allowed to continue on the title as the registered owner. Practically, he holds the possession of the land but the lender holds the right of interest in the said land.

In essence, therefore, a mortgage is a transfer of land as security for the payment of the underlying debt or discharge of some other obligation for which it is granted. In a mortgage contract, the borrower is referred to as the ‘mortgagor’ and the lender as the ‘mortgagor’.

History of Mortgage Law

Mortgage law originated in the English feudal system in the early 12th century. At that time the effect of a mortgage was to legally give both title of interest in the land and possession of the land to the lender. The transfer was ‘absolute’, subject only to the lender’s promise that the property would be re-conveyed to the borrower if a specified amount was paid by a specified date.

On the other hand, if the borrower fails to comply with the conditions, the interest in the land automatically vests with the lenders and the borrower has no further claim or recourse in law. In feudal England, there were basically two types of mortgages:’ad vivum vedium‘, Latin for ‘a living pledge’, in which the income from the land was used to repay the loan, and ‘Ad Mortem Vadium‘, Latin for ‘a dead pledge’ where the lender was entitled to the income from the land and the borrower had to raise funds elsewhere to repay the loan. While initially only ‘living vows’ were legal and ‘dead vows’ were considered a violation of the laws of usury and religious teachings, by the 14th century only dead vows survived and were all very legal and very religious. And, apparently, they are still very religious in the 21st century.

express the contractual terms of a mortgage

The following is an analysis of the clauses contained in most mortgage contracts. However, it should be emphasized that the wording varies from contract to contract, and the types of clauses change to suit particular types of securities.

[ ] redemption

When the mortgagor fulfills his obligations under the contract, the mortgage will become void and the mortgagor will be bound to restore the legal interest to the mortgagor.

[ ] transferability

All agreements made by the mortgagor shall be binding on him, his successors, executors and administrators. This is the case whether the legal interest is with the mortgagor, or with the mortgagor’s heirs, executors, administrators or assignees.

[ ] personal covenant

The contractual promise made by the borrower is his personal covenant. Because of this, it does not run with the land, so that the lender can sue the borrower on his personal covenant, even if the borrower has sold the interest in the land to someone else who has mortgaged it. In practicality, this means that as long as the original mortgage contract is valid, the original mortgagee is always liable in full force and effect.

[ ] title integrity

The mortgagor confirms and warrants that he is the owner in fee simple and bears all the rights and powers which are attached to such ownership, including the right to assign the land to the mortgagor.

[ ] free and clear

This is the essence of a security for a loan: the title must be free and clear of all encumbrances (subject to certain statutory rights such as taxation), in order for the transfer to take place. On transfer, the interest is transferred to the lender while the borrower retains possession. But in case of default, the Borrower shall also assign possession to the Lender subject to any encumbrances in priority. This may be a tax lien or, in the case of a default on a second mortgage, a first mortgage.

[ ] forward assurance

In the event of default, the mortgagor promises to do whatever is necessary to allow the lender to obtain title to the property.

[ ] pre load

Except for statutory encumbrances, the mortgagor must declare any and all encumbrances which have priority over the contracted mortgage, otherwise the lender expects and is entitled to be registered in first priority.

[ ] Insurance

A mortgage contract either to insure at all times the buildings on the said land or, alternatively, to provide for a cash bond to cover the replacement cost of the said buildings.

[ ] release of all claims

The Borrower waives any claims against the Lender with respect to the Property, except the Borrower’s right to demand that the underlying loan be repaid.

[ ] acceleration on default

Acceleration is a provision that stipulates upon default that both the principal and interest of the underlying loan shall be due and payable at the option of the mortgagor.

[ ] quiet possession

There is a condition that, in default, the mortgagor shall have quiet possession of the said land.

[ ] omnibus section

In default of any payment of money to be paid by the mortgagor under the terms of the mortgage contract, the mortgagor may forfeit the same and the amount so paid shall be added to the principal debt secured by the contract and shall bear interest thereon. Rate determined by contract.

[ ] Repairs

It is the duty and obligation of the mortgagor to keep the land and the buildings thereon in good condition and in a proper state of repair and, further, that he shall not leave or destroy the mortgaged property. The purpose of this clause is to protect the value of the lender’s security.

[ ] advance

The mortgagor shall not be bound to advance any part of the money intended to be secured by the mortgage contract. For example, where part of the money has been offered and a builder’s lien has subsequently been filed against the land, the lender will need to remove the lien before further money can be advanced. Note that builder’s liens have priority over mortgages.

[ ] sales segment

Also known as ‘due for sale’, the mortgagor agrees to pay all principal and interest of the underlying loan on the sale of the property, at the option of the mortgagor. This clause effectively prevents any person from accepting the mortgage as unacceptable to the lender. Obviously, the lender’s other option is not to call the loan if the mortgage sells to a buyer acceptable to the lender. In the absence of this clause, the mortgage is always valid.

luigi frascati

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