Learning Outcomes
This article explores the principal theories governing the nature of a mortgage interest: title theory, lien theory, and intermediate theory. It clarifies how each theory affects the rights of the mortgagor (borrower) and mortgagee (lender), particularly regarding possession before and after default. After reading this article, you will be able to distinguish between these theories and analyze their consequences in relation to possession, rents, and foreclosure, preparing you to address these concepts in MBE questions.
MBE Syllabus
For the MBE, understanding the different legal frameworks for mortgages is essential. These theories impact fundamental rights like possession upon default. You should be prepared to:
- Define the basic function of a mortgage as a security interest in real property.
- Distinguish between title theory, lien theory, and intermediate theory states.
- Analyze the mortgagee's right to possession before foreclosure under each theory.
- Understand the implications of each theory on the mortgagor's rights before foreclosure.
- Recognize how the applicable theory can affect issues like entitlement to rents.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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In a jurisdiction following the "title theory" of mortgages, who holds legal title to the mortgaged property during the term of the mortgage?
- The mortgagor exclusively.
- The mortgagee exclusively.
- Both mortgagor and mortgagee as tenants in common.
- Title is held in trust by a third party.
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Under the "lien theory" of mortgages, what is the consequence of a mortgagor's default on the loan regarding possession of the property?
- The mortgagee automatically gains the right to possession.
- The mortgagee must obtain a foreclosure judgment before taking possession.
- The mortgagor retains the right to possession until foreclosure is complete.
- The property immediately escheats to the state.
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The "intermediate theory" of mortgages grants the right to possession:
- To the mortgagor until default, then to the mortgagee upon default.
- To the mortgagee for the entire duration of the mortgage.
- Exclusively to the mortgagor throughout the entire process, including post-foreclosure.
- To a court-appointed receiver immediately upon mortgage execution.
Introduction
A mortgage is a security interest in real property, typically used to secure repayment of a debt, usually evidenced by a promissory note. The property owner (mortgagor) borrows money from a lender (mortgagee) and pledges the property as collateral. If the mortgagor defaults on the debt, the mortgagee can initiate foreclosure proceedings to sell the property and satisfy the debt.
The legal rights and relationship between the mortgagor and mortgagee, particularly concerning possession of the property before and upon default, are governed by the mortgage theory adopted by the jurisdiction. There are three main theories: title theory, lien theory, and intermediate theory. Understanding the distinctions is key for analyzing mortgage-related MBE questions.
Key Term: Mortgage A security interest in land, typically evidenced by a written instrument, that secures the payment of a debt or performance of an obligation.
Mortgage Theories
The characterization of the interest held by the mortgagee significantly impacts the parties' rights, especially the right to possess the property upon the mortgagor's default.
Title Theory
Under the traditional title theory, the execution of a mortgage conveyed legal title to the property to the mortgagee (lender). The mortgagor (borrower) retained only equitable title and the right to possession, akin to a tenant.
- Right to Possession: Technically, under pure title theory, the mortgagee had the right to take possession of the property at any time upon execution of the mortgage, even before default, because the mortgagee held legal title. In practice, mortgage agreements often allowed the mortgagor to retain possession until default.
- Modern Relevance: While historically significant, the pure title theory is followed by only a minority of states today. Its primary modern consequence relates to the right to possession upon default, where these states allow the mortgagee to take possession immediately upon default without a foreclosure proceeding.
Key Term: Title Theory A mortgage theory viewing the mortgage as a transfer of title from the mortgagor to the mortgagee. The mortgagee holds legal title until the debt is fully paid.
Lien Theory
The majority of states follow the lien theory. Under this view, a mortgage does not transfer title but merely creates a lien or security interest in the property in favor of the mortgagee. The mortgagor retains both legal and equitable title, as well as the right to possession, unless and until a valid foreclosure occurs.
- Right to Possession: The mortgagee has no right to possession before foreclosure is complete. Foreclosure typically requires a judicial proceeding culminating in a foreclosure sale.
- Rationale: This theory emphasizes the mortgage's function as security for a debt, rather than as a conveyance of ownership.
Key Term: Lien Theory The prevailing mortgage theory viewing the mortgage solely as a lien on the property, securing the debt. The mortgagor retains both title and the right to possession unless foreclosure occurs.
Intermediate Theory
A few states adopt an intermediate theory, which attempts to integrate aspects of the title and lien theories.
- Title & Possession: Under this theory, the mortgagor retains legal title until default occurs. Upon default, legal title and the right to possession pass to the mortgagee.
- Practical Effect: This theory gives the mortgagee the right to take possession upon default, similar to the title theory, but only after default has occurred, aligning somewhat with the lien theory's protection of the mortgagor's pre-default possessory rights.
Key Term: Intermediate Theory A hybrid mortgage theory where the mortgagor retains title until default, at which point title and the right to possession pass to the mortgagee.
Worked Example 1.1
Borrower obtains a loan from Lender, secured by a mortgage on Borrower's home. The jurisdiction follows the lien theory of mortgages. Borrower defaults on the loan payments. Lender demands immediate possession of the property based on the default. Is Lender entitled to possession?
Answer: No. Under the lien theory, the mortgage only creates a lien on the property. The Borrower (mortgagor) retains both legal title and the right to possession until a valid foreclosure process is completed. Lender cannot take possession merely upon default; Lender must initiate and complete foreclosure proceedings.
Worked Example 1.2
Same facts as Example 1.1, but the jurisdiction follows the title theory. Is Lender entitled to possession upon default?
Answer: Yes. Under the title theory, the mortgage conveys legal title to the Lender (mortgagee). While mortgage agreements often allow the Borrower to remain in possession pre-default, upon default, the Lender's right to possession, derived from holding legal title, becomes exercisable. Lender can typically take possession immediately upon default without awaiting foreclosure.
Significance of Theories
The primary significance of these theories today lies in determining the right to possession upon default.
- Lien Theory (Majority): Mortgagee must foreclose to obtain possession. Mortgagor has possessory rights until foreclosure sale.
- Title Theory (Minority): Mortgagee has the right to possession immediately upon default (or theoretically, even before default, though usually modified by agreement).
- Intermediate Theory (Minority): Mortgagee's right to possession arises upon default.
These theories also impact the mortgagee's right to collect rents from the property upon default. In title and intermediate theory states, the mortgagee's right to possession upon default typically includes the right to collect rents. In lien theory states, the mortgagee generally needs further steps, like obtaining a court-appointed receiver or beginning foreclosure, to claim rents.
Exam Warning
MBE questions often test the differences in possession rights based on the governing mortgage theory. Carefully note whether the jurisdiction is identified as title, lien, or intermediate theory, as this dictates the mortgagee's right to possession upon the mortgagor's default. If the theory isn't stated, assume the majority (lien) theory applies.
Summary
Jurisdictions view mortgages differently, primarily through title, lien, or intermediate theories. Title theory treats the mortgage as a conveyance of title to the lender, granting the lender possessory rights upon default (or earlier). Lien theory (the majority view) treats the mortgage as merely a lien, leaving title and possession with the borrower until foreclosure. Intermediate theory is a hybrid, granting possession rights to the lender only upon the borrower's default. These theories principally affect the timing and method by which a lender can take possession of the mortgaged property following a default.
Key Point Checklist
This article has covered the following key knowledge points:
- A mortgage secures a debt with an interest in real property.
- Three main theories govern mortgages: title, lien, and intermediate.
- Title theory grants legal title to the mortgagee, who typically gains possession upon default.
- Lien theory (majority) grants only a lien to the mortgagee; the mortgagor retains title and possession until foreclosure.
- Intermediate theory grants title and possession to the mortgagee only upon default.
- The applicable theory dictates the mortgagee's right to possession and rents upon default.
Key Terms and Concepts
- Mortgage
- Title Theory
- Lien Theory
- Intermediate Theory
