Mortgage - the Security for a Debt

A mortgate is the document which makes real property the security for a debt.  The mortgage is a security device which allows the lender to sell the property to satisfy a default on the note.  This is called foreclosure on the promissory note.  There are two parts: 1.  the mortgage (the security device), 2.  the promissary note.

A security device goes hand-in-hand with the promissory note when buying real estate.  You cannot have one without the other UNLESS you are paying cash.  99% of the time, the purchase is financed through a lender.  The security device is a lien on the purchased property.  It is the legal document that allows a lender to foreclose on the property if the homeowner does not meet the contractual requirements of the Promissory Note.

Three Major Security Devices: Mortgages, Trust Deeds, Land Sales Contracts


Common characteristics of each of these security devices includes the following:

1.  Voluntary - All these liens are a specific, voluntary lien to secure the promissory note on the property.  Specific in that it is a lien on a specified piece of property.  This is called hypothecation: Pledging property as security for a loan without giving up possession of that property.

2.  Security - The security device allows the property to be sold to satisfy a default on the note.  This is called foreclosure on the promissory note.

3.  Personal Property - The security device itself is personal property of the holder.  The holder is usually a bank and so the security device is the personal property of the bank.  It gives them a personal property interest in the specified real property it is attached to.

4.  Not Negotiable - The security device is not negotiable.  It cannot be converted into cash.  It is only the legal instrument that allows foreclosure to back up the requirements of the promissory note that is negotiable.
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Mortgage Characteristics


Mortgage Lien - Provisions/Clauses:
The following are usual provisions and clauses that are utilized in a mortgage security device.  None of them are mandatory, but most mortgage security devices will use the following:

1.  Compliance Clause - This requires the owner of the financed property to comply with the terms of the promissory note that accompanies this device.

2.  Reserves for PITI Loans - Most security devices require the payment of Principal, Interest , Taxes, and Insurance.  This is called a PITI loan.  When there is a PITI loan, the monthly payments for taxes and home insurance are placed in a reserve.  When payment is due for these areas, the bank will pull money out of the reserve and pay the taxes or insurance premium on the home.

    a.  Principal Last - The mortgage payments required under the security device will state that payments will apply first to reserves, then to interest, and any balance will then go towards the principal amount of debt.

3.  Protection - If there are no reserves for property tax or insurance under the security device, it will require the debtor to provide payment for taxes and insurance.  If the homeowner does not provide payment for taxes or insurance, the lender has the right to pay and bill the homeowner.

    a.  Insurance Premium - The homeowner/debtor will carry the home insurance on their own and purchase protection at least up to the amount of the debt.

    b.  Loss Payee - The security device will stipulate that the lender be named in the policy as a loss payee.  This means the lender has the right of receiving payment (loss payer) if a loss ensues to the property that they have the lien on.

4.  Priority Liens - Security devices require the owner to promptly pay any charges or liens that have priority over this lien.  An example would be a mechanic's lien or a materialman lien.  The owner/mortgagor would be expected to pay off these liens promptly.

Mortgage Requirements:


1.  Good Repair - The security device requires the borrower to keep the property in good repair.

    a.  The borrower may not remove or demolish any building on the property without the lender's approval.

    b.  The borrower must promptly notify the lender of any losses that the property has suffered.

2.  Lender Protection - The security device will usually give the lender the right to protect property from losses if borrower fails to do so.

    a.  The lender has the right to pay taxes, buy insurance, order repairs and add any money so spent to the mortgage debt.

3.  Reasonable Inspection - The lender has the right to inspect the property and see if the borrower is doing a proper job.  However, they must give the mortgagor reasonable notice of their desire to inspect.

4.  Condemnation - If condemnation occurs, any proceeds must first go to the lender, the balance going to borrower.  Example: The State is building a freeway and condemns the borrower's house through eminent domain.  The proceeds paid by the State would pay off the promissory note first and the remaining proceeds to the borrower.

5.  Foreclosure - The lender may reinstate some of the promissory note provisions ...  "no waiver by forbearance", "notice requirements", "joint and several obligation" and "lender's remedies are cumulative" under foreclosure.  The lender can use 1, 2, or all of the provisions if foreclosing on the property.

6.  Place-of-Contract Clause - This clause states that all legal remedies that are utilized by this security device shall abide by and follow State laws where the property is located.

7.  Assignment of Rents Provision - This is a boiler plating document; it allows use in all States.  If the borrower is delinquent on payments, the lender may collect any rental income.  The income will offset the delinquent payments on a dollar for dollar basis.