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mortgage law: an overview
A mortgage involves the transfer of an interest in land as security for a loan or other obligation. It is the most common method of financing real estate transactions. The mortgagor is the party transferring the interest in land. The mortgagee, usually a financial institution, is the provider of the loan or other interest given in exchange for the security interest. Normally, a mortgage is paid in installments that include both interest and a payment on the principle amount that was borrowed. Failure to make payments results in the foreclosure of the mortgage. Foreclosure allows the mortgagee to declare that the entire mortgage debt is due and must be paid immediately. This is accomplished through an acceleration clause in the mortgage. Failure to pay the mortgage debt once foreclosure of the land occurs leads to seizure of the security interest and it's sale to pay for any remaining mortgage debt. The foreclosure process depends on state law and the terms of the mortgage. The most common processes are court proceedings (judicial foreclosure) or grants of power to the mortgagee to sell the property (power of sale foreclosure). Many states regulate acceleration clauses and allow late payments to avoid foreclosure.
Three theories exist regarding who has legal title to a mortgaged property. Under the title theory title to the security interest rests with the mortgagee. Most states, however, follow the lien theory under which the legal title remains with the mortgagor unless there is foreclosure. Finally, the intermediate theory applies the lien theory until there is a default on the mortgage whereupon the title theory applies.
The mortgagor and the mortgagee generally have the right to transfer their interest in the mortgage. Some states hold that even when the purchaser of a property subject to a mortgage does not explicitly take over the mortgage the transfer is assumed. Mortgages employ due-on-sale and due-on-encumbrance clauses to prevent the transfer of mortgages. These clauses allow acceleration (having the principal and interest become due immediately) of the mortgage. In 1982, Congress made these clauses enforceable nationwide by passage of the Garn-St Germain Depository Institutions Act of 1982 (http://www.phil.frb.org/src/Garn.html ).
The law of contracts and property govern the transfer of the mortgagee's interest.
If the mortgage being foreclosed is not the only lien on the property then state law determines the priority of the property interests. For example, Article 9 of the Uniform Commercial Code governs conflicts between mortgages on real property and liens on fixtures (personal property attached to a piece of real estate).
When a mortgage is a negotiable instrument it is governed by Article 3 of the Uniform Commercial Code. See Negotiable Instruments. A mortgage may be used as a security interest by the mortgagee. See Secured Transactions.
The law of mortgages is mainly governed by state statutory and common law. Mortgages are regulated by federal or state law or agencies depending on under whose law they were chartered or established. The Office of Thrift Supervision (http://www.ots.treas.gov/ ), an office in the Department of the Treasury, regulates federally chartered savings associations. The Comptroller of the Currency (http://www.occ.treas.gov/ ) charters and regulates national banks. Federal credit unions are chartered and regulated by the National Credit Union Administration (http://www.ncua.gov/).
Federal agencies that purchase loans and mortgages are the Federal National Mortgage Association or Fannie Mae (http://www.fanniemae.com/index.jhtml ), the Federal Home Loan Mortgage Corporation or Freddie Mac (http://www.freddiemac.com/ ), and the Government National Mortgage Association or Ginnie Mae (http://www.ginniemae.gov/ ). The federal government also insures mortgages through the [http://www.hud.gov/fha/ Federal Housing Administration] and the Department of Veterans Affairs (http://www.va.gov/).
secured transaction law: an overview
A security interest arises when in exchange for a loan a borrower agrees, in a security agreement, that the lender (the secured party) may take specified collateral owned by the borrower if he or she should default on the loan. A security interest also provides the secured party with the assurance that if the debtor should go bankrupt he or she may be able to recover the value of the loan by taking possession of the specified collateral instead of receiving only a portion of the borrowers property after it is divided among all creditors. See Bankruptcy.
Security agreements are contracts. Article 9 (http://www.law.cornell.edu/ucc/9/overview.html) of the Uniform Commercial Code (http://www.law.cornell.edu/ucc/) governs security interests in personal property. It has been adopted, with some modifications, by every state. A security agreement must comply with other state laws governing contracts. See Contracts.
Article 9 of the Uniform Commercial Code covers most types of security agreements for personal property that are both consensual and commercial. See§ 9-102(2) (http://www.law.cornell.edu/ucc/9/9-102.html) and §9-104 (http://www.law.cornell.edu/ucc/9/9-104.html) of the code. This includes fixtures, personal property that is "fixed" to real property such as a water heater. Statutory liens (e.g. a mechanics lien) are generally not governed by Article 9 but by the individual statute that creates them. See §§9-102(2) (http://www.law.cornell.edu/ucc/9/9-102.html) & 9-310 (http://www.law.cornell.edu/ucc/9/9-310.html) of the code. Article 9 contains a statute of frauds which requires a security agreement to be in writing unless it is pledged. See § 9-203(1) (http://www.law.cornell.edu/ucc/9/9-203.html) of the code. A pledged security agreement arises when the borrower transfers the collateral to the lender in exchanger for a loan (e.g., a pawnbroker). The "perfection" of a security agreement allows a secured party to gain priority to the collateral over any third party. To perfect a security agreement the filing of a public notice is usually required. See §§ 9-302 - 9-305 (http://www.law.cornell.edu/ucc/9/9-302.html) of the code.
Article 9 also provides for the resolution of conflicts if there are multiple security interests or liens on specific collateral. See §§ 9-310 - 9-316 (http://www.law.cornell.edu/ucc/9/9-310.html) of the code. Part 5 of Article 9 deals with the procedures to be followed when a borrower defaults. See §§ 9-501 - 9-507 (http://www.law.cornell.edu/ucc/9/9-501.html) of the code.
contracts: an overview
Contracts are promises that the law will enforce. The law provides remedies if a promise is breached or recognizes the performance of a promise as a duty. Contracts arise when a duty does or may come into existence, because of a promise made by one of the parties. To be legally binding as a contract, a promise must be exchanged for adequate consideration. Adequate consideration is a benefit or detriment which a party receives which reasonably and fairly induces them to make the promise/contract. For example, promises that are purely gifts are not considered enforceable because the personal satisfaction the grantor of the promise may receive from the act of giving is normally not considered adequate consideration. Certain promises that are not considered contracts may, in limited circumstances, be enforced if one party has relied to his detriment on the assurances of the other party.
Contracts are mainly governed by state statutory and common (judge-made) law and private law. Private law principally includes the terms of the agreement between the parties who are exchanging promises. This private law may override many of the rules otherwise established by state law. Statutory law may require some contracts be put in writing and executed with particular formalities. Otherwise, the parties may enter into a binding agreement without signing a formal written document. Most of the principles of the common law of contracts are outlined in the Restatement Second of The Law of Contracts (http://www.ali.org/ali/contract.htm ) published by the American Law Institute. The Uniform Commercial Code, whose original articles have been adopted in nearly every state, represents a body of statutory law that governs important categories of contracts. The main articles that deal with the law of contracts are Article 1 (General Provisions) (http://www.law.cornell.edu/ucc/1/overview.html ) and Article 2 (Sales). (http://www.law.cornell.edu/ucc/2/overview.html ) Sections of Article 9 (Secured Transactions) (http://www.law.cornell.edu/ucc/9/overview.html ) govern contracts assigning the rights to payment in security interest agreements. Contracts related to particular activities or business sectors may be highly regulated by state and/or federal law. See Law Relating To Other Topics Dealing with Particular Activities or Business Sectors. (http://www.law.cornell.edu/topics/topic2.html#particular%20activities )
In 1988, the United States joined the United Nations Convention on Contracts for the International Sale of Goods (http://www.jus.uio.no/lm/un.contracts.international.sale.of.goods.convention.1980/) which now governs contracts within its scope.
negotiable instruments law: an overview
Negotiable instruments are mainly governed by state statutory law. Every state has adopted Article 3 of the Uniform Commercial Code (UCC) (http://www.law.cornell.edu/ucc/3/overview.html), with some modifications, as the law governing negotiable instruments. The UCC defines a negotiable instrument as an unconditioned writing that promises or orders the payment of a fixed amount of money. Drafts and notes are the two categories of instruments. A draft is an instruments that orders a payment to be made. An example is a check. A note is an instrument that promises that a payment will be made. Certificates of deposit (CD's) are notes. Drafts and notes are commonly used in business transactions to finance the movement of goods and to secure and distribute loans. To be considered negotiable an instrument must meet the requirements stated in Article 3. Negotiable instruments do not include money, payment orders governed by article 4A (fund transfers) or to securities governed by Article 8 (investment securities).
The rule of derivative title, which is applicable in most areas of the law, does not allow a property owner to transfer rights in a piece of property greater than his own. If an instrument is negotiable this rule is suspended. A good faith purchaser, who does not have any knowledge of a defect in the title or claims against it, takes title to the instrument free of any defects or claims. In relation to the suspension of the rule of derivative title, Article 3 provides for warranties to protect the parties in transactions involving negotiable instruments.
Checks are negotiable instruments but are mainly covered by Article 4 of the UCC. See also Banking Law (http://www.law.cornell.edu/topics/banking.html ). Secured transactions may contain negotiable instruments but are predominantly covered by Article 9 of the UCC. See also Secured Transactions (http://www.law.cornell.edu/topics/secured_transactions.html ).
If there is a conflict between the Articles of the UCC, both Article 4 and 9 govern over Article 3.
The United Nations Convention on International Bills of Exchange and International Promissory Notes (http://www.jus.uio.no/lm/un.bills.of.exchange.and.promissory.notes.convention.1988/doc.html)
would preempt Article 3 in the case of international transactions if the United States were to join. (As of late 1994 it had not ratified the treaty.)
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