Introduction to Mortgage Law

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INTRODUCTION TO MORTGAGE LAW
Chapter 13 Learning Objectives

  • Students should be able to:

    • Summarize the role of mortgages in financial markets.

    • Explain the concept of a "mortgage" and the differences between "mortgagee" and "mortgagor."

    • Describe implied vs. express terms in a mortgage.

    • Recognize and describe various types of mortgages and their applications.

    • Understand the federal Interest Act and Criminal Code's implications on mortgages.

    • Explain relevant provincial legislation on mortgages.

    • Describe assignments of mortgages and the involved parties' obligations.

    • Explain mortgage assumptions and associated risks.

    • Apply provincial and federal legislation to priority issues.

    • Discuss remedies for lenders in cases of mortgagor default.

Chapter 13 – Introduction to Mortgage Law
13.1 Introduction to Mortgages

  • Real Estate Transactions:

    • A large sum is paid for interest in land, but most purchasers rely on debt financing for property acquisition.

    • Mortgages facilitate real estate transactions by enabling purchase and financing.

    • The chapter outlines mortgages in legal terms and characteristics, setting the foundation for financial analysis and processes explored in subsequent chapters.

Overview of Mortgages

  • Definition: A mortgage is a legal instrument granting an estate in land to the lender (mortgagee) as security for a loan to the borrower (mortgagor).

    • Historical Context: Previously a land conveyance, but now primarily a security mechanism.

    • Contract Requirement: Mortgages are typically executed through a mortgage agreement.

    • Main Obligation: Borrower’s promise to repay ("personal covenant to repay").

  • Parties Involved:

    • Mortgagee (Lender): Provides loan and receives mortgage as security.

    • Mortgagor (Borrower): Receives loan and grants mortgage.

Why Is Debt Needed?

  • Importance of Credit: Enables buyers to leverage small down payments with significant borrowed funds, providing immediate purchasing power.

    • Borrowers repay borrowed amounts over time, with interest representing the cost of borrowing.

  • Investment Class Considerations: Nurturing Diversification:

    • Mitigation of risk by diversifying investment portfolios.

    • Investors can seek higher yields: borrow at 5% and invest in projects that return 8%.

    • Real estate acts as an inflation hedge.

13.2 Capital Market Basis of the Capital Market
Structure of Capital Market

  • Conceptual Framework:

    • The interaction between savers (who have excess income) and borrowers (who need capital).

  • Interest Rates:

    • Balance demand and supply, influencing cost and availability of mortgages.

  • Savers and Borrowers:

    • Savers invest their net income; borrowers consume more than what they earn.

    • Fluctuations in savings impact interest rates, affecting lending and housing markets.

13.3 Development of Contemporary Mortgages in Canada
Historical Evolution

  • Early 20th Century:

    • Long-term loans, interest only, minimal repayments.

  • Depression Era:

    • Shift to repayment plans with periodical payments of interest and principal.

  • Post-WWII:

    • Introduction of mortgage default insurance to boost housing market.

  • Late 1960s to 1970s:

    • Emergence of partially amortized mortgages to manage interest rate fluctuations.

  • 1980s:

    • Refinancing concerns arose due to high-interest rates leading to mortgage default.

  • 1990s to 2000s:

    • Increased competition in the mortgage market; introduction of innovative terms and options.

13.4 Mortgages and Legal Framework
Legal Aspects

  • Common Law vs. Equity:

    • Mortgage as a conveyance vs. security.

    • Equity of redemption developed to protect borrowers.

  • Registration and Priority:

    • Registration of mortgages secures legal rights; determines priority among creditors.

  • Mortgage Terms:

    • Express terms (stated explicitly) vs. implied terms (assumed by law).

13.5 Special Types of Mortgages
Common Mortgage Types

  • Interim Blanket Mortgage:

    • Covers multiple properties, often seen in developments; enables partial releases.

  • Seller Take-Back Mortgage:

    • Seller finances part of the purchase price; beneficial for buyers unable to secure conventional financing.

  • Reverse Annuity Mortgage:

    • Provides payments to the borrower until the loan balance is repaid at the end of the term; useful for retirees.

  • Bridge Financing:

    • Short-term financing secured until long-term solutions are found.

13.6 Alternative Financing Arrangements

  • Agreement for Sale:

    • Direct financing option; seller retains title until full payment is made.

  • Lease with Option to Purchase:

    • Tenant has the opportunity to buy; offers flexibility in transactions.

  • Rent to Own:

    • Allows tenants to gradually build equity towards owning a property.

13.7 Federal Legislation Over Mortgages
Interest Act

  • Legal Framework for Mortgages:

    • Establishes how interest is calculated and protects borrowers against excessive charges.

  • Criminal Code:

    • Define criminal rates of interest; federal law prevents interest greater than 60%.

13.8 Provincial Legislation Over Mortgages
Key Acts

  • The Homesteads Act, 1989:

    • Protects married spouses in real estate transactions.

  • The Builders’ Lien Act:

    • Ensures contractors are compensated; gives them priority in certain cases.

13.9 Assignment and Assumption of Mortgages

  • Mortgage Assignment:

    • A mortgage can be sold or assigned, with the mortgagor notified of changes.

  • Mortgage Assumption:

    • Future buyers may take over existing mortgages; attractive feature in real estate transactions.

13.10 Mortgage Remedies
Situations of Default

  • Foreclosure and Power of Sale:

    • Lender may foreclose to eliminate borrower's equity; procedures vary.

  • Quit Claim Deed:

    • Release of equity by a mortgagor when no practical way to maintain property exists.