Equity of Redemption and Law of Mortgages
June 4, 2017
Mortgages provide for the repayment of the loan on a specified date. The effect of failure to redeem on the due date meant that the legal right of the mortgagor to extinguish the mortgagee’s rights had gone forever, and in addition, the mortgagee could sue for repayment of the loan. This did not appeal to equity, therefore the courts evolved a rule that the mortgagor could redeem the mortgage by paying back the mortgage debt and all interest on it at any time before the mortgagee sold or foreclosed. This has had a major impact on new home owners versus the frequency of Jamaica home rentals.
This right of the mortgagor to redeem after the due date is his equitable right to redeem. But from the start of the mortgage, the mortgagor has been possessed of a species of equitable interest known as the equity of redemption.
This interest is a bundle of equitable rights, including the equitable right to redeem.
Law of mortgages
A mortgage is a form of security for the repayment of money lent. Mortgagor (Borrower) is the party who conveys the property by way of security. Mortgagee is the lender who obtains an interest in the property. The importance of the mortgage is that if the borrower fails to repay the mortgage debt, the lender has the powers under the mortgage, of realizing the value of the mortgaged property and repaying himself out of the proceeds.
Equity of Redemption – suppose a house worth $100,000 was mortgaged to secure a loan of 25,000. Obviously, the mortgagor still has asset worth $75,000. This is an equitable estate – the equity of redemption. Without paying off the mortgage, the borrower can sell, lease or devise his interest. This is in fact transferring the equity of redemption. He can also mortgage it, so that there may be a number of mortgages affecting the property.
The mortgagor has two rights to redeem his property:
1) The contractual right on the date specified in the deed, and,
2) The equitable right to redeem, on payment of principal of the loan, the accrued interest along with fees and loan costs, and establishing proper notice to the mortgagee. This does not take effect until and unless the contractual right (the mortgagors prerogative) to redeem, on the date fixed in the mortgage has passed. This process of curtailing the equitable right to redeem and so leaving the mortgagee with a fee simple is known as foreclosure.
A foreclosure puts an end to the equitable right to redeem and so destroys the equity of redemption. It therefore follows that the right to foreclosure cannot arise until the legal date for redemption has passed; for only then does the equitable right – which is the victim in a foreclosure action – arise. An action may apparently commence immediately the legal date has passed, but in practice however, an action for foreclosure is not usually begun except after such default as might justify a sale. While the matter of frequency is not a grave concern it does affect Jamaica home rentals positively, so rent income increases for some property investors.
The effect of a foreclosure is that it vests in the mortgagee the fee simple (or the whole of the mortgagor’s estate) and it also extinguishes the mortgagee’s mortgage term and other subsequent mortgages. But prior mortgages are not affected by the foreclosure: they still subsist and the result is that the foreclosing mortgagee will have to redeem these prior mortgages if he wishes to be absolute master of the property. For example, suppose there are four mortgages of the fee simple in the property which were made to A, B, C and D in that order.
If it forecloses, then the unencumbered fee simple vests in him because all the subsequent mortgagees, that is, those of B, C and D are extinguished. But if C forecloses, he only extinguishes D’s mortgage, those of A and B remain and he must redeem these mortgages by paying off A and B if he wishes to have the property unencumbered. Of course, in any foreclosure action by a mortgagee, subsequent mortgage must be made parties to the action and are also given the opportunity to redeem the mortgage of the foreclosing mortgagee. Thus, in our example, when A was foreclosing, B, C or D could pay off A and redeem A’s mortgage, thus preventing their own mortgage from becoming extinguished.
This principle has given rise to the saying, “redeem up, and foreclose down”. Therefore, any mortgagee can foreclose in an action to recover land and action must be brought within twelve years from the date upon which the right of recovery accrues.
Jamaica real estate agents with house rentals have identified that in recent times they have seen a growing number of listings coming from financial institutions as they are unable to divest foreclosed properties.