Property and Mortgages - Essay Example

?PROPERTY –LAND LAW EXAM ESSAY, EXAM ESSAY MODEL ON MORTGAGES Introduction A mortgage is ‘money-lending’ relationship between a landowner and a lender in which interest in land is the security. A mortgage is different from other money lending arrangements such as bank loans in the sense that it passes interest in the subject land to the lender. The general rule is that the interest reverts to the borrower upon completion of refinancing the mortgage. The history of mortgages dates back to the seventeenth century. Throughout this period, doctrines of equity have been applied to protect mortgagors from mortgagees’ exploitations. Statutory regulations have however recently been formulated to ensure mortgagors’ protection. The courts have similarly joined the efforts. The scope of mortgages covers any venture in which land is used, and is offered on any interest on land as well as other properties other than land. This paper seeks to investigate the statement that ‘mortgages are a suppression of truth and a suggestion of falsehood,’ mortgage destroys our economy. The paper will explore the legal aspects of mortgages with the aim of supporting the statement. Difference between legal and equitable mortgages The major difference between equitable and legal mortgage is the level of formality that is involved on the process of creating the mortgage. A legal mortgage requires strict formalities that include a written contract. All terms of the mortgage agreement are stipulated and the document signed. Equitable mortgages on the other hand involve deposition of title to the subject estate without making formal commitments. Legal mortgages are executable within the strict interpretation of the law of property act (1925) and must be under deed. This means that the mortgage binds any interest in the land, both original and transferred. An equitable mortgage is however informal and do not bind a purchaser in good faith who takes the property for value without the knowledge of existence of the mortgage (Slorash and Ellis, 2007, 121). Another difference between a legal mortgage and an equitable mortgage is the transferability of interest in the subject land. While property in the piece of land is transferred to the mortgagee under a legal mortgage, only possession passes in an equitable mortgage and the mortgagee has to seek judicial intervention for transfer of property in the land in case of a defaulted refinancing (Sharma, 2010, 212). Rights of the mortgagee The mortgage agreement creates a number of rights to the mortgagee. The first right that a mortgagee acquires is the right over “the promise to pay” (Williams, 2011, 90). This right is enforceable against the mortgagee or any subsequent owner of the land subject to the law of property act (2007) and the interpretation of the case of Nefson Diocesan trust board v Hamilton [1926] NZLR 342. The mortgagee also has a right to foreclosure and to gain possession of the land if the mortgagor defaults in payments after a notice after a notice (Williams, 2011, 92). There is also the right to put the piece of land under receivership or even to sell the property as was held in the case of Alliance &Leicester plc v Slayford [2000] EGCS 113. The same case provides legal ground for suit against the mortgagor’s covenant (Pawlowski and Brown, 2002, 177). Rights of the mortgagor The mortgagor’s rights include the right to redeem the mortgage subject to the terms of the mortgage agreement as was illustrated in the case of Jones v Morgan (2001) (Dixon, 2011, 380). The redemption right can be enforced equitably or legally. Further, the mortgagor is entitled to right of possession, inspection of property and accession rights (Mau, 2010, p. 86- 88). Safeguards for borrowers Mortgagors are bound by the lending terms of their agreements that are enforceable under statutory laws. The doctrines of equity supplements statutory regulations to protect borrowers from exploitation. Mortgagor’s right of redemption is for instance absolute irrespective of the delayed refinancing. The courts are also ready to intervene in cases where unfairness to the mortgagor exists. Subject to Financial Services and Markets Act (2000) and based on the case of Palk v mortgage services funding plc, a mortgagee’s right of sale must be exercised in fairness under the doctrines of equity. Equity therefore considers the mortgagor’s conditions to ensure fairness but does not override statutory laws that empower mortgagee to sell property when the mortgagor fails to repay the advanced loans. As a result, borrowers who are not able to meet their mortgage obligations are bound to lose their property over to statutory rights of the mortgagee. Borrowers are therefore prone to losing their houses if they completely fail to redeem their mortgages (Gray and Gray, 2007, 533). How the mortgage destroys the economy The mortgage arrangement is a form of investment whose improper control ruins economies. Though it facilitates availability of resources for investments, mortgages have proved to be costly especially when the banks lower minimum criteria for offering the loans. This qualifies more people leading to cash outflow into the economy resulting in a demand driven inflation. Provision of subprime loans for instance leads to inflations and depreciation in value prices due to excess supply. As a result, the economy looses value in the property that can possibly spread to other sector of the economy. Since the mortgagee is interested in the revenues from loan interests and based on the fact that the money lent is secured, unregulated mortgages leads to a weak economy with lowly valued property (Shaw and Liu, 2011, p. 25). Offering subprime loans also exposes mortgagors to risks of defaulting leading to lost property. This subsequently drains resources from the public to the financial institutions. High levels of lost property and scarcity of resources that are then held by the financial institutions. Mortgages, if not regulated, either ethically or legally, therefore destabilizes the economy through inflation and loss of property (Shaw and Liu, 2011, p. 25). Mortgage is fraudulent The scope of mortgage, especially subprime mortgages, exposes borrowers to high risks of losing property. This has been reported as a common problem in economies with lenders deceiving mortgagors on lending terms. While the mortgagee’s interest is covered in the security, deceived mortgagors lose their property to the benefit of mortgagees. This, based on mortgagee’s intent, constitutes fraud (Schechter, 2011, p. 161). Good’s definition of fraudulent mortgaging further qualifies the current mortgage environment as full of fraud. The author for instance defines predatory lending in terms of advancing loans under “worse terms or higher costs” (2008, p. 19). This, particularly in subprime mortgages in which the mortgagee reserves the rights to vary mortgage terms such as interest rates, therefore constitutes fraud. Mortgages have also been linked with organizations including bank agents, real estate agents and even lawyers who collaborate to inflate prices of mortgages and the mortgage investments. These factors therefore identify high level of fraud against mortgagors (Good, 2008, p. 19, 20). Proposed law reforms, governments initiatives There has been lack of government initiatives to find a legal solution to the mortgage crisis. The government instead prefers administrative and bailout measures as a solution and has as a result not proposed legal reforms to control mortgages (McAauslan, 2009, p.2). Academic suggestions Academic suggestions points to the fact that ‘non-legislative’ initiatives to control mortgage problems are ineffective. The suggestion therefore calls for government initiatives to establish legislative measures (McAauslan, 2009, p.2). Other countries jurisdictions There are other countries with similar ineffective mortgage control laws. The United States, that recently suffered subprime mortgage crisis that led to negative global economic consequences, is an example (Schechter, 2011, 161). Conclusion A mortgage is a money lending agreement in which property in land is passed to the mortgagee as a security. Even though statutory and equitable rules exist, legislations have unsuccessfully regulated fraudulent mortgagees leading to exploitation and lost mortgages to foreclosure and sale. High levels of fraud together with the government’s blind eye to protect mortgagors lead to the conclusion that ‘mortgages are a suppression of truth and a suggestion of falsehood,’ mortgage destroys our economy. Reference list Dixon, M. Modern Land Law. (7th Ed. Taylor & Francis, New York, NY, 2011) Good, Julie. All about mortgages.(Kaplan Publishing, New York, NY, 2008) Gray, K. and Gray, F. Land law. (5th Ed. Oxford University Press, New York, NY,2007) Mau, S. Property Law in Hong Kong: An Introductory Guide. (Hong Kong University Press, Hong Kong, 2010) McAauslan, P. Whose mortgage is it anyway? Producers, consumers and the law in the UK mortgage market. Available from: http://www.gla.ac.uk/media/media_129711_en.pdf. [Accessed on 26 March 2012] Pawlowski, M. and Brown, J. Undue Influence and the Family Home. (Routledge, London, UK, 2002) Schechter, D. The Financial Crisis Inquiry Report: The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, Including Dissenting Views. (Cosimo, Inc., New York, NY, 2011) Sharma, A. Company Law and Secretarial Practice. (FK Publications, 2010) Shaw, D. and Liu, B. The Impact of the Economic Crisis on East Asia: Policy Responses from Four Economies. (Edward Elgar Publishing, Cheltenham, UK, 2011) Slorash, J. and Ellis, J. Business Law 2007-2008. (15 Ed. Oxford University Press, New York, NY. 2007) Williams. Iel Property Trust in New Zealand. (Kluwer Law International, Bedfordshire, UK. 2011.) Read More