Mortgaging Real Property

• Author: Alan R. Romero
• Profession: Professor of law and Director of the Rural Law Center at the University of Wyoming College of Law
• Pages: 311-326

Chapter 18

Mortgaging Real Property

In This Chapter

▶ Finding out what mortgages and deeds of trust are

▶ Understanding mortgagees’ rights to protect and sell mortgaged property

▶ Examining statutory protections for mortgagors

▶ Considering transfers of mortgages and mortgaged property

B

uyers of real property often borrow money to make the purchase. A

promissory note obligates the borrower to repay the loan, of course.

But if the borrower defaults, the lender may find that the borrower simply

doesn’t have the money to pay the debt. The lender may reduce the risk of

nonpayment by taking a security interest — either a mortgage or a deed of

trust — in the borrower’s real property. A mortgage or deed of trust gives the

lender the right to sell the real property at auction and apply the proceeds

of the sale to the unpaid debt. This chapter describes this process, called

foreclosure, as well as other rights the lender may have to protect its interests.

By reducing the risks for lenders, mortgages make loans more available and

cheaper for borrowers. But if a borrower defaults, she may lose her property.

State legislatures have responded to concerns for borrowers by adopting

statutes intended to protect borrowers from abuses and unnecessary

hardship. This chapter also covers these statutory protections.

Finally, this chapter considers transfers by both borrowers and lenders.

The borrower may want to transfer her property to another even though

a mortgage is attached to it. The lender likewise may want to transfer its

promissory note and mortgage to another. This chapter examines some legal

issues connected with such transfers.

312 Part IV: Acquiring and Transferring Property Rights

Introducing Mortgages and

Deeds of Trust

A mortgage is the right to sell property in the event of default on a debt or

other obligation and then apply the proceeds to the satisfaction of the

obligation. The person who owes the debt or obligation gives a mortgage to

secure her performance. Usually her performance is to repay a loan, but a

mortgage can secure other types of obligations too, as long as the obligation

can be quantified. Because she gives the mortgage to her creditor, she’s

called the mortgagor, and the creditor who holds the mortgage is called the

mortgagee.

A mortgage is an interest in land. In fact, some jurisdictions say that the

mortgagee actually has title to the mortgaged property until the debt is

satisfied and the mortgage is released. This theory is commonly referred to

as the title theory. Other jurisdictions say that a mortgage is merely a lien on

property, not title to property. This theory is called the lien theory. In either

case, the mortgagor has the right to possess the property as long as she pays

her debt and doesn’t default.

A deed of trust is similar to a mortgage. It conveys the property to a trustee,

who holds the property in trust for the lender, who is called the beneficiary.

The trustee has the right to sell the property in the event of default by the

borrower, called the trustor, and to apply the proceeds to the debt owed the

beneficiary, just as with a mortgage.

The rules I present in this chapter apply to deeds of trust and mortgages

alike, except where otherwise indicated.

Possessing the Property

before Foreclosure

The mortgagor has the right to possess the property as long as she doesn’t

default. The mortgage agreement specifies what constitutes default, but

generally acts of default include failure to repay the debt as agreed and

breach of other important obligations, such as paying property taxes.

The fundamental right of a mortgagee is to sell the property in foreclosure if

the mortgagor defaults. But the lender/mortgagee may not want to foreclose

immediately when the borrower/mortgagor first defaults. And even if the

mortgagee does want to foreclose immediately, the process of foreclosing

can take a while. In the meantime, the mortgagee wants to make sure the

property’s value doesn’t decline and thereby reduce the amount the mortgagee

can recover if and when it ultimately forecloses.