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MORTGAGE AND ITS TYPES

Mortgage

A mortgage is a debt instrument, secured by the collateral of specified real estate property,
that the borrower is obliged to pay back with a predetermined set of payments.

Who Uses a Mortgage?

Individuals and businesses use mortgages to make large real estate purchases without
paying the entire purchase price up front.

 If the borrower stops paying the mortgage, the lender can foreclose. They are a form
of incorporeal right.

 In a residential mortgage, a homebuyer pledges their house to the bank or other type
of lender, which has a claim on the house should the homebuyer default on paying the
mortgage.

 In the case of a foreclosure, the lender may evict the home's tenants and sell the
house, using the income from the sale to clear the mortgage debt.

Types of Mortgages

 The most popular mortgages are a 30-year fixed and a 15-year fixed.

 Some mortgages can be as short as five years; some can be 40 years or longer.

 Stretching payments over more years reduces the monthly payment but increases
the amount of interest to pay.

Characteristics of Mortgage

 A mortgage can be effective only on immovable property, the immovable property

includes land, benefits that arise out of things attached to the earth like trees,
buildings, and machinery. But a machine that is not permanently fixed to the earth
and is shiftable from one place to another is not considered to be immovable property.
 A mortgage is the transfer of an interest in the specific immovable property and
differs from sale wherein the ownership of the property is transferred. Transfer of an
interest in the property means that the owner transfers some of the rights of
ownership to the mortgagee and retains the remaining rights with himself. For
example, a mortgagor retains the right to redeem the property mortgaged.
 The object of transfer of an interest in the property must be to secure a loan or
performance of a contract which results in monetary obligation. Transfer of property
for purposes other than the above will not amount to the mortgage. For example, a
property transferred to liquidate prior debt will not constitute a mortgage.
 The property to be mortgaged must be a specific one, i.e., it can be identified by its
size, location, boundaries, etc.
 The actual possession of the mortgaged property need not always be transferred to
the mortgagee.

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 The interest in the mortgaged property is re-conveyed to the mortgage on repayment

of the loan with interest due on.
 In case the mortgager fails to repay the loan, the mortgagee gets the right to recover
the debt out of the sale proceeds of the mortgaged property.

Different Types of Mortgage

1. Simple mortgage: Without delivering possession of the mortgaged property, the

mortgagor binds himself personally to pay the mortgage money and agrees expressly
or impliedly that in the event of his failure to pay according to his contract, the
mortgagee shall have a right to cause the mortgaged property to be sold and the
proceeds of the sale to be applied so far may be necessary, m the payment of the
mortgage money.

2. Mortgage by conditional sale: Mortgage by conditional sale is one where the

mortgagor ostensibly sells the mortgaged property on the condition that.

 On default of payment of the mortgage money on a certain date the sale shall
become absolute, or

 On such payment being made the sale shall become void, or

 On such payment being made the buyer shall transfer the property to the
seller.

3. Usufructuary mortgage: A usufructuary mortgage is one where the mortgagor

delivers or agrees to deliver the possession of the mortgaged property to the
mortgagee and authorizes him –

 To retain such possession until payment of the mortgage money,

 To receive the whole or any part of the rents and profits accruing from the
property, and

 To appropriate such rents or profits; (i) in lieu of interest, or (ii) in payment of

the mortgage money, or (iii) partly in lieu of interest and partly in lieu of the
mortgage money.

4. English mortgage: English mortgage has the following characteristics:

 The mortgagor makes a personal promise to repay the mortgage money on a

certain day.

 The property mortgaged is transferred to the mortgagee. The mortgagee,

therefore, is entitled to take immediate possession of the property. He/She
may, under certain circumstances sell the mortgaged property without the
intervention of the court.

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 The transfer is subject to this condition that the mortgagee will re-transfer the
property to the mortgagor upon making payment of the mortgage money as
agreed.

5. Mortgage by deposit of title deeds: Where a person delivers to a creditor or

his/her agent documents of title to immovable property, to create a security thereon,
the transaction is called a mortgage by deposit of title deeds.

 This mortgage does not require registration. It is the most popular with banks.

6. Anomalous mortgage: A mortgage other than any of the mortgages explained so

far. It is an anomalous mortgage.

 Such a mortgage includes a mortgage formed by the combination of two or

more types of mortgages as explained above.

 It may, therefore, take various forms depending upon custom, local usage, or
contract.

7. Based on the transfer of title to the mortgaged property, mortgages are

divided into types namely:

 Legal Mortgage: In a legal mortgage, the legal title to the property is transferred in
favor of mortgagee by a deed.

o The deed is to be registered when the principal money is Rs.100 or more. On

repayment of the loan, the legal title is re-transferred to the mortgagor.

o The method of creating a charge is expensive as it involves registration charges

and stamp duty.

 Equitable Mortgage: An equitable mortgage is affected by the delivery of documents

of title to the property to the mortgagee.

o The mortgagor through Memorandum of deposit undertakes to grant a legal

mortgage if he fails to pay the mortgage money.

Bank Risks

A bank faces many different types of risks and these need to be managed very carefully. The
risks in Banks arise due to the occurrence of some expected or unexpected events in the
economy or the financial markets.

Systematic Risks: It is the risk inherent to the entire market or say a market segment, and
it can affect large number of assets.

 Systematic risk affects the overall market and not just a stock or industry in
particular.
 This type of risk is both unpredictable and impossible to avoid completely.

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 Examples of it include interest rate changes, inflation, recessions and wars.

Unsystematic Risks: It is the risk that affects a very small number of assets.

 This type of risk refers to the uncertainty inherent to a company or industry

investment in particular.
 Examples include a change in management, a product recall, a regulatory change that
could drive down company sales and a new competitor in the marketplace with the
potential to take away market share from a company in which you’ve invested.
 It is possible to avoid Unsystematic Risks through diversification.

The Basel Committee on Banking Supervision defines credit risk as the potential that a bank
borrower, will fail to meet its payment obligations regarding the terms agreed with the bank.

Market Risk: The Basel Committee on Banking Supervision defines market risk as the risk
of losses in on-balance or off-balance sheet positions that arise from movement in market
prices.
 Market risk is the most prominent for banks present in investment banking.