Mortgage Origins and Evolution: Incorporation of Equity Principles

To what extent do the rights of a mortgagor under a legal mortgage provide sufficient protection for the borrower?

The concept of mortgage has been in use for more than centuries but it was highly indebted to the principles of equity widely practiced by the common law court. The idea emerged at the moment of the creation of a collateral acting as a security against a transaction only to be forfeited on fulfilling the debt, until then the collateral functions as a debt instrument. Once the debt was to be paid by the borrower on the date as decided and agreed on terms by the parties, the borrower had no obligations. Th common courts were rather apparent in following the law with strict literal interpretation of the same. Therefore, the interest that arose in the property was a security received by the lender and given by the borrower. The instrument that held the terms and conditions of both parties is known as the mortgage, the borrower being the mortgagor and the lender is the mortgagee. The law that was previously followed kept the lenders at an elevated position since the possibilities of failure of payment by the borrower as against the property was extremely high. In case such a default occurred, the property was at the mercy of the lender which were necessarily sold. The equitable principles were incorporated in the 17th century, especially when the common laws started being unfavourable to the Chancellors making them initiate the distinct legislative measures. The lenders were comparatively at a more superior position than the borrowers as there was sufficient means to execute the contract with freedom, dictate the terms and conditions in a manner that would predominantly satisfy their needs and conditions other than the borrower. This set up in between the borrower and lender was not desirable making way for the equitable interpretation of the mortgage laws. A deed is prepared between the two parties as per section 87 of the Land Registration Act, 1925 which specifies the details of the terms contracted between the mortgagee and the mortgagor reflecting a certain charge on the real estate property which is to be repaid by the borrower with some amount of interest.

Position of Mortgagors and Mortgagees

In cases of the mortgage of any residential property, instances arise where the lender attempts to keep the property of the borrower and repossess it, the borrower is given certain protection against the same. Section 36 of the Administration of Justice Act, 1970 gives the borrower the power to claim for deferring such possession wherein there is “any sums due” and provide leeway for borrowers to pay the debt within the extended period of time but it was interpreted in the case of Halifax Building Society v Clark that to claim Section 36 of the Administration of Justice Act, 1970, it was mandatory for the borrower to show sufficient means to repay the debt. This position was considered and changed through an amendment after much debate wherein the courts further interpretated the amount of money due as the only amount that the borrower was expected to pay otherwise. Another much discussed area was with respect to the time period given to the borrowers to pay the sum of money due which was termed as a” reasonable” amount of time as per Section 36 of the Administration of Justice Act, 1970. In Cheltenham & Gloucester BS v Norgan, this was interpreted as the entire time period that was agreed on by the parties must be taken into account. The term period of 2 years or more was not encouraged for the payment to be made, therefore, this was interpreted and practiced in favour of the borrowers since the courts started adjudicating this clause more liberally and the original term is only considered. It must be accompanied by the detailed evidences of the ability of the borrower to pay the money in arrears over the due period of time.

In the case of Ropaigealach v Barclays Bank Plc, the mortgagor was not even informed about the initiation of the sale proceedings of the house by the lender. The lender was not obligated to obtain any court order and thus this has been understood as strictly disadvantaging the mortgagor along with a gross human rights violation as well. The mortgagees have been given a latent power to sale the property of the mortgagor in case of default which was widely discussed in the case of Horsham Properties Group Ltd v. Clark wherein the question of sale of such property and the implication sale such property was in question thus, it was considered a heavy infringement of the Human Rights Act, 1998. The court had issued a strict judgment where it was held that the borrowers had lost the right to equity in redemption and this leeway would advantage the borrowers than the lenders and it was not on the Human Rights Act, 1998 to provide more protection to mortgagors keeping the lenders at a disadvantaged position. This judgment had been provided enough room for discussion and acknowledgement of the position of the borrowers and have raised many questions regarding the blatant simplification of the position of the parties, allowing to incorporate newer proposals and sufficient reformation of laws to alleviate the position of the borrowers.

Regulation

The concept of public law mortgage has not been in use for long but the system incorporating public law mortgages had been in existence. The Financial Services Authority and the Financial Services and Markets Act 2000 had been playing alongside in this field but the Office of Fair Trading has been institutionalised under the Consumer Credit Act, 1974 also functioned in governing the public law mortgages. Consumer credit agreements, primarily like the mortgage deed and many other services were outside the purview of Consumer Credit Agreements. There could be overlapping regulation over a particular jurisdiction and that concern was addressed and acknowledged by drawing up jurisdictions to oversee for each body especially the effect of an understanding highly reflected the action plan initiated by the FSA and OFT. This was merely to ensure that the borrowers are given fair protection and kept at an equal pedestal helping them to release the onerous dept repayment scheme.

Right of Mortgagors

The mortgagor is given sufficient number of rights to be exercised judiciously along with certain duties of the mortgagee, making it a safer net for the borrowers in debt. The borrower is liable to pay the mortgagee the decided amount of debt on the real estate property attached with an interest. Once the borrower has re paid the due sum within the specified time period, the borrower has the power to redeem the property relinquishing all rights of the lender on the property. However, this redemption can take in the form of law which is bound by a contractual spirit or equity, where the ideal interest of the mortgagor is reserved on the land. The equitable redemption makes it absolutely mandatory for the mortgagor to have the right to redeem the property as soon as the interest. If such a redemption is not exercised duly and stands delayed for some unforeseeable reason, such a redemption will stand void. In case any mortgage deed is oppressive in nature and benefits the mortgagee unduly and puts the borrower in a detrimental position, such an agreement shall stand invalid.

In case, the mortgagor is unable to pay the due sum amount left, the mortgagor is provided with the right to take loan from another party to pay off the debt to the original mortgagee by keeping the same property as a security. This can be completed by assigning and transferring the debt to any other party as the mortgagor deems fit.

In case of a lease, the mortgagor reserves the right to grant lease to the lender as provided under Section 85 and 86 of the Land Registration Act, 1925 along with the statutory power that is vested on the borrower to bind the mortgagee with the lease. Even though the rights of a mortgagor over their mortgaged property is governed by the rules of the mortgagee but if unforeseeable situation arises, the mortgagor reserves the right to sue as well or surrender lease in case of a potential replacement that may arise.

Protection Schemes

The Homeowners Mortgage Support Scheme was introduced to tackle the rising crisis of mortgage especially with arrears and repossession. This scheme will permit mortgagees to lessen a borrower's present month to month contract instalments, with the conceded instalments moved up, added to the head, and paid sometime in the future when the borrower's monetary conditions have improved. The Government will ensure the mortgagee against an extent of any misfortune brought about on the conceded revenue instalments in the event that the borrower defaults. The plan will be deliberate and dependent upon qualification measures to guarantee that there is appropriate danger dividing among Government, banks and borrowers and the plan is feasible for those that take an interest. There are certain requirements for the mortgagor to be able to avail to the scheme provided the mortgagors have a stringent financial situation, a lot of income or employment, exceeding mortgage loan amount etc. The Mortgage Rescue Scheme is also an initiative to release the mortgagors of the burden of homelessness and other factors that may cause the families to live in great financial dearth and unable to battle repossession. Additionally, the government has reserved funds for the assistance of the mortgagors with legal aid or counselling.

The mortgagee has the right lawfully to possess the property of the mortgagor in case of default but if the position of the borrowers can be strengthened by allowing both the parties to engage in an open discussion revealing the financial position of the borrower and the statutory power as well as the plan of the lender in initiating the deed, then such a situation may ensure some amount of protection to the borrower. The Pre-Action Mortgage Protocol was designed to acter to this need of the hour wherein the protocol ensured enough space for the borrower to develop and explore possibilities that may assist them in establishing means to pay the debt within a reasonable period of time. This protocol was not encouraged much at the beginning and discussed critically but on application, this seems to have impacted positively on all repossession The scheme to provide legal aid to the borrowers have also been a remarkable step in providing a safe base and protection for the mortgagors. The lenders have been given the power to initiate sale proceedings against the case of mortgages that have been charged for the first time but it has been debated and discouraged by the Citizen’s Advice Bureau. Even a change in the legislative structure is in discussion. However, such a significant change in the legislative framework may provide better protection for the mortgagors but it may fall hefty on the mortgagees and in turn the entire consumer market.

Other protection schemes for borrowers

There are a few other protection measures that provide a safety net or enough resource to protect the home owners in cases of emergency. The insurance schemes like the Critical Illness Insurance and Permanent Health Insurance helps in case of any emergent sickness that may arise rendering the policy holder incapable of working may rely on these schemes to assist in paying off the loan. The Mortgage Indemnity Guarantee Scheme is prepared to help the parties in case there is a shortage on the home loan. This assists with delivering borrowers who should sell up, from the obligation that may in any case exist after the property is sold despite the fact that the borrower stays subject for the extraordinary obligation. The Mortgage Protection Payment scheme is the most sought after as it covers the payment for 12-24 months in certain unfortunate cases. There are many other schemes available for the borrowers to take assistance of in case there is a financial crunch and they are faced with huge debt crisis, given that a newer approach and proper application of all the private as well as governmental schemes is the need of the hour.

Conclusion

The mortgagee has sufficient rights over the mortgagor in case of a mortgage loan and the borrowers are mostly left at a state to recoup the debt payment on their own which is often onerous and falls heavy on the borrowers from being absolutely homeless. The agreement entered into by both the parties often dictate the ways in which the lenders and borrowers may proceed in cases of default. The Horsham case and others has had sufficient impact on looking at mortgage laws and interpreting them in a better light to offer better protection and simplify the rigid laws in this regard. Even though, in raising the protective measures for borrowers could lead to an economic damage with the hefty reduction in costs entitled with borrowing but also affect ownership as well. However, as much as a structural change in legislation will be appreciated, it may also be ineffective in raising the economic position of the United Kingdom but may enable to swim through the crisis that UK is currently embedded in with respect to mortgage. The rights ensured with the mortgagors are also a viable tool to secure their position as against the lenders but the implied title and statutory rights has also seen to affect the borrowers to a great extent. There is no doubt that this the time to rethink mortgage laws and bring about a cohesive and comprehensive legislative measure that attempt to achieve a better balance between the two parties and not contravene any provision of the Human Rights Act, 1998 as well.

Dig deeper into Legal Issues in the Case of One Acre House with our selection of articles.

Articles/Journals

• Morris G. Shanker, Will Mortgage Law Survive ? A Commentary and Critique on Mortgage Law's Birth, Long Life, and Current Proposals for Its Demise, 54 Case W. Res. L. Rev. 69 (2003) Available at: https://scholarlycommons.law.case.edu/caselrev/vol54/iss1/4
• Private Law Tutor,“Does the law give protection to borrowers against repossession of their homes by the banks? < http://www.privatelawtutor.co.uk/does-the-law-give-protection-to-borrowers-against-repossession-of-their-homes-by-the-banks-dummy-text/ > accessed on 31st December, 2020
• Patrick McAuslan Professor of Law, Birkbeck College, W G HART WORKSHOP on Law Reform and Financial Markets 23 – 25 June “ Whose mortgage is it anyway? Producers, consumers and the law in the UK mortgage market “
• All Answers ltd, 'Creating a Mortgage Lecture' (Lawteacher.net, December 2020) accessed 31 December 2020
• ,McAuslan, P. (2009) Mortgage Arrears: the repossession crunch” Journal of International Banking and Financial Law, (2009) 3 JIBFL
• Wood, J. (2009) Horsham Properties Group Ltd v. Clark: A year on, Coventry Law Journal, Cov L.J.(2009) 14(2), 31-36.
• Greer, S. (2009) Horsham Properties Group Ltd v. Clark: Possession- Mortgagees’s right or discretionary remedy? Conveyancer and Property Lawyer, Conv. 2009.
• Howard, J. Building Societies Association“Long Term Safety Nets to Protect Mortgage Borrowers” < https://www.bsa.org.uk/BSA/files/08/0810f74b-2ae6-425a-9212-3e0102c5b346.pdf > accessed on 2nd January, 2021

Cases

• Pawlett v Attorney General(1667) Hardres 465
• Toomes v Conset(1745) 3 Atk 261.
• Cityland & Property (Holdings) Ltd v Dabrah [1968] Ch 166.
• Cheltenham & Gloucester BS v Norgan [1996] 1 WLR 343
• Horsham Properties Group Ltd v. Clark [2009] 1 WLR 1255
• Wood v UK (32540/96)(1997)24 EHRR CD69; Harrow LBC v Qazi [2004] 1 AC 983
• Halifax Building Society v Clark [1973] Ch 307

Statutes

• Land Registration Act, 1925
• Administration of Justice Act, 1970