The Mortgage Loan

The Mortgage Loan

The Mortgage

Historically, the most commonly used real property security instrument was the mortgage. The parties to a mortgage are:

  • The mortgagor is the individual who owns the mortgaged property. This party is also known as the borrower and is the party giving the mortgage to the lender.

  • The mortgagee is the lender on the mortgaged property and the party who receives the mortgage.

The basic English common law mortgage concepts adopted by the early American colonies transferred title from the borrower to the lender. Over time, some states elected to make a mortgage merely a lien against the property with title vested in the borrower. States that still adhere to the original English mortgage concept are called title theory states. Those states that have adopted the mortgage lien approach are known as lien theory states. In lien theory states, the borrower retains title to the financed property and the lender has a lien on the property. Today, most states are lien theory states.

The mortgage will remain a lien on the property until the amount of the underlying note is paid in full. When the note is paid in full, the mortgagee will execute a satisfaction of mortgage and mark the note paid in full. The note is returned to the borrower and the satisfaction of mortgage gets recorded in the same county recording office as the original mortgage instrument. The satisfaction of mortgage clears the mortgage lien from the public record.

Unfortunately, not all mortgagors make their payments as promised. When that is the case, the borrower is in default and the lender will file a court action called judicial foreclosure or statutory foreclosure. State law specifies the requirements and procedures that must be followed in a foreclosure action. The following are issues or concepts relating to mortgage foreclosure:

  • The foreclosure case - The lender must prove in the judicial foreclosure suit that there is a debt owed by the borrower and that the borrower is in default. If the lender proves that, the court will issue a judgment ordering the sale of the property. Notice of the sale must be published, recorded, posted at the property that is the subject of the foreclosure, and be delivered to the defaulting mortgagor. The court will often establish the minimum price for the auction sale and the sheriff of the county in which the property is located will conduct the sale.

  • Payment in full by the borrower prior to foreclosure sale - If the borrower pays the lender the full amount of the judgment prior to the date set for the sheriff sale, the foreclosure is defeated. The amount of the judgment that must be paid will include the principal amount of the note, all accrued interest to date, lender legal fees, court costs, and any other costs or fees of the sale. By paying the judgment, the mortgage lien is extinguished. The ability of the mortgagor to pay the judgment between the time of notification and the time of sale is known as the mortgagor's equity of redemption.

  • Property sold at the foreclosure sale - In a judicial foreclosure, If the mortgagor cannot cure the default (i.e., pay the judgment) after the foreclosure judgment is entered and prior to the sale date, the property will be sold at public auction. The highest bidder will receive a Sheriff's Certificate or a Certificate of Sale. The Sheriff's Certificate is not a deed. A deed will not be given to the purchaser until the borrower's redemption period has expired.

  • Period of redemption - The amount of time the defaulting mortgagor has to redeem the property after the date of the sheriff's sale is known as the statutory period of redemption or statutory right of redemption. The amount of time for the period of redemption will depend on state law; some states don't have a redemption period after judicial foreclosure (e.g., Colorado, Georgia, and Mississippi, among others). A typical period of redemption is 180 to 360 days. For the defaulting mortgagor to successfully redeem the property during the redemption period, the mortgagor must pay the party who bought the property the full amount owed, plus costs of the sale, plus potential interest as required by state laws. If this amount is paid, the individual who bought the property at the sheriff's sale will no longer have an interest in the property and the defaulting mortgagor will have free and clear title to the property.

    The original mortgage lien is paid off at the sheriff's sale by the successful bidder. If the mortgagor does not redeem the property within the statutory period, the successful bidder will be given a Sheriff's Deed. The Sheriff's Deed is used to transfer title of the foreclosed property, not the Sheriff's Certificate.

Sometimes a property sold at a sheriff's sale does not sell for enough to cover the foreclosure judgment. When that occurs, the difference between the judgment and the sales price is known as a deficiency. The mortgagee may then sue the mortgagor for this difference.

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