Real Estate - Bond And Mortgage
( Originally Published 1911 )
Transactions in which these instruments are appropriate.—Deeds are appropriate instruments for the immediate conveyance and the transfer of title, but there are many transactions in which the transfer of title is not immediately contemplated but merely potential, in that land may be pledged as security for debts. In such a transaction the loan is secured by two instruments, one and the most important, being the evidence of indebtedness, and the other the mortgage. In New York State the bond is the principal instrument securing a loan of money. There are many states in which the evidence of indebtedness is a note; and there are places where the evidence of indebtedness is not only a single note for the principal but there are also issued at the same time notes for all the installments of interest contemplated.
A form of bond in use in New York is as follows:
KNOW ALL MEN BY THESE PRESENTS,
That ........... hereinafter designated as the obligor, do.. hereby acknowledge to be indebted to TITLE GUARANTEE AND TRUST COMPANY, hereinafter designated as the obligee, in the sum of .................dollars, lawful money of the United States, which sum said obligor do.. hereby covenant to pay to said obligee, its successors or assigns, on the day of ....., nineteen hundred and with interest thereon, to be computed from the day of 19.., at the rate of per centum per annum, and to be paid on the .. day of next ensuing the date hereof, and semi-annually thereafter.
AND IT IS HEREBY EXPRESSLY AGREED THAT the whole of the principal sum shall become due at the option of said obligee after default in the payment of interest for thirty days, or after default in the payment of any tax or assessment for thirty days after notice and demand. All of the covenants and agreements made by the said obligor in the mortgage covering premises therein described and collateral hereto, are hereby made part of this instrument.
Signed and sealed this day of 19..
IN THE PRESENCE OF
The form of bond given above begins with a rhetorical flourish: "Know all Men by these Presents." It does not mean anything. The "obligor" means the person who obligates himself or makes the undertaking. It may be plural, and, if so, the word "ourselves" follows "acknowledged." If it be the bond of one person nothing is inserted after the words, "to be"; if more than one, they contract "jointly and severally." Upon a "jointly and severally" obligation all the makers of the obligation can be sued, or any of them. If only one is sued, he must seek contribution from the others; but with that the creditor has no concern.
The bond then proceeds to name the holder of the evidence of indebtedness and the principal sum. The modern form of bond provides only an obligation for the principal sum. Until within recent years it was usual and is customary still in a great many states that the bond should be in the form of a double obligation, the double amount being then known as "penal sum." If the obligation is written in the penal form, there follows it a condition in which the parties say that while they obligate themselves for double the amount the condition of the obligation is such that if they pay half the penal sum the obligation is void and of no effect. No more than the amount of the condition can be collected, no matter how many times the bond be broken.
Legal tender.—"Lawful money of the United States."—That is the usual obligation, which means all the kinds of money which are legal tender under the laws of the United States : gold, United States notes and silver dollars, and fractional currency for a limited amount. Bank notes are not legal tender. Certificates of deposit, silver certificates and gold certificates are not legal ten-der. As some foreign lenders feel there may not always be parity between the paper money of the United States and actual gold coin, it is appropriate when dealing with them, instead of expressing an obligation to pay in "lawful money of the United States," that the obligation be to pay "in gold coin of the United States of the present weight and fineness." If the obligation be written in that form it is usually known as a gold bond.
If the bond is in the plural after "hereby" the words "jointly and severally" may be again inserted. Then follows the due date. Unless the instrument provides that it may be paid on or before the due date, the obligor has no option to pay the amount earlier than the due date. If he desires to pay off the debt before the day specified, he must have an express provision in the bond for that purpose. It may be expressed by putting after the word "on" the words "or before." It may then be paid at any time without notice, but cannot be demanded until the due date. The privilege to pay may also be expressed in a clause, providing for payment on notice, or on special terms.
Interest on Bond.—The interest is usually computed from the day the money is lent. The first interest payment may be six months from the day on which the loan is made, or upon the first of any month, or upon an arbitrary date. Large money lenders, especially corporations, have specific interest days, and they will make the first interest day the first of the special days on which they like their money to come in; and then interest will be paid, usually, semi-annually thereafter. That is mere custom: there is no reason, in law, why interest should not be paid every day as it accrues and there are places in which it is paid quarterly. Interest is not payable in advance; it is paid, after it has accrued, in the installments specified.
The rate of interest is limited in some states by law, so that no more than a certain rate may be taken for the loan of money. If interest be paid in advance at the full legal rate for any considerable period, the lender not only gets his interest, but also the use of the interest money before it has been earned, therefore he is really getting something in excess of the legal rate as it has accrued, and the courts have held that a transaction of that sort may be usurious. Banks are expressly authorized to take discount in advance. Lenders who are getting the full legal rate should not take interest in advance. If interest be taken at a greater rate than the lawful rate, that constitutes usury. The penalty of usury, if it be pleaded and proven, differs in various states, in some the lender may lose the entire sum loaned and the interest thereon. In many states a corporation cannot plead usury. If, therefore, money be loaned to a corporation, the lender can get any rate of interest or any sum over the lawful rate which he is able to obtain, without the danger of committing usury.
Savings banks often have their mortgages written for a year at a specified rate greater than they exact. They do not require the money to be paid when it is due, nor do they take all the interest which is written in the bond, but they will notify their borrowers from time to time with what rate of interest they will be content. Especially do they do this with overdue loans, and they always like to have their loans overdue so that they can call the money when they want it, or whenever they feel the security is depreciating ; and ask for such rate of interest as is satisfactory to them. They do not usually exact as great a rate of interest as other lenders, because they try to get and keep the best loans : they are content with better security and lower interest rates. There is a pit-fall in some forms of bond on this very subject. Some-times the bond reads : "With interest to be paid at the rate of — per cent per annum and to be paid on ...... and semi-annually thereafter until said sum be fully paid and discharged." There is a contract that the rate of interest shall be so much until the sum is fully paid and discharged. When such an obligation is over-due the obligee may not notify the borrower that unless he pays on a specified day that thereafter he will charge him such rate of interest as is satisfactory to the obligee, up to the legal rate. If the obligor has contracted to pay only 4 1/2 per cent "until said sum be fully paid and discharged," he can refuse to pay more than 4½ per cent no matter how long the obligation may remain overdue. In cases where mortgages are written without this stipulation, but in ordinary short form, the best opinion is that lenders have a right to insist upon such interest after demand of payment, as is satisfactory to them, up to the legal rate.
Privilege to pay off.—If the borrower has agreed with the lender that he will pay his debt at a certain time, but desires to, have the privilege of paying off at some earlier time, the space left in the bond is appropriate for that purpose. Large sums of money are usually kept out at interest, and are not always capable of investment immediately; for that reason lenders will insist that if they accord a privilege to pay off be-fore the due date, that before such a privilege is exercised, they shall have notice in writing of the intention to make payment. Sometimes, in addition to notice, they will insist that they have interest not only up to the time of payment but to some later time in advance, sometimes thirty or sixty days. Such payment is not usury, because there is no obligation to pay it; it is a mere payment for a privilege which the borrower may or. may not exercise, as he sees fit. If he exercise the privilege, he must pay the stipulated price for the accommodation. There are some money lenders who insist that there shall be provision in the bond that if it be not paid on the due date, it cannot be paid until some time after notice, and such a provision is not usury, because there is no obligation to make the payment; it is merely a penalty for non-payment.
Usury laws. Economically and at base all usury laws are wrong. They are all fallacious; they do not protect the borrower. The needy borrower who must pay the legal rate when money is worth more than the legal rate will pay that excess in the shape of commission or expenses, and not only the excessive rate which money is worth over and above the legal rate, but he will pay more than that, because lenders who are willing to commit usury will want a bonus for the risk they are running; so that the direct operation of a usury law is not to protect the needy, but to make the needy pay more than the full worth of the money. If the lender did not fear that the money could be traced to his hands, if he did not have to get expert counsel to show him methods of evading the usury law, the borrower would pay only what the money was worth and not, in addition, insurance against usury and fees to expert counsel to get around the usury law.
Default in payment of interest, taxes, etc.—The next stipulation in the bond is intended for the protection of the lender, indeed all the instruments which are exchanged at a loan are framed for the protection of the lender. He is the one who parts with money, and he does not have to part with it unless he gets satisfactory security. This clause stipulates that if the interest be not paid when due, the borrower still has, say, thirty days in which to pay it, but if at the end of such thirty days it is not paid, then the holder of the bond may call the whole amount due and demand payment of the entire sum, with interest. If he does so demand, he can sue on the bond or foreclose the mortgage for the whole amount; and coming in on the thirty-first day with the interest will not reinstate the term of credit. In the same manner, if there be default in the payment of taxes or assessments for a stipulated period, and the default be ascertained and the holder of the bond exercise his option, he may forbear so long as he pleases, but that does not necessarily reinstate the term of credit. If the borrower wants a stipulated time thereafter, he must get a new agreement. If the interest or taxes be paid before the lender exercise his option, the default is waived.
All options of the lender may be waived; even if a lender has exercised an option he may, by agreement, waive it and reinstate the credit.
Execution and Enforcement.—The bond next proceeds by incorporating into it all the covenants and agreements made by the obligor in the mortgage, which is collateral to the bond, and which is made part of the instrument. Thus, by reference, all the valuable parts of the mortgage are made part of the principal obligation. The instrument is then signed and sealed. It should be signed, sealed, subscribed and executed in the same manner as a conveyance. It is not necessary to its enforcement that it be either acknowledged, proved or witnessed; so long as the instrument is subscribed, it is enforceable. It is an obligation for the payment of money only, and may be enforced separately from the collateral security. If the obligor so elects he may sue on the bond and collect as much as he can, and then hold the mortgage, which is collateral, for the balance, and foreclose it, the only stipulation in that regard which the law makes being that if he proceed first on the bond, the obligor must exhaust his remedies under that instrument before he can enforce the mortgage. If he does not want to sue on the bond first, he can sue to foreclose the mortgage, and in the same action ask, not that the whole bond be paid, but that if there be any deficiency after the mortgage has been enforced against the property, that he get judgment on the bond for that deficiency.
A person can sue on a sealed bond within the time of limitation for sealed instruments after it is due, or after there is a payment of principal or interest. If the bond be unsealed, the time of limitation is shorter. Limitation upon an obligation for money begins to run from the due date or the last time when there was any payment on account of the debt, or acknowledgment of the obligation.
The law of supply and demand affects interest rates more quickly than it does any other commodity. Money is a mere commodity in the lending market. When the demand is great and the supply short, the interest rate goes up; when money is plentiful the interest rate falls.
Mortgage recording tax.—Mortgages are personal property. If the owner of a bond has no debts to offset against it, he is liable to be taxed as the owner of so much personal property. The taxing of debts only imposes the burden of the tax upon the borrower. The lender will insist, whether he pays tax or not, upon getting net for himself the current rate of interest which the most fortunate lender can get. If there be a lender who does not pay any tax, who can get 4 per cent for his money, every other lender will want 4 per cent for his money net over the taxes. The result is that the lender who does not pay taxes, who lends his money at net 4 per cent and has to give nothing out of it, will get the first chance at the good loans.
Seeing the falsity of taxation upon debts, some states have provided that instruments of debt secured by mortgage upon real property, instead of being generally taxable as personal property, shall be subject to a special tax (sometimes a recording tax, which is paid once for all, and sometimes an annual recurrent tax) , and that thereafter the mortgage, the bond and the debt which it secures all are free of any kind of taxation in the state, except that the mortgage is liable to transfer tax upon the death of the holder, where there is such a tax.
The question will come up very frequently whether if money is lent at the full legal rate, it can be required, in addition, that the borrower shall pay the mortgage tax. If there be no express provision against it, the best opinion is that such payment by the borrower does not make the loan usurious.
Former method of pledging property for debt.—Before modern forms of conveyance were invented, when land served to secure the payment of money, the title to the land was actually transferred by the borrower to the lender, who became to all intents and purposes the owner of the land, and was entitled, if he so desired, to take possession. The borrower had a mere right in equity and good conscience that if he paid his debt, he might redeem his land.
Equity of redemption.—The interest which the owner retained in the property, the potentiality of getting it back upon payment of a stipulated debt became known as the "equity of redemption" ; and that term has continued to designate, until the present day, the right which remains in the owner of the land over and above the interest of the pledgee.
In some states a mortgage transfer to this day is an actual transfer of the title; except for the fact that the borrower retains possession and collection of rents the mortgagee is regarded as the owner of the property ; and when the debt is paid off the fact of payment is evidenced by a quit claim deed, transferring the title back from the mortgagee to the person redeeming. In New York State, and in many other states, the interest of the lender is not an ownership of the land, but is a lien upon the title. It falls naturally within the classification of liens which are known as, "voluntary liens," and within the classification of a special lien. It has all the general incidents of liens upon real property.
A mortgage interest, being personal property, passes at death to the personal representative, and not to the heirs. It is taxed to the holder as personal property, unless it be exempt because it has paid special tax. It passes by assignment or by delivery, and not by deed, and in order that title under it may be taken from the owner of the equity of redemption there must be some legal procedure to cut off the right of redemption. Be-cause it is a chattel interest and a lien upon the land, and not an effectual transfer of title, there may be a first, second or third or as many mortgages as the borrowing capacity of the land will stand, each taking its rights in the order of its precedence, the subordinate or junior being subject in their rights to the senior or prior mortgages.
Taking up the instrument by which the creation of this lien is accomplished it will be seen that in its structure it seems to be an absolute conveyance of the property, but upon condition that if certain things be performed that then the conveyance of title transferred shall be void and the property shall revert to the mortgagor. This is a vestige of the old form of the transaction, but as a matter of fact in those states in which a mortgage is a lien and not a conveyance of title the transfer is not accomplished until the equity of redemption has been cut off by foreclosure; and the instrument, notwithstanding its form, creates a lien or personal property interest only.
"Bearing even date herewith."—In its commencement the instrument is like a deed. It then recites, "Whereas the said" (the party of the first part) "by virtue of a certain bond or obligation bearing even date herewith." It is usual that the bond or note shall be dated on the same day as the mortgage, although this is not absolutely necessary in law. It is possible to se-cure by mortgage an antecedent debt. The lender may desire additional security for an antecedent debt, and the borrower may pledge his real property to secure that antecedent debt; and the transaction would then, so far as its effect upon the real property was concerned as between the parties, be entirely similar to one in which the pledge accompanied the making of the loan. Or a person may pledge his land to secure the debt of another, and in its effect upon the title the result will be the same as if he were pledging his land to secure a loan made to him at the time of giving the pledge. Cases of that sort arise frequently. Lenders may loan upon the bond of a man, and get a mortgage upon his wife's property. No matter. whose obligation it is, so long as the pledge is to secure some specific obligation, it is quite appropriate that land be pledged as security. After "justly indebted to the said party of the second part in the sum of" is inserted the principal amount of the loan.
"Secured to be paid, together with the interest thereon, at the time and in the manner expressed in said bond or obligation."—This is a recent frill in conveyancing, making a mortgage which does not disclose anything as to the terms of the loan, except the amount of the principal sum. The bond never goes on record, and it is very often desirable, both from the view-point of the borrower and of the lender, that no more of their transaction be disclosed to the public than is necessary; and this form of mortgage is gradually forcing itself into general acceptance because it discloses that which it is necessary to disclose, and does not disclose those things which are really only matters which interest the parties to the transaction.
There is no reason why the business of dealing in real estate, being now a commercial business, should be conducted with any greater publicity than private transactions with relation to any other commercial business. A merchant who discounts his paper at a bank is not obligated to tell all the world upon what terms he can borrow money; and a bank which lends its money to one customer at such rate as is appropriate to the security which he offers and the soundness of his business reputation, is not obligated to disclose those terms to :the next borrower who has not as good security or whose business standing is not as high as that of the first man. It is also an embarrassment in a commercial transaction between two persons, who ought to be free to negotiate upon the basis of their own affairs only, to know that people are necessarily invited into their confidence, and are able to instance what has been done by them.
If it is desired to disclose the rate of interest and the due date, a blank is left in which they can be added after the words "bond or obligation." There is always a way to obtain the due date: where mortgages are made by large institutions, they always keep a record of the terms; and they will usually be disclosed to persons who have a right to know them. If this form of mortgage finds general acceptance, the business community will adapt itself to it.
The instrument then recites the clause to which attention was called in the bond. This is followed by a clause granting, in the form of a deed, the real property in-tended to be the subject of the loan, to the mortgagee, his heirs and assigns forever. The description ,of the real property should be inserted in this instrument with the same care and particularity as in a deed.
"Together with the appurtenances," etc.—This is a distinct departure from the deed. The instrument, not being the result of a contract which provided that certain articles of personal property which were appurtenant to and used with the land, should pass by the deed, the mortgage expressly provides that the conveyance shall include not only the land, but all fixtures and articles attached to or used in connection with the property covered by the mortgage. It is intended thereby to catch under the lien all those things which are personal property, but which are generally used with and necessary to the use of the property as a going concern. The mortgagee would not get a man's furniture under that clause, but he would get the gas fixtures which were attached to a house, and the ranges which were appurtenances of a flat building. This clause is followed by the habendum.
The defeasance.—If the instrument stopped here, it would be a complete deed, but the habendum is followed by the defeasance, so called because it provides that the title of the lender or mortgagee may be defeated. The law provides in many states that if a conveyance be made accompanied by a defeasance in writing, that unless the defeasance be recorded at the same time that the conveyance is recorded, the grantee shall take no benefit from the recording of the instrument, the intention being that there shall be, so far as the law can control it, no hidden conditions of this sort.
It is therefore customary that the defeasance be writ-ten immediately after the conveyance and in the instrument which creates the lien.
As already stated, the interest of the mortgagee is usually a personal interest, and while in the part of this form that looks like a deed an interest is conveyed to the mortgagee, his heirs and assigns ; and in the habendum it reads, "to the party of the second part, his heirs and assigns," it must be remembered that the debt belongs to the mortgagee or his personal representative or assigns, and the defeasance provides that if payment be made to the mortgagee or his personal representative—not to his heirs—that this will defeat the title which has just been conveyed, and that then, "these presents and the estate hereby granted, shall cease, determine and be void."
If the instrument stopped there, it would be a complete mortgage, perfectly efficacious to carry out the intention of the parties, but there are a number of important covenants in the instrument, which lenders exact in order to improve their security.
First covenant.—The first covenant is a repetition of the obligation in the bond, a promise by the party of the first part to pay the indebtedness, and then a stipulation that if default be made, the party of the second part shall have power to sell the premises according to law. That is an important stipulation. It confers a power under which the holder of the mortgage may transfer the title to the land; and if the law had not stepped in to protect borrowers and save their equity for them, under this clause the lender could, upon any de-fault, execute a deed in the name of the mortgagee, conveying the property, and thus cut out all intervening interests.
The last sentence of the first covenant provides that, "The premises may be sold in one parcel, any provision of law to the contrary notwithstanding." The general provision of law upon this subject is that when the premises comes to sale under a foreclosure, if it consist of more than one lot, the property, for the benefit of the mortgagor, shall be sold in separate parcels. If there are several lots they must be offered for sale in such separate lots as form natural divisions, so that no more is sold or the owner's property than is sufficient to raise the debt. But lenders make loans very often, not only upon the value of the separate lots but also taking into consideration the fact that they are more valuable by reason of being in one ownership, and that structures upon the property may be more useful when operated together than separately; they therefore require that they shall have the right to sell the property in one parcel. However, if a property is foreclosed by action of the courts, they will relieve from this stipulation, if it be too harsh, and if the owner who is about to be foreclosed of his rights can show that the property falls into natural divisions and will probably raise enough money if part only be sold. Then the courts will require that the property be sold in separate parcels, but provide that if the sale of the property in separate parcels does not raise enough to pay the entire mortgage debt, that then the mortgagor may offer the property as a whole.,
Second covenant.—This covenant relates to fire insurance. The structures upon real property are as much real estate or real property as the soil itself. Where the property is adequately improved, they are usually the most important part of the security of the loan. Loans are made upon improved property usually at a lower rate and for a longer term than loans upon unimproved property. Improved property is the subject of investment or use by its owner. Some lenders require for their security that there shall be adequate fire insurance obtained by the owner of the property, and this is provided for specifically in the second covenant. The form of that transaction usually is that the policy is issued with loss payable to the owner of the property, but with a slip attached by which the insurance company agrees that if there should be loss it will pay that loss, first, to the holder of the mortgage to the extent of the interest of the mortgagee; and after that, the owner may have any surplus of insurance that remains. It is usually enacted that the original policy or policies be de-posited with the holder of the mortgage, and the owner of the land must be content with a copy or with a certificate of the insurance company. Mortgage clauses usually provide that while there may be contribution among the insurance companies who have issued policies to the mortgagee, that there need not be contribution by those companies who have not issued policies to the mortgagee, thus the mortgagee gets his money out of such companies as have issued policies to him or policies which bear this mortgage clause, without caring whether the owner has or has not outside insurance.
The next sentence in this covenant provides that if any sum of money be paid by the insurance company by reason of a loss, that the amount thus paid may be retained by the holder of the mortgage and credited to the debt, or it may be paid over to the owner of the land to enable him to repair the building, or for any other purpose satisfactory to the holder of the mortgage, without affecting the lien of the mortgage for the full amount.
Third covenant.—This covenant contains stipulations under which the mortgage may become due earlier than the term of credit prescribed in the bond.
The thirty days notice is not absolutely necessary; it may vary according to agreement of the parties. The interest clause is very often twenty days; the tax and assessment clause is very often sixty or ninety days, or some period after notice and demand has been made.
This clause also stipulates that, at the option of the holder, the amount owing shall become due immediately upon the "actual or threatened demolition or removal of any building erected upon said premises." It must be remembered that the owner of the property remains in possession, and the holder of the mortgage has no control over the uses of the property so long as his interest is paid and the principal sum has not become due. The owner may at any time tear down a building or remove an important part of the security. If the mortgagee knows of it soon enough, he can get an injunction enjoining the owner of the land from committing waste. But, for the reason that the holder of the mortgage may not know of the removal or demolition before it is accomplished, in addition to enjoining the destruction of the building, it is provided that if the building should be demolished or threatened to be demolished that the holder of the mortgage may call for payment of the whole amount owing.
If the owner put a new building on the property, it becomes part of the realty and immediately falls under the mortgage : there need not be any other instrument. The mortgage attaches to the land and all that is real property so long as the lien continues. This clause also provides that the loan shall come due if for any reason it shall be impossible to obtain fire insurance. It may happen that property has been put to some extra hazardous use after the mortgage was made, and in order to prevent that casualty, the holder of the mortgage stipulates that if that sort of thing happen, he does not have to leave his money on that property but can demand payment.
Fourth covenant.—The fourth covenant contains stipulations by which the income may be paid to the holder of the mortgage in certain cases. First, it is provided that if action be brought to foreclose, a receiver of rents and profits shall be appointed. It may happen that it will be necessary to foreclose, and that the land and improvements at that time Will be found to be rather slender security for the amount owing. Interest and taxes may have been allowed to run; the property may have run down; or the holder of the `mortgage may find that he has made a mistake and loaned more upon the property than is safe. He may want to have the rents applied as soon as possible to the payment or redemption of his debt; he stipulates, therefore, that if he must foreclose, he can apply to the courts for the appointment of a receiver. The courts, however, are jealous of their prerogative, and claim that parties cannot stipulate for the appointment of a receiver of the court to act as their collector unless there be reasonable ground to fear that the property will be slender security or will not bring enough to answer to the debt. The courts say the mortgagee by contract cannot force them to appoint their officer, but if colorable reason be shown for the intervention of a receiver the courts will act upon this clause. Even if there be no receiver's clause, after due notice, and if there be danger to the holder of a mortgage, the courts may appoint a receiver.
This covenant further proceeds to pledge the rents and profits in case of any default in payment of principal and interest of the mortgage, as further security of the indebtedness. This assignment can be enforced only through the instrumentality of a receivership in a foreclosure suit, or through the voluntary giving up of possession by the owner of the land. There is no way by which the holder of a mortgage, to whom rents and profits have been pledged and assigned, can push aside the owner of the land, and require the tenants to pay to him. If he tried to give notice that the rents were pledged to him, they would pay nobody; not that the tenants would be actually relieved of the obligation to pay rent, but that is the way it would work out. If, however, in order to obtain forbearance, the owner of the land voluntarily gives up his possession and instates his mortgagee under this clause or under any other voluntary arrangement, to collect the rents and become thereby a mortgagee in possession, that does not deprive the owner of his equity of redemption, but merely adds security to the lien. It puts upon the holder of the mortgage the obligation of managing the property prudently not only for the reduction of his lien, but also for the benefit of the owner who has put him in possession and makes the mortgagee in possession practically trustee of the income, to apply it first to the fixed charges upon the property, and then to the reduction of the principal debt ; and, if the mortgagee does while in possession work out income enough to pay off his debt, from that moment the owner is entitled to resume his possession, to be reinstated in the collection of his rents, and to have an accounting and discharge of his mortgage. If there is not enough income to pay the entire principal and interest, then, in case of foreclosure, there will be an accounting taken and anything that may have been collected by a mortgagee in possession will be credited upon the mortgage debt. A mortgagee who is thus in possession never acquires an adverse title to the owner; he is merely a trustee until there is an accounting or a conveyance.
Fifth covenant.—This covenant relates to taxes and assessments. 'Under the operation of the third covenant; the owner is required to pay all taxes and assessments within a stipulated time, or the property may be foreclosed. Under that clause also the holder of the mortgage may require from time to time, if he manage his affairs prudently, that all tax receipts be produced to him, so that he may keep in touch with the situation and know whether the taxes have been paid.
But if the taxes are allowed to run into default, and the security be ample, the holder of the mortgage may not care to demand payment of his debt, and may under this fifth covenant pay any taxes or assessments which are upon the property, and add them to the amount owing to him. If he does so, then he will be entitled not only to the payment of his principal and interest, but also to whatever he may advance for taxes on the property, with interest on that amount; and if he foreclose, he may have his foreclosure for the total debt thus built up.
Sixth covenant.—This clause relates to the subject of special taxation of mortgages. Very many forms of taxation on mortgages have been tried, all of them unsatisfactory because the borrower finally pays all taxes on debts ; and no matter in what way it was attempted, the result necessarily was to increase interest rates by the amount of the special tax. The proper theory is that there should be no tax at all upon mortgages, either special or general, because the needy borrower must always pay the tax on debts.
Lenders making their loans with the understanding that they are getting a tax exempt security, require in this clause that if there be any legislation on the sub-j ect of mortgage taxation, so as to affect the security which has been given to the lender, that then the lender does not have to leave his money out liable to some new form of taxation, but may demand payment.
Seventh covenant.—This clause provides merely for the giving of such notice as the holder of the mortgage desires to give to the owner. Under the form of mortgage security given above there is no notice that the holder of the mortgage must give to the owner. It is the duty of the borrower to seek his creditor, under every stipulation in this instrument. But if the lender does desire to ask for fire insurance to be renewed, the production of the tax receipt, to send notice that interest will become due or to make demand or give notice of any sort, it is here expressly stipulated that if he send it by mail to such address as is furnished by the owner, that this is all that is required.
Eighth covenant.—This clause is borrowed from the deed form. It covers the covenant of further assurance and the covenant of warranty found in deeds. Under the operation of the covenant of warranty, if, at the time the loan is made, the borrower does not own the entire title to the premises which are mortgaged, and afterwards acquires any additional interest in the premises, that additional interest immediately, by action of the warranty clause, comes under the lien.
Special clauses in subordinate mortgages.—All the above are clauses which are required in ordinary loans, but there are other clauses which may be appropriate in special mortgages. A piece of property may be encumbered by two, three or any number of mortgages, one taking precedence of the other. The rights of a second mortgagee are subordinate to those of the first mortgagee. If there be default on the first mortgage, and the holder begins to foreclose, and if the second mortgage be not yet due, the interest of the holder of the second mortgage may be seriously jeopardized. For that reason it is usual to stipulate, in subordinate mortgages, that if proceedings be commenced to fore-close the prior mortgage, or if interest be not paid, or if there be any other default upon the prior mortgage, that the holder of the second mortgage may demand the amount owing to him; and further, that if there be any default in taxes, or interest on the prior encumbrance, that the holder of the subsequent encumbrance may pay those charges and add them to his security; and may thereupon call his debt for payment. Very often in order to stop a foreclosure upon a first mortgage, the holder of a second mortgage will pay the taxes and the interest on the first and then start to foreclose the second, in order to avoid embarrassment and to obtain for the property the benefit of the terms of credit still remaining on the first mortgage. All those contingencies are provided for in a properly drawn second mortgage form.
Lifting clause.—Suppose a purchaser buy a piece of property for $10,000, on which a savings bank has an overdue first mortgage of $5,000, and he is to give a second of $3,000 payable in five years. If the mortgagee wants his money and goes to the bank and gets it to foreclose, that five-year term of credit does not do much good; so that it is often stipulated in subordinate mortgages, that if the prior encumbrance be paid off, the mortgagor may borrow the same amount upon a new first mortgage, and that the amount so borrowed shall be secured by a new first mortgage, the second mortgage remaining second to the new instrument. This is known as a "lifting clause"; the prior mortgage is lifted out and another put in its place. It is appropriate that there should be such a clause pursuant to contract, or where a longer term of, credit is desired than the term in the prior encumbrance.
Foreclosure by advertisement.—There are two methods of foreclosure, the first, most simple and least employed being the procedure known as, "Foreclosure by advertisement." This is not a proceeding at law, but is applicable only as the execution of the power to sell the property which is granted in the mortgage instrument. If our system of law had not regulated and circumscribed the power to sell which is contained in the instrument, it would be feasible for the holder of a mortgage whenever there was default, to step into possession of the property, sell it at the best price he could obtain, bid it in if there was no one to bid against him, and then cut off the equity and all interests subsequent to the mortgage. The statutes with regard to real estate mortgages do not deprive the holder of a mortgage of his power to sell, but requires the giving of notice to the owner of the equity—if he can be found —the posting of notices in public places, and then the sale at a public auction in a public place. If these formalities be observed, the certificate of the sale is sufficient to entitle the purchaser to possession of the property. The trouble with using this method of foreclosure is, that the owner of the property, not having had a chance to test the validity of the lien and require it to be adjudicated and it not being a process of a court under which the purchaser can get possession, it may happen that after he has properly executed his power of sale, he may not get into possession. The owner of the land may retain the possession, and then there is no other way to get in except by the costly and cumber-some action for ejectment. For that reason, although apparently the most direct method for foreclosing mortgages, it is the least used.
Foreclosure by action at law.—The customary method of foreclosing mortgages is by action at law. The mortgage being in default for some reason, the first step in foreclosing is to make search to ascertain ?what interests there are subject and subsequent to the mortgage all the holders of which must be made defendants to the suit. Every person who has or claims an interest in the property which is subsequent to the mortgage, should be made a defendant. Any person who has or claims some interest superior to the mortgage may be made a defendant, but nothing is gained by this. A person who has an interest superior to the mortgage, properly recorded, if made a defendant, is not required to answer the allegation, and the judgment of foreclosure does not affect his rights. All that can be cut off is some subsequent and subordinate interest.
If the holder of a second mortgage wants to affect the right of the first mortgagee, he must make a further allegation with regard to it which the first mortgagee is called upon to answer, for instance, that his right, while appearing to be first, is really second.
Another important class of cases in which it often happens that persons are made parties is where they are owners of conditional bills of sale. The owner of a properly executed and filed conditional bill of sale claims, not an interest in the property which is subject and subordinate to the mortgage, but that the property on the premises never became real estate, but still retains its character as personal property, and was never subject to the mortgage; and if the owner of a conditional bill of sale has properly safeguarded his interest, he does not care how many times he is made a party to a foreclosure suit : he would still be able to take out his property, if it were not paid for.
Method of procedure.—All parties whose interest is subject and subordinate to the mortgage having been ascertained, they are made parties to an action, and are entitled to be served with a summons, and given an opportunity to defend the action. If there be answer on the part of any person, the issue must be tried out. If there be no answer, then the plaintiff obtains judgment as matter of course. Whether the issue be tried or the plaintiff obtain judgment upon an uncontested case, when it is ascertained that he is entitled to judgment, the amount owing is computed either by the court or by a referee. The amount of the lien having been ascertained in that manner, a judgment is entered directing the sale of the property by a master, referee or sheriff, under the direction of a court. All parties to the action who have appeared, are entitled to notice of the sale, which must be advertised. Then the sale must be had at public auction in a public place, and all persons who desire to bid must have a fair opportunity to do so.
The property having been offered for sale, and having been bid in, one of two things may happen. Enough may be bid to pay the mortgage and those encumbrances which are ahead of it, or the amount paid may not be enough to pay these charges. The plaintiff in framing his complaint may allege of any person who is liable for the principal debt that that person is so liable, and claim, in addition to getting his judgment of foreclosure and sale, that if there be any deficiency that he have a personal judgment for the amount of that deficiency. In cases where there is more than enough to pay the mortgage,. the defendant is entitled—unless there be a special provision in the mortgage to the contrary—to have the property sold in such separate lots or divisions as it may fall into naturally. This is principally for the reason that if it should develop that the plaintiff's lien can be raised by the sale of less property than the whole, as soon as enough has been sold to raise the lien, that ends the plaintiff's interest ; of course the referee or officer of the court is authorized to sell only enough property to raise the claim for which judgment is obtained.
The defendants are entitled to have .the divisions of the property sold in a special order, in order to protect purchasers. Persons who have paid for their lots and who have purchased from the owner of the equity subject to a mortgage or other claim, are entitled to have the property sold in the inverse order of alienation, that is, in the inverse order from that in which the common owner of the property has parted with it.
At the conclusion of the sale, the referee gets the purchaser to sign the terms of sale, and after the period fixed for examination and closing of title, he receives the price bid for the property. Out of that price he is directed to pay first all taxes and assessments which there may be against the property; second, to pay the costs and expenses of the foreclosure suit, his fees and the expenses of advertising the sale ; and third, to pay the plaintiff's debt. If there is not enough money on hand to pay the plaintiff's debt, he gives the plaintiff what he has and reports the amount of the deficiency.
As soon as the report of sale is filed with the county clerk, the deficiency may be docketed as a money judgment; and the plaintiff is then entitled to the same remedies as he would be on any other money judgment. If, however, the referee finds more than enough money to pay the plaintiff's debt, the extra amount is called the surplus. In that case he pays the plaintiff's debt and pays the surplus into court; and then all persons who have claims against the property which would be valid if not cut off by the foreclosure suit, give notice of their claim against the surplus, which stands as a substitute for the land. It is then ascertained in what order those claims should be paid, and the amount of the surplus which remains in the court is equitably divided and paid over to the persons claiming it, according to legal priority, just as if they were making their claim against the land. If there is enough to discharge all liens, the owner of the property gets what is left. All persons who have claims against the property are interested to see to it that at the sale it brings all that it is worth. The purchaser, having paid his money to the referee, is entitled to two things: first, to a deed, which becomes a record evidence of his ownership ; and, second, to possession. If he does not peaceably obtain possession upon presentation of the referee's deed, he is entitled to the aid of a court in a process under which the sheriff is entitled to go to the property and assist the purchaser to get possession ; and under a writ of assistance the sheriff is authorized to put out of possession every person bound by the judgment or named as a defendant in the action. That is the utility of making tenants parties. If a person is willing to take a property subject to a tenancy, it is not wise to disturb the tenants, because just as soon as they are served with a summons, they may stop paying rent. If they are made parties, they are bound by the effect of the judgment and can be put out of possession if they will not pay their rent to the new owner.