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Understanding Mortgages

Updated on September 7, 2009

Mortgage, in law, the purported conveyance of property as security for the payment of a debt. The condition of the instrument is that, if the debt is paid according to the terms of the note, the conveyance is then void. Both real and personal property may be so mortgaged. Usually, in order to indicate the type of property involved, the conveyance of personal property to secure a debt is called a chattel mortgage. Real estate mortgages take the form of a deed. The borrower is called the mortgagor; the lender is called the mortgagee. Mortgages must be in writing, whatever the property secured. In order to protect innocent purchasers of a mortgaged property, mortgages must be recorded within prescribed time limits; in the United States, each of the several states sets this time limit. An unrecorded mortgage is still enforceable against the original mortgagor or any purchaser of the mortgaged property who has knowledge of its existence.

Foreclosure is the legal means by which a mortgagor (one who makes a mortgage to borrow money) loses his right to redeem his property. A mortgage is a form of security for money owed whereby the debtor keeps possession of the property, usually real estate (unless it is a chattel mortgage), but agrees to hold it as security for the debt. If the borrower fails to keep up his payments, the mortgagee (lender of the money) may bring foreclosure proceedings. If the property, sold at auction, fails to bring enough to pay the claim, the mortgagee can hold the borrower responsible for the difference between what the property brought at a sale and the balance due on the mortgage. If the property sells for more than the mortgage amount (plus interest, legal fees, and court costs), the surplus is turned over to the borrower.

Where the amount is due in installments, payment of the installment due, plus interest and costs, prevents sale of the mortgaged premises- if the mortgage does not contain an acceleration clause. That allows the entire mortgage to become due on failure to comply with the mortgage conditions.

Previously the courts regarded a mortgage deed as in fact contemplating a conveyance of title in the event of default. If the terms of the loan were not met, foreclosure action was instituted, with the mortgagee taking possession of the property as settlement of the obligation. Title passed to the mortgagee, with little or no right of redemption on the part of the mortgagor. The recent tendency of the courts, however, has been to treat a mortgage as simply a lien against the pledged property. In the event of default on the loan, the mortgagee may institute foreclosure proceedings which in this case call for the public sale of the property to satisfy the debt. The proceeds are used, first, to pay the court and sale costs, and then the outstanding debt to the mortgagee. Any portion of the proceeds remaining goes to the mortgagor. The mortgagee may bid on the property, but without any special privilege. However, the conveyance theory is still generally applied to chattel mortgages.

More than one mortgage may be placed on a property at a given time. A first mortgage has a superior claim both as to interest income and as to principal. A second mortgage (or junior mortgage) receives nothing from the proceeds of the sale of a mortgaged property until the first mortgage obligation has been completely satisfied. Should the sale of a mortgaged property in foreclosure fail to realize sufficient funds to meet the full amount of debt outstanding, the debt is not extinguished; the unsatisfied portion of the loan remains an obligation of the mortgagor. The mortgagee is a general creditor of the mortgagor, with an unsecured claim against the mortgagor's assets. In many jurisdictions, the mortgagee may obtain a deficiency judgment which is an effective claim against future property holdings of the mortgagor.

Just as a mortgage must be recorded to be fully effective, so a release of mortgage (a "satisfaction piece") should be recorded to provide lasting evidence that the debt has been satisfied.

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