Creation of Mortgages

Question 1

Why mortgages

Answer 1

• Central to the economy
  
  • We have had 10 years of austerity because of the 2008 credit crunch which was caused by the mortgage
• 63.4% of the UK owns their homes, in comparison to Romania (96.8%) or Singapore (90.7%)
  
  • This is because there are more banks in Romania or Singapore
• Enable you to fund other ventures because they are the most valuable assets that one can have
  
  • The average mortgage interest is 4.2% (very cheap in comparison to credit card interest rate which is 19.0%)
• They are central to wealth creation
• A mortgage is not an ownership interest, it is simply secured on the value

Question 2

Mortgages as wealth creation

Answer 2

Mortgages are central to wealth creation

There has been a growth of 5.4%, way above the national average, even with Brexit. The value of the market of real property (just housing) was over £7trillion in 2018; the total value of residential lending in 2017 was just over £1trillion

Difference between acquisition and non-acquisition mortgage of home: latter used to underwrite business ventures: equity in property as fungible wealth.

History: neoliberal economic policies from 1980s onward: including expectation that people would invest for their own retirement: individuals as autonomous rational subjects with access to full knowledge and able to accept risks – deregulation of financial sector – securitisation and the problem of refinancing

Question 3

Other kinds of securities

Answer 3

Lien

Pledge

Charge

Question 4

Lien

Answer 4

: a common law right that the lender has to keep goods until the borrower pays

Only over chattel

Lien is also used to indicate a charge over any property imposed without the consent of the owner

An equitable lien is the ‘unpaid vendor’s lien’ where A transfers freehold title to B before B pays the purchase price; A automatically has a lien over the property now in B’s name to the value of the purchase price.

Question 5

Pledge

Answer 5

Using chattel as security for a loan

The lender takes possession (control) of the property.

Pawnbroking is a kind of pledge where the pawnee lends money to the pawner on the security of a pledge (e.g., cash for jewellery).

Bailment is the delivery of goods by one person to another for some purpose (e.g., dry-cleaning, car repair). The bailee is entitled to keep the goods until paid.

Question 6

Charge

Answer 6

where the borrower retains ownership and possession of the property and the lender has the right to force its sale in the event the borrower defaults

Can involve mortgaged property

Question 7

Mortgage definition

Answer 7

• Possession of property (land) given to lender as security for repayment of loan, subject to a covenant to re-convey the property when the borrower repaid the loan; or if the borrower defaulted, the lender kept the property, whereupon the pledge was ‘dead’
  
  • If you repay the money, you get your property back free from the interest, and so the interest is not ‘dead’ and cannot be fettered
• Equity of redemption: you have the right to redeem the property and free it entirely from the burden
• True mortgage is where title is transferred to the lender subject to the equitable right to redeem
  
  • The borrower has an equity that on repayment of loan he can insist on the title being reconveyed to him
• You grant a mortgage to the bank in exchange for a loan

Question 8

Mortgagor

Answer 8

• Borrower
• The grantor of the mortgage
  
  • Grants the mortgage to the bank
• Also known as the chargor

Question 9

Mortgagee

Answer 9

• The lender
• The grantee of the mortgage
  
  • Receives the mortgage on the property
• Also known as the chargee

Question 10

Change in 1925

Answer 10

• There have been no real mortgages in the English law since 1926
• Pre-1926 mortgage – the mortgagor (borrower) conveyed the title to the mortgagee (lender) who then owned the property subject to the mortgagor’s equitable right to redeem the property (have it re-conveyed to her) once the debt was paid
  
  • This changed under the LPA 1925
• Post 1926 mortgage: s85 LPA “charge by way of legal mortgage”
  
  • Mortgagor keeps the title and grants a charge on the estate to the mortgagee. The equity of redemption remains, but it is the right of the mortgagor to free the estate from the charge on repayment of the debt
  • The bank does not own the property

Question 11

Modern mortgage

Answer 11

“CHARGE BY DEED EXPRESSED TO BY WAY OF LEGAL MORTGAGE”

• Borrower (mortgagor) remains the legal and beneficial owner, and still has possession, but grants by deed a legal interest to the lender (mortgagee) which gives the latter the same rights and remedies as if he had a mortgage by demise (long lease) [s87(1) LPA]
  
  • Treats the mortgagee as if they had a real mortgage (as if they had an estate in the land) – they will be able to vest the estate
• If the mortgagee sells the property after default by mortgagor, he is able to vest the freehold or leasehold in the purchaser: ss88-89 LPA (even though they do not actually have the estate – an exception to nemo dat)
• Treats the mortgagee as if they were the owner for the purposes of remedies

Question 12

Right to possession

Four-Maids v Dudley Marshall

Answer 12

• About a badly drafted contract that did not specify that the lender did not have the right to possess in the occasion of default
• Harman J: “the right of the mortgagee to possession in the absence of some contract has nothing to do with default on the part of the mortgagor. _The mortgagee may go into possession before the ink is dry on the mortgage_ unless there is something in the contract, express or by implication, whereby he has contracted himself out of that right”
  
  • The right to possess is a common law right, that is the point of security
  • The fact that there is this interest, from the moment the mortgage is signed it is in the nature of the interest that the lender has the right of possession

Question 13

Why possession

Answer 13

• The mortgagee is entitled to protect the value of his security
• Once in possession, the mortgagee is liable to account for any income generated
• Generally, the mortgagees prefer to keep the mortgagor in possession and to take possession only in order to sell or to prevent waste
  
  • If there has been no default but the borrower has been letting the property fall into disrepair and the value has decreased and is getting dangerously close to negative equity, the lender will seek possession to protect the property from becoming valued to the point that the loan is not sufficiently secured (very rare)

Question 14

Possessing

Answer 14

• Mortgagee does not have to seek the permission of the court to recover possession
  
  • A mortgagor who resists possession by a mortgagee becomes a trespasser on his own property
• But, where mortgaged property is residential, mortgagee may prefer to go through court and seek an order for possession (to avoid charges of harassment, e.g.)
  
  • Here, statutory restrictions apply: s36 Application of Justice Act 1970
• Where no one is in residence, the mortgagee may prefer just to take possession, and is entitled to do so [Ropaigealach v Barclays Bank]

Question 15

Priorities: registered land

Answer 15

• LRA 2002 s27(2b) f
  
  • Section that lists all the registrable interests [s27(2b)]
    
    • Express agreements granting legal interests in land
  • Grant of a legal charge required to be completed by registration
  • If not, then s27(1): it does not operate at law
    
    • See Barclays Bank v Zarrovabli where Barclays forgot to register their charge and a legal lease took priority under s29
  • Acquisition mortgages: mortgagee’s interest always takes precedence [Abbey National v Cann]
• S30 LPA: the priority of a registered disposition of a charge is protected over earlier unprotected interests

Question 16

Equitable mortgages

Answer 16

• Arise where something has gone wrong
  
  • Not complied with formalities of a legal interest (i.e. not used a deed)
  • There has been some sort of misconduct (forgery, undue influence, etc)
• mortgage of equitable interest
• specifically-enforceable contract
• dealings by one co-owner

Question 17

Mortgage of equitable interest

Answer 17

A derivative interest, so its nature depends on the interest over which it is granted

• All mortgages are derivative interests
• If you mortgage an equitable interest under a trust
• Usually accidental because a deed has not been used

Question 18

Specifically-enforceable contract

Answer 18

s2 LP(MP)A + Walsh v Lonsdale doctrine

Usually accidental because a deed has not been used

Question 19

Dealings by one co-owner

Forgery cases

Answer 19

• National Security v Hegarty*
• Ahmed v Kendrick*
• Thames Guaranty v Campbell*

Question 20

Thames Guaranty v Campbell

Answer 20

• A legal owner forged the name of his co-owner because he wanted money
• You cannot grant that which you do not have
• The would-be mortgagor did not have the entire legal title without the true signature of the other legal co-owner
• You can give what you have got, which is what was charged
• The mortgage is a derivative interest, so it depends on the interest over which it is granted.
  
  • If the interest is an equitable share, then the mortgage is equitable.
  • Remember Sainsbury’s v Olympia Homes – the unregistered owner only had an equitable estate and that is what he charged to the mortgagee.
• Slade LJ: “It is a well-established principle of equity that where, in the course of concluding a contract, a person has represented that he can grant a certain property, or is entitled to a certain interest in that property, and it later appears that there is a deficiency in his title or interest, the other party can obtain an order compelling him to grant what he has got…” [nemo dat…]”
  
  • Campbell tried to argue that because the attempt to grant a charge failed for forgery, he was thus not bound by the mortgage in equity
  • You can charge your own share in equity, just not the whole legal estate without the other co-owner

Question 21

National Securities v Hegarty

FACTS

Answer 21

H & W bought house in joint names as JTs. H forges W’s name on charge to lender. H & W split, and H purports to renounce interest so it falls to W. She does not know that it is charged to NS Ltd. H defaults, NS Ltd seeks possession, W resists and seeks to have charged removed. The forgery acted to sever the JT into a TC. But W then received H’s, which was encumbered by the charge, could she take the share without the encumbrance?

Question 22

National Securities v Hegarty

HELD

Answer 22

No, she could not. She had to accept the charge if she wished to accept her husband’s share

• When the husband forged the signature, the charge was not void but took effect in equity over his share thereby severing the JT
• Note that although she had to accept the charge if he wanted to keep her ex’s beneficial interest, the lenders would have to apply for an order for sale under s 30 LPA 1925 (now s 14 TLATA 1996).

Question 23

Ahmed v Kendrick

FACTS

Answer 23

Mr Ahmed forged W’s name on both the purchase and the acquisition mortgage in favour of Cheltenham & Gloucester Building Society. W left H. H stayed in home and purported to sell it to Kendrick, forging his wife’s signature.

Question 24

Ahmed v Kendrick

HELD

Answer 24

• Wife had adopted the charge by accepting the purchase of the house in her name
  
  • Even though the wife did not know about the acquisition mortgage, she accepted the house in her name and thus could not deny the charge that enabled her to get it even though she never saw any of the money
• The sale to K only had the effect of passing H’s equitable interest to him. Therefore, W held the house on trust for herself and the defendant K, and subject to the mortgage
  
  • With an acquisition mortgage, even where you name has been forged, if you are acquiring the beneficial interest and would not have done so if not for the mortgage, you will still be affected by it (the share will be encumbered by it)
• Mr Ahmed still holds part of the purchase money for the lender because he is bound by the contract he signed

Question 25

Failure to register

Answer 25

• Failure to register means charge does not bind purchaser or take priority over later, registered interest, BUT it is still binding on borrower, who holds proceeds of sale on constructive trust for lender: Barclays Bank v Buhr
• Even if it is defeated by a later purchaser
• However, weak decision as it protects careless lender against later, unsecured creditors.
• A bank did not protect its security, and yet it still binds the borrower so that it leapfrogs ahead of their unsecured creditors

Question 26

Problem of debt

Answer 26

• “Necessitous men are not, truly speaking, free men but, to answer a present exigency, will submit to any terms that the crafty may impose upon them” [per Lord Henley LC in Vernon v Bethell]
• With mortgages, the court is very keen to police the boundaries of these deals
  
  • They are highly regulated because there is an imbalance of bargaining powers

Question 27

Equity of redemption

Answer 27

• Before 1926, this entitled the borrower to have the property reconveyed back to them free of any interest
  
  • Because no title is conveyed but a charge is created, the redemption refers to lifting the charge off the property
• Right to discharge debt by repayment.
• Or, “once a mortgage, always a mortgage”
• Contracts will specify date of legal redemption at six months after creation of the charge, but mortgagor always takes longer, as is expected
• After this date, the mortgagee may seek contractual remedies.
• Equity allows mortgagor to redeem at any time after the date of redemption and this is the equitable right to redeem.
• Recognises fact that the mortgage, however much it resembles an interest in land, is really security for a loan, so it must always be able to be terminated by the mortgagor by repayment of capital, interest, and costs.
• Originally entitled the borrower to have the property re-conveyed to him under the old ‘true’ mortgage.
• But where no title is conveyed but a charge created, what is there to redeem?
• Nowadays, amounts to a right to discharge the debt by repayment.