Mortgage types and their legal requirements

By Harold Ayodo

Mortgages are loans advanced to prospective owners of property, which are security to the credit. Some prospective homeowners live with the nightmare of failing to make their repayments and getting their property auctioned.

There are four legal mortgages entailed in the Indian Transfer of Property Act (ITPA) 1882, which is applied countrywide. These are: simple mortgages, usufructuary mortgage, mortgage by condition of sale and the English mortgage.

In simple mortgages, the prospective property owner is the mortgagor. He or she binds him/herself to make mortgage repayments and when he fails, that the property be sold upon default. The proceeds of the resold property are legally channelled towards discharging the mortgage debt.

In usufructuary mortgage, investors are often given possession and authority to retain the property until they fully pay the debt. Mortgagors sell the property to the mortgagee on condition that the sale will become irrelevant if the person who applied for the loan defaults.

Judicial sale

With the English mortgage, a mortgagor is required to bind her/himself to repay the debt on a specific date and transfer the mortgaged property absolutely to the mortgagee. This mortgage, however, has a rider that the mortgagee will re-transfer the property to the mortgagor upon repayment of the debt.

Section 100 (2) of the Lands Act provides for equitable mortgages by deposit of title deeds and registration of the same at the land’s office. There are also anomalous mortgages where the rights and obligations of both parties are determined by their written contract.

Simple, usufructuary mortgages and mortgages by conditional sale are generally defective as security. Legal experts believe the English mortgage is the best for prospective investors following remedies provided under Sections 67 to 69 of the ITPA 1882. The ITPA provides that mortgages that secure property in excess of Sh200 must be registered, signed by the mortgagor and attested by two witnesses.

The law provides remedies to mortgage companies in cases where the borrowers fail to service their loans as agreed in writing. The remedies include foreclosure, judicial sale, statutory powers of sale, appointment of a receiver and right to consolidate.

A foreclosure is a court order that prohibits the defaulting investor of property from his right to redeem his property. The judicial power of sale is preferable to foreclosure especially when the property is worth more than the loan advanced.

The statutory power of sale is a legal remedy prescribed after the contractual date of repaying the loan has elapsed. It is here that property is sold in public auction. Lenders exercising their statutory power of sale that also includes sale by private contract must exercise reasonable care and act in good faith.

Consolidation of property

The law requires that the borrower is given the surplus money that has been obtained from the auction and her/his interests given due regard. The court may appoint a receiver to the suit property in a bid to enable the mortgage company get its money back.

There is also a legal right to consolidation where the lender has vested in two or more mortgages. Consolidation allows the lender to refuse to accept payment of one mortgage unless the other existing mortgages are repaid also.