21 November 2018

Mortgage: The Legal Provisions governing it


Mortgage defined
Mortgage is transfer of an interest in a specific immovable property, for securing an advance payment of money by way of loan.  It creates a pecuniary liability. It is in the form of a debt. The liability cannot be defeated by any subsequent transfer of that property, even if it is a bonfide one.
In mortgage, when an interest in the mortgaged property is transferred in favour of the mortgagee, the mortgagee gets a right. The property must be immovable and specific. If the property is not specific, the mortgage debt cannot be secured against the property. The property in a mortgage is given just as security for the discharge of debt. The mortgage comes into operation by the acts of the mortgagor and mortgagee, but not by the operation of law.
A mortgage is carried out by a registered instrument, signed by the mortgagor and attested by at least two witnesses. The mortgagee need not normally be a signatory to a deed of mortgage.
The Sections 54 to 104 of the Transfer of Property Act 1882, are the legal provisions governing mortgages.
Kinds of mortgage
There are different kinds of mortgage. The important ones are as follows:-
Simple Mortgage: In this kind of mortgage of property, the mortgagor borrows money on mortgaging a specific property but the possession of the property is not transferred to the mortgagee. The right of the mortgagee in this mortgage is not for possession of the property but for sale of it.
The mortgage deed provides for a personal undertaking by the mortgagor to pay the debt. If mortgage money is not repaid to the mortgagee, the mortgagee has the right to obtain a decree for sale of the mortgage property or a personal decree against the mortgagor.  The mortgage deed must be an attested and registered one.
Mortgage by Conditional Sale: In this kind of mortgage, the mortgagor while mortgaging ostensibly sells the mortgage property. The sale is but unreal.
The mortgage deed should in itself include a condition that the amount paid to the mortgagor will be returned to the mortgagee on or before a particular date, and the property in turn would be returned to the mortgagor on or before a particular date.
No title actually passes from the mortgagor to the mortgagee in a mortgage by conditional sale. If the mortgagor pays the back the mortgage money to the mortgagee, the property shall be re-conveyed to the mortgagor. If the mortgage money was not paid as provided for in the deed the mortgagee would become the owner of the property. The mortgagor can redeem the property even after the due date, since a mortgage is always a mortgage. The deed intended to enforce sale in this kind of mortgage must contain in it the conditions of re-conveyance also.  
A mortgage by conditional sale is quite different from a real conditional sale in which the transaction turns into an absolute sale when the payment is not paid on the due date. But in mortgage by conditional sale, the conditional sale does not become an absolute one even if there is non-payment of money on the due date. This is mainly because a mortgage is always a mortgage which is redeemable even after the due date, but before foreclosure.
Usufructuary Mortgage: In this type of mortgage, the possession of the property is given to the mortgagee. He can enjoy the property until the debt is satisfied. In this type, the mortgagor authorizes the mortgagee to retain the property in possession until mortgage money is paid. The mortgagee can receive the rents and profits accruing from the property during the mortgage. This is called usufructuary mortgage.
Equitable mortgage : Mortgage by deposit of title deed is allowed only in some big commercial cities notified by the government. It is executed in an informal manner by a mere deposit of title deed by the mortgagor with the mortgagee.
The property covered by the deed should be the security for the loan. The property need not situate within the local area.  Neither a written mortgage deed nor registration of it is required for creation of such a mortgage.
Reverse mortgage: Reverse mortgage is a kind of mortgage in which home is mortgaged on a monetary value arrived at by the bank, on the basis of the demand for the property, current property prices, and the condition of the house. The bank then disburses a loan amount to the borrower periodically, considering a margin for interest costs and price fluctuations. The periodic payment is known as reverse Equal Monthly Installment (EMI) which the borrower receives for a fixed tenure of loan.
With each monthly payment the equity or the individual's interest in the house decreases. A reverse mortgage is an ideal option for senior citizens who require regular income.
The Reserve Bank of India has formulated the detailed guidelines for a reverse mortgage as follows : Maximum loan amount would be up to 60% of the value of the residential property. Maximum tenure of the mortgage is 15 years and minimum is 10 years. The loan has option of monthly, quarterly, annual or lump sum loan payment. Property revaluation is to be undertaken by the lender once every 5 years. If the valuation of the home has increased, borrowers have the option of increasing the quantum of the loan.
House owners of above the age of 60 years can take loan. If spouse is a co-applicant, then she should be above 58 years. Owners of a self-acquired, self-occupied residential house or flat, located in India can also apply for reverse mortgage. The titles should be clear, indicating the prospective borrower's ownership of the property. The property should be free from any encumbrances. The life of the property should be of minimum 20 years. The property should be the permanent primary residence of the individuals.
A reverse mortgage loan becomes due when the last surviving borrower dies, or if the borrower chooses to sell the house. The bank first gives an option to the next of kin to settle the loan along with accumulated interest, without sale of property. If the next of kin is unable to settle the loan, the bank then opts to recover the same from the sale proceeds of the property.
Any extra amount, after settlement of the loan with accrued interest and expenses, through the sale of the property, will be passed on to the legal heirs of the mortgagor. If the sale proceeds are lower than the accrued principal plus interest amount, the loss is borne by the bank. This loss could happen in cases where the banks original estimation is not in line with the real estate market movement.
The amount received through reverse mortgage is a loan and not income. Hence it will not attract any tax. However, a borrower is liable to capital gains tax, when the mortgaged property is mortgaged by the mortgagee.
Anomalous mortgage: A mortgage that does not fall within the above kinds of mortgage is called an anomalous mortgage.  An anomalous mortgage is in essence a transaction in which an immovable property remains as a security for the debt. Therefore, in this mortgage the stipulations need not conform to any particular pattern except that the immovable property should be the security for the debt.
Right for redemption of mortgage
The mortgagor has an absolute right to redeem the mortgage property at any time on repayment of mortgage money. The right is a statutory one and no agreement of whatsoever nature can extinguish it.
On payment of mortgage debt the mortgagee in turn is bound to deliver the property and all deeds relating to the mortgage to the mortgagor without fail. If any mortgagee fails to do this, the mortgagee has the right to file a suit for redemption of mortgage or recovery of property in question.
A mortgagor has the right to redeem a share alone of the mortgaged property though indivisibility is an essential characteristic of mortgage. Then the mortgage will subsist in other shares of the mortgage. If a contract of mortgage is created during the continuance of a tenancy, the contract of lease would get merged into the mortgage. But on redemption of mortgage the leasehold rights get revived.
As part of redemption, the mortgagor can ask the mortgagee to transfer the property even to a third party on clearing all the mortgage debts.
No provision to prevent redemption
No provision in a mortgage deed can be used to prevent, evade or hamper redemption. If such a condition which serves as a clog on redemption is there in a mortgage deed that will be ignored by the court. An equity of redemption is a statutory right. A mortgage is always a mortgage and hence nothing that hampers it will have any effect on the mortgage. That means if a transaction is a mortgage in its inception its character cannot by any means be changed subsequently.
Suit for foreclosure of mortgage
In a mortgage by conditional sale, the mortgagee has the right to obtain from the court a decree to the effect that the mortgagor is debarred of his right to redeem or sell the property, after the due date. The suit for such debarring or selling is called a suit for foreclosure of mortgage.
Personal decree against mortgagor
The mortgagee has the right to sue for the mortgage money and obtain a personal decree against the mortgagor, if the mortgagor personally binds himself to repay the debt in the deed.  
A personal decree can be obtained if the property is destroyed by no fault of either party in the mortgage also.
Mortgage creates no interest in property
A contract to mortgage gives rise to personal obligation alone. It creates no interest in the property.
The remedy for breach in a contract of mortgage is a suit for damages but not for specific performance. If a mortgagee who paid the mortgage money brings a suit for specific performance of the mortgage the mortgagor is left with no option, but to repay the money.
Multiple mortgages on same property
If multiple mortgages are there in same property a prior mortgagee cannot be ignored by a subsequent mortgagee. So such a prior mortgage has to be redeemed up first.
In the case of a subsequent mortgage the best course is to foreclose that mortgage so as to make the sale of property absolute. Thus the mortgagee can realize the amount due to them in regard to the mortgages.
Other matters
If a mortgagee makes any improvement in the mortgaged property the mortgagor is not liable to pay the cost of improvement, unless there is a specific clause in the agreement.
If a mortgaged property is a lease and the mortgagee obtains a renewal of lease, the mortgagor on redemption of property has the benefit of the lease if there is no contract contrary to it. A mortgagor, in possession of the mortgaged property, has the power to make any lease on the property but it shall be binding on the mortgagee.
A mortgagor, in possession of the mortgaged property, is not liable to the mortgagee for the deterioration of the mortgaged property if he has not done any act destructive or injurious thereto.
Difference between Mortgage, pledge & hypothecation
Mortgage, has already been explained in detail above. It is rather a security interest in immovable property held by the borrower.
Pledge, defined in Section 172 of the Contract Act, is a transaction where the person who takes the loan on pledging must provide the pledgee some movable property worth the same amount he takes as loan. Here goods are delivered as security for discharging a liability. This is known as pawning also. If the borrower cannot replay the amount, pledge (creditor) can sell the property. In pledge, deed of pledge is used as the binding document. Gold loan is the best example of this.
Hypothecation, defined in Section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act 2002, is the practice where borrower pledges the collateral to acquire a loan where owning the collateral. This is applicable to movable properties. Hypothecation agreement is the document in this transaction. Car loan is the best example of hypothecation.
In short, different forms of mortgage play a key role in the financial sphere for the purpose of obtaining money from the mortgage lenders.

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