Mortgages/security devices - Mortgage theories: title, lien,...

Learning Outcomes

This article explains how different mortgage theories shape the nature and consequences of a mortgage interest, including:

• The core features of title, lien, and intermediate theories and how each characterizes the mortgagee's interest in land.
• The timing and scope of the mortgagee's right to possession before default, after default, and after foreclosure under each theory.
• How possession rules determine who may occupy the property, collect rents, manage the premises, and bear ongoing expenses such as taxes and maintenance.
• The interaction between mortgage theory and the equity of redemption, foreclosure procedure, and attempts to clog redemption rights.
• How waste, protective advances, and the duties of a mortgagee in possession protect the lender's security interest.
• The impact of mortgage theory on co-ownership, especially whether a mortgage granted by one joint tenant severs the joint tenancy or is extinguished by survivorship.
• Common MBE fact patterns that silently assume lien theory and those that expressly invoke title or intermediate theories to change the result.
• Analytical steps and issue-spotting techniques for quickly identifying the governing theory in exam questions and predicting its effect on possession, rents, and ultimate ownership.

MBE Syllabus

For the MBE, you are required to understand mortgage theories, with a focus on the following syllabus points:

• 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 and after default under each theory.
• Understand the implications of each theory for the mortgagor's rights before foreclosure.
• Recognize how the applicable theory can affect issues like entitlement to rents and responsibility for waste.
• Relate mortgage theory to the equity of redemption and pre-foreclosure rights.
• Apply mortgage theory to co-ownership situations, especially joint tenancies and possible severance.

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.

1. In a jurisdiction following the "title theory" of mortgages, who holds legal title to the mortgaged property during the term of the mortgage?
   1. The mortgagor exclusively.
   2. The mortgagee exclusively.
   3. Both mortgagor and mortgagee as tenants in common.
   4. Title is held in trust by a third party.
2. Under the "lien theory" of mortgages, what is the consequence of a mortgagor's default on the loan regarding possession of the property?
   1. The mortgagee automatically gains the right to possession.
   2. The mortgagee must obtain a foreclosure judgment before taking possession.
   3. The mortgagor retains the right to possession until foreclosure is complete.
   4. The property immediately escheats to the state.
3. The "intermediate theory" of mortgages grants the right to possession:
   1. To the mortgagor until default, then to the mortgagee upon default.
   2. To the mortgagee for the entire duration of the mortgage.
   3. Exclusively to the mortgagor throughout the entire process, including post-foreclosure.
   4. To a court-appointed receiver immediately upon mortgage execution.
4. In a lien theory jurisdiction, one of three joint tenants mortgages her interest. What is the usual effect of that mortgage on the co-tenancy?
   1. It severs the joint tenancy as to all three tenants.
   2. It severs the joint tenancy only as to the mortgaging tenant and the lender.
   3. It does not sever the joint tenancy.
   4. It converts all interests into a tenancy by the entirety.
5. A borrower is in default, and the lender begins foreclosure. Before the foreclosure sale, the borrower tenders the full amount due on the loan. Which of the following statements is most accurate?
   1. The borrower’s right to redeem depends on whether the jurisdiction follows lien or title theory.
   2. The borrower may redeem and stop the foreclosure sale under the equity of redemption.
   3. The borrower has no right to redeem once foreclosure has been filed.
   4. The lender may refuse redemption if the jurisdiction follows the intermediate theory.

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.

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.

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. Each theory answers two core questions differently:

• What interest does the mortgagee receive (legal title vs lien)?
• When, if ever, can the mortgagee take possession prior to foreclosure?

These distinctions drive many downstream consequences: who can occupy the property, who collects rents, who bears certain risks, and whether a mortgage by one co-owner severs a joint tenancy. Knowing the majority and minority rules—and spotting them quickly in a fact pattern—is critical for MBE performance.

Mortgage Theories

At the most basic level, all three theories recognize that a mortgage creates security for a loan. They differ in how they characterize the mortgagee’s interest in the land and in the timing of the mortgagee’s rights to possess and manage the property.

Title Theory

Under the traditional title theory, the execution of a mortgage is treated as a conveyance of legal title to the mortgagee, with the mortgagor retaining equitable title.

Key Term: Title Theory
A mortgage theory viewing the mortgage as a transfer of legal title from the mortgagor to the mortgagee. The mortgagee holds legal title until the debt is fully paid.

• Nature of title

  • Legal title passes to the mortgagee at the moment the mortgage is given.
  • The mortgagor retains equitable title (often called the equity of redemption) and the right to recover full title upon repayment.

• Right to possession before default

  • In pure theory, because the mortgagee holds legal title, the mortgagee could take possession immediately after the mortgage is executed.
  • In practice, mortgage instruments almost always allow the mortgagor to remain in possession so long as there is no default. Courts will enforce that agreement.

• Right to possession after default

  • Upon default, the mortgagee’s right to possession becomes fully effective.
  • In many title theory jurisdictions, the mortgagee may take possession before completion of foreclosure (for example, through an ejectment action), because it already holds legal title.

• Rents and profits

  • Once a title theory mortgagee rightfully takes possession (typically after default), it may collect rents and profits from tenants.
  • Those rents must be applied to interest, principal, taxes, and necessary expenses tied to the property.

• Effect on joint tenancy and severance

  • In a title theory jurisdiction, when one joint tenant mortgages her interest, the conveyance of legal title to the lender is treated as a transfer of title.
  • This transfer severs the joint tenancy as to that joint tenant, converting the co-ownership between that joint tenant (and the lender’s interest) and the remaining joint tenant(s) into a tenancy in common.

This severance effect is a classic MBE trap: if a joint tenant mortgages in a title theory state and then dies before the mortgage is paid, the right of survivorship is already destroyed for that share.

Lien Theory

The lien theory is followed by the majority of states and is the default assumption on the MBE unless a question specifies otherwise.

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 legal and equitable title unless and until foreclosure occurs.

• Nature of title

  • The mortgage is treated as creating only a lien—a non-possessory security interest.
  • Legal and equitable title remain with the mortgagor.

• Right to possession before default and foreclosure

  • Because the mortgagee has only a lien, it has no right to possession prior to foreclosure.
  • The mortgagor remains the owner and possessor unless and until a foreclosure sale transfers title to a purchaser.

• Right to possession after default but before foreclosure

  • Default alone does not give the mortgagee any possessory rights in a lien theory state.
  • The lender must pursue and complete foreclosure (usually judicial) before it can obtain possession, either as purchaser at the sale or through the purchaser’s rights.

• Rents and profits

  • The mortgagor, as owner in possession, is generally entitled to rents and profits from the property.
  • A mortgagee who wants to reach the rents typically must:
    • Foreclose and buy the property, or
    • Obtain a court-appointed receiver to collect rents during foreclosure proceedings, based on showing that the security is inadequate and default has occurred.

• Effect on joint tenancy and severance

  • In a lien theory jurisdiction, a mortgage given by one joint tenant is treated as granting a lien on that tenant’s interest only.
  • Because title is not transferred, the joint tenancy is not severed merely by the mortgage.
  • If the mortgaging joint tenant dies before the mortgage is foreclosed, the right of survivorship in the other joint tenant(s) extinguishes the mortgaging tenant’s interest, and the lender’s lien simply disappears.

This majority rule is a frequent MBE point: same facts, different result depending on whether the state is lien or title theory.

Intermediate Theory

A few jurisdictions adopt an intermediate theory, which blends elements of the other two.

Key Term: Intermediate Theory
A hybrid mortgage theory in which the mortgagor retains legal title until default, at which point legal title and the right to possession shift to the mortgagee.

• Title and possession pre-default

  • Before default, the mortgage is treated like a lien theory mortgage: the mortgagor holds both legal and equitable title and has the right to possession.

• Title and possession upon default

  • Upon default, title and the right to possession automatically shift to the mortgagee.
  • After default (but before foreclosure), the lender is in a position similar to a title theory mortgagee and may seek possession even before completing foreclosure.

• Rents and profits

  • Once default occurs and the mortgagee properly takes possession, it may collect rents and profits, subject to duties discussed below for a mortgagee in possession.

Intermediate theory protects the mortgagor’s possessory rights before default but favors the mortgagee after default more than lien theory does.

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 seek possession immediately upon default without awaiting completion of foreclosure.

Equity of Redemption and “Clogging”

Regardless of mortgage theory, modern law recognizes a powerful equitable protection for mortgagors: the equity of redemption.

Key Term: Equity of Redemption
A common law right allowing the mortgagor to reclaim the property and prevent foreclosure by paying the full amount of the secured debt (plus costs) at any time before the foreclosure sale.

• Scope of the right

  • Applies in all jurisdictions, regardless of whether they follow title, lien, or intermediate theory.
  • Allows the mortgagor to “redeem” the property and stop foreclosure by tendering the full amount due before the foreclosure sale takes place.

• Timing

  • The right exists up until the foreclosure sale is completed.
  • Once a valid foreclosure sale occurs, the equity of redemption is cut off.

• Deed in lieu of foreclosure

  • Instead of going through foreclosure, the mortgagor may voluntarily convey the property to the lender (a “deed in lieu”) in exchange for release from the debt.
  • This is voluntary and does not violate the equity of redemption so long as it is not the product of coercion in the original mortgage transaction.

• “Clogging” the equity of redemption

  • Parties sometimes try to insert terms in the original mortgage that make redemption impossible or extremely difficult (for example, a term that says “mortgagor waives all rights to redeem”).
  • Courts generally invalidate such clauses as impermissible “clogs” on the equity of redemption.

Exam angle: If you see an original mortgage document in which the borrower appears to waive the right to redeem, assume that waiver is not enforceable.

Waste and Duties of the Mortgagor

Even before default, the mortgagor’s rights to possess and use the property are limited by the lender’s security interest. The mortgagor must avoid conduct that materially impairs the lender’s collateral.

Key Term: Waste
Conduct by a person in possession that substantially impairs the value of another’s interest in the property (such as a mortgagee’s security), including affirmative, permissive, or, less commonly, ameliorative acts.

• Types of waste relevant to mortgages

  • Affirmative (voluntary) waste: Deliberate destructive acts, such as removing fixtures or timber for sale.
  • Permissive waste: Failure to make ordinary repairs or to pay property taxes, leading to deterioration or tax sale.
  • Ameliorative waste: Improvements that change, but may not diminish, value; less likely to concern lenders.

• Mortgagee’s remedies

  • A mortgagee can sue for damages or seek an injunction to stop waste that threatens its security.
  • The specifics are largely independent of the jurisdiction’s mortgage theory; they flow from the existence of the security interest itself.

On the MBE, if a borrower commits or allows waste that causes the property value to fall below the mortgage balance, assume the lender can seek protection even before default.

Mortgagee in Possession

When the mortgagee properly takes possession—most commonly in title or intermediate theory states after default—the lender becomes a mortgagee in possession.

Key Term: Mortgagee in Possession
A mortgagee who has lawfully taken physical possession of the mortgaged property (typically after default), thereby assuming duties to manage the property prudently and account for income.

A mortgagee in possession:

• Must manage the property reasonably, using ordinary care.
• Must collect rents and profits and apply them to:
  • Interest and principal on the debt,
  • Taxes and insurance, and
  • Necessary maintenance expenses.
• May be liable for loss caused by negligence in management.

Lien theory states rarely see mortgagees in possession prior to foreclosure, but a mortgagee might enter with the mortgagor’s consent or by agreement. Once in possession, the same duties apply.

Joint Tenancy and Mortgages

Mortgage theory has a direct impact on co-owners, especially joint tenants.

Key Term: Joint Tenancy
A co-ownership form in which co-tenants hold equal undivided interests with a right of survivorship, meaning each surviving joint tenant automatically takes the decedent’s share when a joint tenant dies.

• Lien theory (majority)

  • Mortgage by one joint tenant creates only a lien on that tenant’s share.
  • No severance of joint tenancy at the time of the mortgage.
  • If the mortgaging joint tenant dies first, the remaining joint tenant(s) take full title by survivorship, and the mortgage is extinguished.

• Title theory (minority)

  • Mortgage by one joint tenant is treated as conveying legal title to the mortgagee.
  • This transfer is incompatible with the single-title requirement and severs the joint tenancy as to the mortgaging tenant.
  • That tenant (and the lender’s interest) now holds as a tenant in common with the remaining joint tenant(s).

Intermediate theory jurisdictions vary, but many treat mortgages like title theory after default for possession purposes while following lien theory on severance. Unless the question says otherwise, treat severance questions under the majority (lien theory) rule.

Worked Example 1.3

A and B own Blackacre as joint tenants with right of survivorship. In a lien theory state, A mortgages her interest to Bank. A dies before the loan is repaid. Bank has not foreclosed. Who owns Blackacre?

Answer:
Because this is a lien theory jurisdiction, A’s mortgage to Bank did not sever the joint tenancy. When A died, B took A’s interest by right of survivorship and now owns Blackacre in fee simple. Bank’s lien is extinguished, because the lien attached only to A’s now-extinguished interest.

Worked Example 1.4

Same facts as Example 1.3, but the jurisdiction follows title theory. A mortgages her interest to Bank and then dies. Bank has not foreclosed. Who owns what?

Answer:
Under title theory, A’s mortgage to Bank transferred legal title in A’s share to Bank and severed the joint tenancy as to A. A and B became tenants in common immediately upon the mortgage, with Bank holding A’s legal title as security. When A died, B’s right of survivorship no longer applied to A’s share, because the joint tenancy had been severed. Bank’s mortgage interest in A’s tenancy in common share survives A’s death.

Significance of Theories

The primary significance of these theories today lies in determining the right to possession upon default, but several other consequences flow from them.

• Right to possession upon default

  • Lien Theory (Majority): Mortgagee must foreclose to obtain possession. Mortgagor has possessory rights until foreclosure sale and transfer of title.
  • Title Theory (Minority): Mortgagee has the right to possession, at least after default, and may seek possession before foreclosure is complete.
  • Intermediate Theory (Minority): Mortgagor keeps possession until default; after default, mortgagee may seek possession even before foreclosure is completed.

• Rents and income

  • In title and intermediate theory states, once the mortgagee lawfully takes possession, it can collect rents and profits as a mortgagee in possession.
  • In lien theory states, the mortgagor generally keeps rents unless:
    • The mortgage document assigns rents to the lender, and
    • The lender enforces that assignment (often via receiver) after default.

• Joint tenancy and severance

  • In the majority lien theory jurisdictions, a mortgage by one joint tenant:
  • Does not sever the joint tenancy, and
  • May be wiped out by that joint tenant’s death before foreclosure.
  • In title theory jurisdictions, the mortgage severes the joint tenancy as to the mortgaging tenant.

• Equity of redemption

  • Operates uniformly across all theories: mortgagors can redeem by paying the full debt any time before foreclosure sale.
  • Clauses in the original mortgage that attempt to waive or restrict this right are generally invalid.

• Waste and security

  • Regardless of theory, the mortgagor must not commit waste that significantly impairs the lender’s security.
  • Mortgagees may obtain injunctions or damages to protect the value of the collateral.

• Foreclosure method

  • Mortgage theory does not dictate whether foreclosure is judicial or via power of sale (nonjudicial). That depends on state foreclosure law and the mortgage instrument.
  • However, mortgage theory will influence who may possess the property during the foreclosure process and who collects income while foreclosure is pending.

Exam Warning

MBE questions often test the differences in possession rights and joint tenancy effects based on the governing mortgage theory. Carefully note whether the jurisdiction is identified as title, lien, or intermediate theory, as this dictates:

• Whether the mortgagee can take possession upon default;
• Whether a mortgage by one joint tenant severs a joint tenancy; and
• Who gets rents and profits before and after default.
  If the theory is not stated, assume the majority lien theory applies.

Worked Example 1.5

Borrower owns a small apartment building and mortgages it to Lender in a lien theory state. Borrower defaults but remains in possession and continues collecting rents. Lender files a foreclosure action and also seeks appointment of a receiver to collect rents pending foreclosure. Is Lender entitled to the rents immediately?

Answer:
Not automatically. In a lien theory jurisdiction, the mortgagee has no possessory rights before foreclosure and does not automatically get rents upon default. Lender may obtain a receiver if it shows that the security is inadequate and that the property (or rents) needs to be preserved. If a receiver is appointed, the receiver, not Lender directly, will collect rents and apply them according to court order.

Summary

Jurisdictions view mortgages through three main theoretical lenses: title, lien, and intermediate theories.

• Title theory treats the mortgage as a conveyance of legal title to the lender, leaving the borrower with equitable title and a right to regain full title upon payment. After default, the lender may take possession even before foreclosure is complete, and a mortgage by a joint tenant typically severs the joint tenancy.

• Lien theory (the majority view and the assumed rule on the MBE if not specified) treats the mortgage as creating only a lien, not a transfer of title. The borrower keeps legal and equitable title and the right to possession until foreclosure. Mortgages generally do not sever a joint tenancy, and the mortgagor keeps rents until foreclosure or receivership.

• Intermediate theory is a hybrid: the borrower retains title and possession before default, but upon default, title and the right to possession pass to the lender even before foreclosure.

Across all theories, mortgagors retain an equity of redemption, cannot clog that right via waivers in the original mortgage, and must avoid waste that impairs the lender’s security. Understanding which theory applies and how it affects possession, rents, and co-ownership structures is key to analyzing mortgage questions on the MBE.

Key Point Checklist

This article has covered the following key knowledge points:

• A mortgage secures a debt with an interest in real property, typically evidenced by a promissory note and a mortgage instrument.
• Three main theories govern mortgages: title, lien, and intermediate.
• Under title theory, legal title is in the mortgagee; the mortgagee typically gains possession upon default and may be able to possess before foreclosure.
• Under lien theory (majority), the mortgagee receives only a lien; the mortgagor retains legal title and possession until foreclosure is complete.
• Under intermediate theory, the mortgagor keeps title and possession until default; upon default, title and possession shift to the mortgagee.
• The equity of redemption allows a mortgagor to redeem the property by paying the full amount due before the foreclosure sale; attempts to “clog” this right in the original mortgage are generally invalid.
• The mortgagor must not commit waste that impairs the mortgagee’s security; the mortgagee can seek injunctive or monetary relief.
• A mortgagee in possession must manage the property prudently and account for rents and profits applied to the debt and expenses.
• In lien theory jurisdictions, a mortgage by one joint tenant does not sever the joint tenancy and may be extinguished by that tenant’s death before foreclosure.
• In title theory jurisdictions, a mortgage by one joint tenant usually severs the joint tenancy as to that tenant’s share.
• Mortgage theory affects who has the right to possession and rents upon default and during foreclosure, and these issues are common targets in MBE questions.

Key Terms and Concepts

• Mortgage
• Title Theory
• Lien Theory
• Intermediate Theory
• Equity of Redemption
• Waste
• Mortgagee in Possession
• Joint Tenancy