A mortgage is an interest in the land created by a contract, not a loan.. Although almost all mortgage agreements contain a promise to pay a debt, a mortgage is not a debt in itself. It can best be characterized as evidence of a debt. More importantly, a mortgage is a transfer of a legal or equitable interest in the land, on the condition sine qua non that the interest will be returned when the terms of the mortgage contract are met. A mortgage agreement generally transfers the interest in the land from the borrower to the lender. However, the transfer has an attached condition: if the borrower fulfills the obligations of the mortgage contract, the transfer is canceled. This is why the borrower can remain on the title as a registered owner. In practice, you retain possession of the land, but the lender has the right to share in the land.
In essence, therefore, a mortgage is an assignment of land as collateral for the payment of the underlying debt or the fulfillment of some other obligation for which it is granted. In a mortgage contract, the borrower is called the “mortgagor” and the lender is called the “mortgagee.”
The history of mortgage law
Mortgage law originated in the English feudal system as early as the 12th century. At that time, the effect of a mortgage was to legally convey both title to the interest in the land and ownership of the land to the lender. This transfer was ‘absolute’, which is subject only to the promise of the lender to transfer the property back to the borrower if the specified sum was repaid before the specified date.
If, on the other hand, the borrower did not meet the terms, then the interest in the land automatically became the lender and the borrower had no further claims or recourse under the law. There were, in feudal England, basically two types of mortgages: ‘ad vivum vadium‘, Latin for’ a live promise ‘in which the borrower used the income from the land to pay off the debt, and’ad mortuum vadium‘, Latin for’ a dead promise ‘where the lender was entitled to the income from the land and the borrower had to raise funds elsewhere to pay the debt. While at first only ‘living promises’ were legal and ‘dead promises’ were considered a violation of usury laws and religious teachings, in the 14th century only dead promises remained and they were all very legal and very religious. And apparently they are still very religious in the 21st century.
Express contractual terms of a mortgage
Below 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 the particular types of mortgaged securities.
[ ] Redemption
When the mortgage debtor complies with its contractual obligations, the mortgage will be void and the mortgagee will be obliged to return the legal interest to the mortgage debtor.
[ ] Transferability
All agreements made by the mortgage debtor will be binding on him, his heirs, executors and administrators. This is the case whether the legal interest belongs to the mortgagee or to the heirs, executors, administrators or assignees of the mortgagee.
[ ] Personal pact
The contractual promise made by the borrower is his personal covenant. Because of this, it does not work with the land, so the lender can sue the borrower in his personal covenant even in the event that the borrower has sold the interest in the land to another person who has assumed the mortgage. In practice, this means that until the original mortgage contract is valid, in full force and effect, the original mortgagor is always liable.
[ ] Title integrity
The mortgage debtor confirms and guarantees that he is a simple commission owner and holds all the rights and powers that such ownership entails, including the right to transfer the land to the mortgagee.
[ ] Free and clear
This is the very essence of the debt security: the title must be free and free of all encumbrances (subject to certain legal rights, such as taxes), for the transfer to take place. After the transfer, the interest is transferred to the lender while the borrower retains possession. But in case of default, the borrower will also hand over the possession to the lender subject to any lien in priority. This can be a tax lien or, in the case of a second mortgage default, a first mortgage.
[ ] More guarantees
In the event of default, the mortgagor agrees to do whatever is necessary to allow the lender to obtain title to the property.
[ ] Previous liens
Except for legal encumbrances, the mortgage debtor must declare each and every one of the charges that have priority over the contracted mortgage, otherwise the lender waits and has the right to be registered in first priority.
[ ] Sure
The mortgage undertakes to keep the buildings located on said land insured at all times or, alternatively, to provide a cash bond that covers the replacement cost of said buildings.
[ ] Release of all claims
The borrower waives any rights he may have against the lender with respect to the property, except the right of the borrower to demand repayment when the underlying debt is repaid.
[ ] Default acceleration
Acceleration is a condition that, in the event of default, the principal and interest on the underlying debt will expire and be immediately payable at the option of the mortgagee.
[ ] Quiet possession
A stipulation that, until default, the mortgagee will have quiet possession of said land.
[ ] Omnibus clause
In the event of non-compliance with any payment of money to be paid by the mortgage debtor in the terms of the mortgage contract, the mortgagee may pay the same and the amount thus paid will be immediately added to the principal debt guaranteed by the contract and accruing interests to it. Rate stipulated in the contract.
[ ] Repair
The debtor has the duty and the obligation to keep the land and the buildings on them in good condition and in a reasonable state of conservation and, furthermore, he will not abandon or waste any part of the mortgaged property. This clause is intended to safeguard the value of the lender’s collateral.
[ ] Advances
The mortgagee will not be obliged to advance any part of the money that is intended to be guaranteed by the mortgage contract. For example, when some money has been advanced and a builder’s lien is subsequently filed against the land, the lender will require that the lien be removed before advancing more funds. Keep in mind that builder’s liens take precedence over mortgages.
[ ] Clause of sale
Also known as ‘Maturity on sale’, the mortgagor agrees to pay, at the option of the mortgagee, all principal and interest on the underlying debt at the time of sale of the property. This clause effectively prevents the mortgage from being assumed by someone unacceptable to the lender. Obviously, the lender’s other option is not to cancel the loan if the mortgagor sells to a Buyer acceptable to the lender. In the absence of this clause, the mortgage is always assumable.