This entry contains information applicable to United States law only. A legal document by which the owner (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 borrowing the money and giving the mortgage (the debtor) is the mortgagor; the party paying the money and receiving 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 be signed by all owners, including nonowner 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, 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 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 payments had been made.
Courts of equity, which were originally ecclesiastical courts, had authority to decide cases on the basis of moral obligation, fairness, or justice, as opposed to 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 forfeit, by paying the debt with interest and costs. This form of relief is known as the equity of redemption.
Now nearly all states have enacted statutes incorporating the equity of redemption, and many have also 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 equity of redemption, many are not, because redeeming means coming up with the balance of the mortgage plus interest and costs, something a financially troubled debtor may 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 foreclosure 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 given a right to bid at the sale to protect their claims. Similar protections are afforded transactions involving deeds of trust.
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 Administration 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. In 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 mortgages-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 adjustable-rate mortgages. These mortgages are offered at initial interest rates that are somewhat lower than those for twenty- to thirty-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.
See: amortization.
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