Concept of Mortgage: its Legal Analysis

by shubhra mishra on April 30, 2009 A mortgage is the transfer of an interest in property (or the equivalent in law - a charge) to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lenders security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower. The term comes from the Old French dead pledge, apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure. In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than on other property (such as ships) and in some jurisdictions only land may be mortgaged. A mortgage is the standard method by which individuals and businesses can purchase real estate without the need to pay the full value immediately from their own resources. See mortgage loan for residential mortgage lending, and commercial mortgage for lending against commercial property. The cost to the borrower can be measured by the Annual Percentage Rate (APR), which is the effective annual interest rate paid by the borrower, computed according to a standard formula, and taking account of fees charged by the lender. In many countries, though not all (Bali is one exception), it is normal for home purchases to be funded by a mortgage. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Ireland, Spain, the United Kingdom, Australia and the United States. HISTORY OF MORTGAGE UNDER ROMAN LAW The study of the forms of mortgage in the Roman Law is valuable for a twofold reason. It shows the evolution of the theory of mortgage in that system of jurisprudence and also the origin of the equitable theory of mortgage that now prevails in the American States. The first form of pledge among the Romans was an absolute conveyance, a literal jure cessio, accompanied with an agreement on the creditors part to recover the property to the debtor upon payment of the debt. It was not an absolute conveyance with a defeasance clause as in the English Common Law, a conveyance upon condition subsequent, but a conveyance, a sale of the property, with an ancillary agreement that the creditor would sell back the property when the debt is paid. The transaction was known as fiducia, the borrower being dependant upon the honor and faith of the creditor. In this form of mortgage there was no way of compelling the restoration of property, the res, upon the payment of the debt.

Under a fiduciary sale, the borrower, therefore, obtained his loan at great risk as far as the recovery of the specific property was concerned. This led, in time of the praetors, to a change in the law. The praetor by his edict provided that instead of making a formal conveyance of the ownership of the property to the creditor, the creditor should be placed in the possession of the property, but its ownership should remain with the debtor. This transaction was known as pignus or pledge. UNDER COMMON LAW 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 met usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word mortgage (a legal term in French meaning dead pledge). The debt was absolute in form, and unlike a live pledge was not conditionally dependent on its repayment solely from raising and selling crops or livestock or simply giving the crops and livestock raised on the mortgaged land. 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 in 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 borrowers 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 lender was in 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 laws position was altered so that the mortgagor would retain ownership, but the mortgagees rights, such as foreclosure, the power of sale, and the right to take possession, would be protected. UNDER UNITED STATES OF AMERICA 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. Types of mortgage instruments in U.S.A Two types of mortgage instruments are commonly 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.[citation needed]

Security deed The deed to secure debt is a mortgage instrument used in the state of Georgia. Unlike a mortgage, however, a security deed is an actual conveyance of real property in security of a debt. Upon the execution if such a deed, title passes to the grantee or beneficiary (usually lender), however the grantor (debtor) maintains equitable title to use and enjoy the conveyed land subject to compliance with debt obligations. Security deeds must be recorded in the county where the land is located. Although there is no specific time within which such deeds must be filed, the failure to timely record the deed to secure debt may affect priority and therefore the ability to enforce the debt against the subject property.<![if !supportFootnotes]>[5]<![endif]> 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.<![if !supportFootnotes]>[6]<! [endif]> 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 the 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 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 most other liens on the propertys title. 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. 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.

MORTGAGE UNDER INDIAN LAW (Transfer of Property Act, 1882) 1. Simple Mortgage: When the possession of the mortgaged property is not transferred from mortgagor to the mortgagee. If the mortgagor fails to repay the loan, the mortgagee has the right to sell the property and recover the loan from the sale amount. 2. Conditional Sale: Here the mortgagor apparently sells the property to the mortgagee subject to certain condition. The condition may be either of the following: a. On failure to repay the mortgage money before a certain date the sale shall become absolute, or b. On such repayment of mortgage money the sale shall become invalid, or c. On such repayment the mortgagee shall retransfer the property. 3. Usufructuary Mortgage: In this type of mortgage, the possession of the mortgaged property is transferred to the mortgagee. He receives the income from the property, eg. rent, profit etc, until the repayment of the loan. The title deeds remain with the owner. 4. Mortgage By Deposit Of Title Deeds: Here, the mortgagor delivers the title document of the property to the mortgagee with an intention to create a security thereon. This mortgage can be entered into only in the towns of Chennai, Kolkota, Mumbai or any other town, as notified by the State Government in the official gazette. 5. English Mortgage: In an English Mortgage: a. The mortgagor transfers the property absolutely to the mortgagee. b. The mortgagor binds himself to repay the borrowed money before a certain date. c. Such transfer is subject to the condition that the mortgagee will retransfer the property on repayment before the agreed date. When Can The Mortgagee Sell The Property? Is The Permission Of The Court Necessary In Order To Sell It? It is very important to note at this juncture that the mortgagee can sell the property only when the mortgagor has failed to repay the loan. The permission of the Court is necessary, except in the following cases: a. English mortgage. b. Where the power of sale has already been conferred by deed to the mortgagee. c. Where the power of sale has already been conferred by deed and the mortgaged property is situated within Chennai, Kolkota, Mumbai or any other notified town or area. Relevance Of English Mortgage In India

Before the passing of the Law of Property Act, 1925 a mortgage in the English form of properties situated in the mofussil between parties of whom one was a Hindu was always treated as mortgage by conditional sale. Where both the parties were Englishmen, all the incidents of English mortgage were held applicable. After the passing of the Act a mortgage in English form could be treated in the mofussil as well as in the presidency towns, no matter to what communities the parties belonged to. The type of mortgage usually prevalent in England does not contain a personal covenant and in that sense the expression English in the definition of English Mortgage is not appropriate. The legislature seems to have employed this expression on the basis that transfer of property to the mortgagee with the specified proviso is of the essence of the mortgage as understood in England, at least before Law of Property Act, 1925. Grant of an estate in fee with the condition that if the mortgagor shall repay the mortgagee shall reconvey the estate to the mortgagor was the usual form of a mortgage deed in England. However, a personal covenant is not found in mortgages in England but it has been made a part of English. CONCLUSIVE ANALYSIS Mortgage in India. The first case in which the mortgagee can have the power to sell is mentioned in clause (a) of sub-section (1) of Section 69 of the Transfer of Property Act, 1882. It lays down the following conditions for the acquisition of the power, namely: (1) That the mortgage must be an English mortgage, as defined in Section 58(e) of the Transfer of Property Act, 1882, and (2) Neither the mortgagor nor the mortgagee must be: a. a Hindu, Mohammedan or Buddhist, or b. a member of any other race, sect, tribe, or class from time to time specified in this behalf by the State Government in the Official Gazette. In L.V. Apte v. R.G.N. Price, AIR 1962 AP 274, the A.P. High Court applied Section 69 of the Transfer of Property Act, 1882, to an English mortgage between a company and trustees for debenture-holders, some of the trustees being Hindus. Section 69(1)(a) of the Transfer of Property Act, 1882, is confined only to a select sect of mortgagors and mortgagees who do not belong to the majority communities in India. This section is taken advantage of by corporate bodies that are not natural persons since such bodies are not deemed to belong to any religion. As far as individuals are concerned, this section can be adopted if both the mortgagor and mortgagee do not belong to the religion, race, sect, tribe or class, which are excluded from the purview of Section 69(1)(a) of the Transfer of Property Act, 1882. If the conditions in Section 69(1)(a) and Section 69(2) of the Transfer of Property Act, 1882 are complied with, mortgagees power of sale arises suo motu.

It is opined here that Section 69(1)(a) of the Transfer of Property Act, 1882 is outdated in the present circumstances since the stipulations cannot be applied to the commercial transactions like mortgages, in letter and spirit. No community can be compelled to exclude themselves from a particular commercial venture, as it would affect their constitutional rights. Sale Of Mortgaged Property Without Court Intervention Section 69 of the Transfer of Property Act, 1882 is one of the rare instances and is an exception to the general rule of law. Under this section a person, who is not the owner of the property, could convey the right, title and interest of a third party- mortgagor in the mortgaged property even without the intervention of the court. Where the mortgagee sells the mortgaged property, he is selling it against the wishes of the mortgagor. So, he is not acting under the mortgagor or as an agent of the mortgagor. Section 69 of the Transfer of Property Act, 1882, was modeled on the English Conveyancing Act, 1881 and the English Law of Property Act, 1925. Amending Act 20 of 1929 drawing the principles from the English law later remodeled section 69 of the Transfer of Property Act, 1882. Section 69 of the Transfer of Property Act, 1882 contains five sub-sections. Subsections (1) and (2) as detailed hereunder, deal with the circumstances under which the mortgagees right to exercise the power of sale without the intervention of the court arises. Sub-sections (3) and (4) respectively dwell on the title of the purchaser from the mortgagee and the manner of deployment of sale proceeds of the mortgaged property by the mortgagee, his duties and responsibilities. Sub-section (5) states that nothing in this section applies to powers conferred before the first day of July, 1882. The right under Section 69 of the Transfer of Property Act, 1882, is as much and as full a right as the right of redemption of the mortgagor. The mortgagee is, in no sense, a trustee for the mortgagor in the matter of the power of sale; as he holds it for protection of his interest and for his benefit. The mortgagee is not debarred from exercising the power of sale, even though the mortgagor files a suit for redemption. So long as the mortgage money is not paid or validly tendered, the mortgagee with full knowledge of a pending suit for redemption and even to defeat the suit can enforce his power of sale under this section. While clauses (b) and (c) of sub-section (1) require that power of sale without intervention of the Court must be expressly conferred on the mortgagee by the mortgage deed, no such conditions need be fulfilled, where the mortgage is an English mortgage and neither of the parties is Hindu, Mohammedan or Buddhist or any sect, race etc., as stipulated under clause (a) of sub-section (1). Well. If so, under what conditions/circumstances could the mortgagee exercise the above right? A mortgagee can exercise this right of private sale only in the following circumstances: 1. When the mortgage-deed expressly provides that the mortgagee is entitled to sell the mortgaged property, or any part thereof, in default of payment of the mortgage-money, without the intervention of the court.

2. And when the mortgagee is the Government. (Clause (b) of sub-section (1)). 3. If the mortgaged property or any part thereof is, on the date of execution of the mortgage deed, situate within the towns of Calcutta, Madras, Bombay or in any other town or area which the State Government may, by notification in the Official Gazette, specify in this behalf. (Clause (c) of sub-section (1)). But, sub-section (2) puts some restraint over this right and requires the mortgagee to give three months advance notice in writing to the mortgagor, calling upon him to pay the principal or part of the principal that is still outstanding after the due date within 3 months from the date of receipt of said notice and that on his failure to comply with the request will result in the private sale of his mortgaged property. In the case of interest, if the interest amounting to at least Rs.500/- remains unpaid for three months after becoming due, similar notice must be given before the mortgagee wants to invoke the above provision of law. This power of sale can be exercised only when there has been a default of payment of mortgage-money. However, the mortgagee cannot buy the property for himself under this section even assuming there is a contract to that effect between the mortgagor and the mortgagee. The words power of sale refers to a clause expressly included in the mortgage deed. They mean conveyancing. The expression has not been defined in the Act, but it includes all steps that are necessary to be taken in connection with a sale. The law permits the greatest freedom of contract, unless it is expressly taken away. If any party contends that a particular clause restricts, in any way, the power of parties to enter into a contract, the burden rests on him to show that the words prevent an agreement between the parties. The power of sale, under Section 69 of the Transfer of Property Act, 1882, can be exercised only in the three cases mentioned in clauses (a), (b) and (c) of sub-section (1) of Section 69 of the Transfer of Property Act, 1882. The situation of the property is immaterial in cases falling within clauses (a) and (b). A mortgagee has no right of sale if there is no default in payment of the mortgage money. There can be default in payment of mortgage money only after it has become due, and not before. In cases, where no time is fixed for payment of the mortgage money, there must be a demand for payment before it can be said that the mortgagor has made a default in payment of the mortgage money. It has been held in Purasawalkam Hindu Janopakara Saswatha Nidhi Ltd. v. Kuddus Sahib, AIR 1926 Mad 841, that where the amount due for principal is not repayable at any particular date, nor is anything stated as to when it is to be repaid, there can be no default in the payment of the principal sum due until there is a demand made for the money.