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A mortgage involves the transfer of land interest in land and as a security for a loan or other obligation. It is the most common method of financing real estate transactions. The mortgagor is the party who transfers 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 its sale to pay for any remaining mortgage debt. The foreclosure process depends on state law and the terms of the mortgage. The most common process are a court proceeding (judicial foreclosure) or by granting the mortgagee the power to sell the property (power of sale foreclosure). Many states regulate acceleration clauses and allow late payments to be made to avoid foreclosure.
Three theories exist in the United States on who has legal title to a mortgaged property. Under the title theory, title to the security interest rests with the mortgagee. Most states follow the lien theory under which the legal title remains with the mortgagor unless there is foreclosure. The intermediate theory applies the lien theory until there is a default on the mortgage and then the title theory.
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 Federal Home Loan Bank Board regulates savings and loan associations chartered by the government. National banks are chartered by the Office of the Comptroller of the Currency. Credit Unions are regulated by the National Credit Union Administration.
Federal agencies that purchase loans and mortgages are the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association. The federal government also insures mortgages through the Federal Housing Association and the Department of Veterans Affairs.