Mortgage Law
A mortgage
involves the transfer of an interest in land as security
for a loan or other obligation. It is the most common
method of financing real estate transactions. The mortgagor
is the party transferring the interest in land. The mortgagee,
usually a financial institution, is the provider of the
loan or other interest given in exchange for the security
interest. Normally, a mortgage is paid in installments
that include both interest and a payment on the principle
amount that was borrowed. Failure to make payments results
in the foreclosure of the mortgage. Foreclosure allows
the mortgagee to declare that the entire mortgage debt
is due and must be paid immediately. This is accomplished
through an acceleration clause in the mortgage. Failure
to pay the mortgage debt once foreclosure of the land
occurs leads to seizure of the security interest and it's
sale to pay for any remaining mortgage debt. The foreclosure
process depends on state law and the terms of the mortgage.
The most common processes are court proceedings (judicial
foreclosure) or grants of power to the mortgagee to sell
the property (power of sale foreclosure). Many states
regulate acceleration clauses and allow late payments
to avoid foreclosure.
Three theories
exist regarding who has legal title to a mortgaged property.
Under the title theory title to the security interest
rests with the mortgagee. Most states, however, follow
the lien theory under which the legal title remains with
the mortgagor unless there is foreclosure. Finally, the
intermediate theory applies the lien theory until there
is a default on the mortgage whereupon the title theory
applies.
The mortgagor
and the mortgagee generally have the right to transfer
their interest in the mortgage. Some states hold that
even when the purchaser of a property subject to a mortgage
does not explicitly take over the mortgage the transfer
is assumed. Mortgagees employ due-on-sale and due-on-encumbrance
clauses to prevent the transfer of mortgages. These clauses
allow acceleration (having the principal and interest
become due immediately) of the mortgage. In 1982, Congress
made these clauses enforceable nationwide by passage of
the Garn-St Germain Depository Institutions Act of 1982.
The law of contracts and property govern the transfer
of the mortgagee's interest.
If the mortgage
being foreclosed is not the only lien on the property
then state law determines the priority of the property
interests. For example, Article 9 of the Uniform Commercial
Code governs conflicts between mortgages on real property
and liens on fixtures (personal property attached to a
piece of real estate).
When a mortgage
is a negotiable instrument it is governed by Article 3
of the Uniform Commercial Code. A mortgage may be used
as a security interest by the mortgagee. The law of mortgages
is mainly governed by state statutory and common law.
Mortgagees are regulated by federal or state law or agencies
depending on under whose law they were chartered or established.
The Office of Thrift Supervision, an office in the Department
of the Treasury, regulates federally chartered savings
associations. The Comptroller of the Currency charters
and regulates national banks. Federal credit unions are
chartered and regulated by the National Credit Union Administration.
Federal agencies
that purchase loans and mortgages are the Federal National
Mortgage Association or Fannie Mae, the Federal Home Loan
Mortgage Corporation or Freddie Mac, and the Government
National Mortgage Association or Ginnie Mae. The federal
government also insures mortgages through the Federal
Housing Association and the Department of Veterans Affairs.
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