With the kind of publicity the term sub prime crisis and mortgage lending is generating, getting an idea about mortgages and its various types should be a good idea!
So, what is a mortgage? The term mortgage is defined in the Transfer of Property Act, 1882 as follows:
A mortgage is the transfer of interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, on existing or future debt or the performance of an engagement which may give rise to a pecuniary liability.
Whoa! What was that? So, what basically is a mortgage? In Simple terms, A mortgage is a loan to buy a home. Like any loan, interest is charged on the amount you borrow (the principal). Each mortgage payment consists of repayment of the principal, plus interest.
And if you are one heck of an investor, this should light up your eyes!
Mortgage is debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front.
So, one fine morning, you decide you need to buy a flat and go to your favorite bank ask them for the loan. Now an amount this big (Combine that with the burgeoning real estate price and the amount of money the sloth is always ready to gobble up!) will not be loaned without any collateral (Some Kind of security that gives the banker the satisfaction that even if you happen to default on the payments, he will be able to recover his money! ). Now, what would you secure your loan against? You and both the banker hit upon a great idea: Why not secure the home itself for which the loan is being taken! And that's where the idea of mortgages starts. You become the mortgager since the property, the home, is yours, even if you have borrowed the money to buy the same and the person/bank which lends you the money is the mortgagee!
Talk of fancy names! :D
Now, of course, life is not that simple with mortgages and is not simple collateral borrowing. There are various kinds and types and some fancier names and terms associated with it. Let's start with the simplest of them, the Simple mortgage. The mortgage is simple because possession of the mortgaged property is not handed over to the mortgagee. However, the mortgager accepts personal liability to pay the mortgage money (principal plus interest. After all, you are in debt dude!).
If the mortgager does not pay the dues, the mortgagee has the right to approach court for a decree to sell the mortgage property. This right of the mortgagee may be expressed in the mortgage deed or implied. As is logical, the mortgagee does not have the right to receive rent or any other proceeds from the property (Imagine where and what the rent business in NCR would have been if not for this clause! We would have been spared the tyranny of paying the ever increasing Rents, which you ever happen to tell your parents, they will flip!). The Rents and any other such things would belong to the mortgager.
Another type of mortgage is mortgage through Conditional Sale. Here, the mortgager “sells” the mortgage property, but subject to conditions:
• The sale becomes absolute only if the mortgager defaults on paying the dues by a specified date; or
• The sale becomes void if the mortgager pays the dues by the specified dates. In that case, the mortgagee will transfer the property back to the mortgager.
Now, on the face of it, it would look better than a simple mortgage to the bankers since he is getting the property, in theory. However, a big, legal technicality is that the mortgagee cannot sue to sell the property, but he can sue to foreclose the mortgage deed. Once court grants the foreclosure, the mortgager loses the right to claim the property. Thereafter, the mortgagee can sell the property to recover his dues. But this is a long procedure and banks do not want to get into such long, potentially loss making pursuits.
The Problem is, in a standard form of such a mortgage, there is no personal liability on the mortgager to pay the dues [he only (presumably) has an interest in paying it, so that he will get the property back]. If he does not pay, and the asset sale does not fully cover the mortgagee’s dues, he cannot claim the balance from the mortgager. Therefore, bankers typically are not comfortable with such a mortgage. If you are here, you might remember the Prime and the Sub-Prime Lending crisis that the US went through, which actually pushed the US economy on recession! Imagine the kind of pressure a bank would be if the amount that he has lent to someone for such a home actually turns out to be way more than what the value of the home is actually! It is a disaster and this is what happened in the US market! People simply stopped paying EMI's since legally they could simply let go of the property and have more money and, interestingly enough, buy new and better homes!!
Now think of what the effect would be if that same somebody who could do it over and over again and actually make money in the process! The big problem was: There were huge numbers of these somebody's!
Now, since we are discussing Mortgages, let's jump to some other types of the same. We will talk about the Sub Prime and the US Mortgage Crisis in coming articles.
The other type is usufructuary Mortgage. This is a mortgage where the mortgagee has the right to recover rent and other incomes from the mortgaged property, until the dues are cleared. Thus, repayments come from the property rather than from the mortgager! So the rent a tenant pays actually goes for EMI's. Directly to the bank. As with Conditional Sale, there is no personal obligation on the mortgager to pay. The banker has to keep holding the property for an indeterminate period of time, until the dues are cleared. Therefore, bankers are not comfortable with such mortgages, as you guessed!
Yet another type is English Mortgage. In this form of mortgage, the mortgager transfers the property to the mortgagee absolutely. However, the mortgagee will have to re-transfer the mortgaged property to the mortgager, if the dues are paid off. Since the mortgager assumes personal liability to repay, the mortgagee can sue the mortgager for recovery of dues or seek a court decree to sell the property. This gives comfort to the banker. :D
There are others also, such as Equitable Mortgages and Anomalous Mortgages, with different and interesting properties and clauses!
There are various issues with Mortgages and it will be great if we could discuss that sometime, later on maybe! For the purpose of an introduction, this should suffice!!
PS: Hypothecation and Pledge are next!
So, what is a mortgage? The term mortgage is defined in the Transfer of Property Act, 1882 as follows:
A mortgage is the transfer of interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, on existing or future debt or the performance of an engagement which may give rise to a pecuniary liability.
Whoa! What was that? So, what basically is a mortgage? In Simple terms, A mortgage is a loan to buy a home. Like any loan, interest is charged on the amount you borrow (the principal). Each mortgage payment consists of repayment of the principal, plus interest.
And if you are one heck of an investor, this should light up your eyes!
Mortgage is debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front.
So, one fine morning, you decide you need to buy a flat and go to your favorite bank ask them for the loan. Now an amount this big (Combine that with the burgeoning real estate price and the amount of money the sloth is always ready to gobble up!) will not be loaned without any collateral (Some Kind of security that gives the banker the satisfaction that even if you happen to default on the payments, he will be able to recover his money! ). Now, what would you secure your loan against? You and both the banker hit upon a great idea: Why not secure the home itself for which the loan is being taken! And that's where the idea of mortgages starts. You become the mortgager since the property, the home, is yours, even if you have borrowed the money to buy the same and the person/bank which lends you the money is the mortgagee!
Now, of course, life is not that simple with mortgages and is not simple collateral borrowing. There are various kinds and types and some fancier names and terms associated with it. Let's start with the simplest of them, the Simple mortgage. The mortgage is simple because possession of the mortgaged property is not handed over to the mortgagee. However, the mortgager accepts personal liability to pay the mortgage money (principal plus interest. After all, you are in debt dude!).
If the mortgager does not pay the dues, the mortgagee has the right to approach court for a decree to sell the mortgage property. This right of the mortgagee may be expressed in the mortgage deed or implied. As is logical, the mortgagee does not have the right to receive rent or any other proceeds from the property (Imagine where and what the rent business in NCR would have been if not for this clause! We would have been spared the tyranny of paying the ever increasing Rents, which you ever happen to tell your parents, they will flip!). The Rents and any other such things would belong to the mortgager.
Another type of mortgage is mortgage through Conditional Sale. Here, the mortgager “sells” the mortgage property, but subject to conditions:
• The sale becomes absolute only if the mortgager defaults on paying the dues by a specified date; or
• The sale becomes void if the mortgager pays the dues by the specified dates. In that case, the mortgagee will transfer the property back to the mortgager.
Now, on the face of it, it would look better than a simple mortgage to the bankers since he is getting the property, in theory. However, a big, legal technicality is that the mortgagee cannot sue to sell the property, but he can sue to foreclose the mortgage deed. Once court grants the foreclosure, the mortgager loses the right to claim the property. Thereafter, the mortgagee can sell the property to recover his dues. But this is a long procedure and banks do not want to get into such long, potentially loss making pursuits.
The Problem is, in a standard form of such a mortgage, there is no personal liability on the mortgager to pay the dues [he only (presumably) has an interest in paying it, so that he will get the property back]. If he does not pay, and the asset sale does not fully cover the mortgagee’s dues, he cannot claim the balance from the mortgager. Therefore, bankers typically are not comfortable with such a mortgage. If you are here, you might remember the Prime and the Sub-Prime Lending crisis that the US went through, which actually pushed the US economy on recession! Imagine the kind of pressure a bank would be if the amount that he has lent to someone for such a home actually turns out to be way more than what the value of the home is actually! It is a disaster and this is what happened in the US market! People simply stopped paying EMI's since legally they could simply let go of the property and have more money and, interestingly enough, buy new and better homes!!
Now think of what the effect would be if that same somebody who could do it over and over again and actually make money in the process! The big problem was: There were huge numbers of these somebody's!
Now, since we are discussing Mortgages, let's jump to some other types of the same. We will talk about the Sub Prime and the US Mortgage Crisis in coming articles.
The other type is usufructuary Mortgage. This is a mortgage where the mortgagee has the right to recover rent and other incomes from the mortgaged property, until the dues are cleared. Thus, repayments come from the property rather than from the mortgager! So the rent a tenant pays actually goes for EMI's. Directly to the bank. As with Conditional Sale, there is no personal obligation on the mortgager to pay. The banker has to keep holding the property for an indeterminate period of time, until the dues are cleared. Therefore, bankers are not comfortable with such mortgages, as you guessed!
Yet another type is English Mortgage. In this form of mortgage, the mortgager transfers the property to the mortgagee absolutely. However, the mortgagee will have to re-transfer the mortgaged property to the mortgager, if the dues are paid off. Since the mortgager assumes personal liability to repay, the mortgagee can sue the mortgager for recovery of dues or seek a court decree to sell the property. This gives comfort to the banker. :D
There are others also, such as Equitable Mortgages and Anomalous Mortgages, with different and interesting properties and clauses!
There are various issues with Mortgages and it will be great if we could discuss that sometime, later on maybe! For the purpose of an introduction, this should suffice!!
PS: Hypothecation and Pledge are next!
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