Credit Transactions (Arts.

1933 – 2141, Civil Code)

Real Estate Mortgage (Art. 2124)

Real Mortgage

 is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation,
specially subjecting to such security immovable property or real rights over immovable property
in case the principal obligation is not complied with at the time stipulated.

Characteristics

1. It is an accessory and subsidiary contract.

2. It is also unilateral because it creates only an obligation on the part of the creditor who must free
the property from the encumbrance once the obligation is fulfilled.
3. It is indivisible, each and every parcel under mortgage answers for the totality of the debt.
 It is inseparable. A mortgage directly and immediately subjects the property upon which is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it
was constituted: the mortgage adheres to the property regardless of who its owner may
subsequently be.
4. The objects of a real mortgage are immovable (Art. 415) and alienable real rights imposed upon
immovables.
5. In order that a mortgage may be validly constituted, it must appear in a public document duly
recorded in the Registry of Property.
6. A mortgage creates a real right, a lien inseparable from the property mortgaged, which is
enforceable againsthe whole world. Until discharged, it follows the property wherever it goes
and subsists notwithstanding changes of ownership.

Kinds of Mortgage

(1) Voluntary. one which is agreed to between the parties or constituted by the will of the owner of
the property on which it is created
(2) Legal. one required by law to be executed in favor of certain persons
(3) Equitable. - one which, although it lacks the proper formalities or sher requisites of a mortgage
required by law. nevertheless reveals the intention of the parties to burden real property as a
security for a debt, and contains nothing impossible or contrary to law

Subject Matter of Mortgage

(1) Immovable (Art. 415)

(2) Alienable real rights imposed upon immovable (Art. 2124)
 Future property cannot be object of mortgage but inclusion of future improvements on the
property already belonging to the mortgagor is valid

Essential Requisites of a Valid Constitution of a Real Estate Mortgage

1. It is constituted to secure the fulfillment of a principal obligation;

2. The mortgagor must be the absolute owner of the real estate mortgaged;
3. The mortgagor has the free disposal of the property, and in the absence thereof, that he is legally
authorized for the purpose. (Art. 2085)
4. The document in which it appears be recorded in the Registry of Property to bind third persons
(Art. 2125)
Essential Requisites of Mortgage

 Registered mortgage is presumed valid; burden of proof on the person attacking its validity:

1. Where mortgage in a private document - no valid mortgage is constituted

2. Where mortgage not registered - binding on the parties. Registration only operates as a notice of the
mortgage to others but neither adds to its validity nor converts an invalid mortgage into a valid one between
the parties.

3. Where mortgage registered under Act No. 3344- is without prejudice to the better right of third parties.

Effect of Mortgage

1. The only right of a mortgagee in case of non-payment of a debt secured by real mortgage would
be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding
indebtedness.
2. The mortgagor's default does not operate to vest in the mortgagee the ownership of the
encumbered property. His failure to redeem the property does not automatically vest ownership
of the property to the mortgagee.
 By mortgaging a piece of property, a debtor merely subjects it to a lien but ownership thereof is
not parted with.

Extent of Mortgage

General Rule: A mortgage constituted on immovable property is not limited to the property itself but also
extends to all its accessions, improvements, growing fruits and rents or income (see Art. 2102) as well as to
the proceeds of insurance should the property be destroyed of the expropriation value of the property should
it be expropriated.

Exception: contrary stipulation

Alienation or Assignment of Mortgage

 Said assignment is valid and assignee may foreclose the mortgage in case of nonpayment of the
mortgage indebtedness,
1. The fact that the mortgagor has transferred the mortgaged property to a third person does not
relieve him from his obligation to pay the debt to the mortgage creditor in the absence of
novation. (Art. 2129)
2. The mortgage credit being a real right which follows the property, the creditor may demand from
any possessor the payment of the credit secured by said property. It is necessary, however, that
prior demand for payment must have been made on the debtor and the latter failed to pay.
3. An assignee cannot acquire greater rights than those pertaining to an assignor
4. Right of creditor against transferee of mortgaged property
 Stipulation forbidding alienation of mortgaged property is void. However, if the mortgagor
alienates the property, the transferee is bound to respect the encumbrance because being a real
right, the property remains subject to the fulfillment of the obligation for whose guaranty it was
constituted (Art. 2126).
 A stipulation granting the mortgagee the right of first refusal over the mortgaged property in the
event the mortgagor decides to sell the same

Foreclosure of Mortgages

 Foreclosure is the remedy available to the mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation to secure which the mortgage was given.
1. Judicial foreclosure governed by Rule 68 of the Rules of Court.

2. Extrajudicial Foreclosure governed by Act. No. 3135 as amended, if and when the mortgagee is given a
specific power or express authority to do so.

a) Public auction must be conducted in the province where the property is situated.
b) Posting of notice of sale in at least 3 public places therein
c) Publication in a newspaper of general circulation
d) Personal notice to mortgagor is not required
e) Debtor has the right to redeem the property sold within the term of one year from and after the
date of the sale (Section 6).

Right of Mortgagee to Recover Deficier

1. Mortgage is merely a security, not a satisfaction of an obligation. If there be a balance due to the
mortgagee after applying the proceeds of the sale, the mortgagee is entitled to recover the
deficiency.
2. The action to recover a deficiency after foreclosure prescribes after ten (10) years from the time
the right of action accrues as provided in Article 1144(2) of the Civil Code.

Waiver of Security by Creditor

1. The mortgagee may waive the right to foreclose nis mortgage and maintain a personal action for
recovery of the indebtedness. There is no statutory provision in our jurisdiction prohibiting a
personal action to recover a sum of money even though a mortgage has been given as security
for the payment of the same.
2. The mortgagee cannot have both remedies. He has only one cause of action. i. e.. non-payment
of the mortgage debt; hence, he cannot split up his cause of action by filing a complaint for
payment of the debt and another complaint for foreclosure.

Redemption (of foreclosed property)

 Redemption may be defined as a transaction by which the mortgagor reacquires or buys back the
property which may have passed under the mortgage or divests the property of the lien which the
mortgage may have created.

Kinds Of Redemption

1) Equity of redemption
2) Right of redemption

Kinds of Redemption

1. Equity of redemption is the right of the mortgagor to redeem the mortgaged property after his
default in the performance of the conditions of the mortgagee but before the sale of the
mortgaged property or confirmation of the sale. The mortgagor's equity of redemption is simply
the right of the mortgagor to extinguish the mortgage and retain ownership of the property by
paying the secured debt within the 90-day period after the judgment becomes final, in
accordance with Section 2, Rule 68 of the Rules of Court or even after the foreclosure sale but
prior to its confirmation.
2. Right of redemption is the right of the mortgagor to redeem the mortgaged property within a
certain period (1 year) after it was sold for the satisfaction of the mortgaged debt.

Right of Redemption
 1. In all cases of extrajudicial sale, the mortgagor may redeem the property at any time within the
term of one year from and after the date of registration of the sale (see Section 6, Act No. 3135).
2. In judicial foreclosure of real estate mortgage, there is a right of redemption which he can
exercise at any time after service of judgment of foreclosure and within the 90-day period and
even thereafter provided he does so before the foreclosure sale is confirmed by the court.
 Confirmation on of the sale of mortgaged real property cuts off all the rights or interests of the
mortgagor and of the mortgage and persons holding under him, and with them the equity of
redemption in the property and vests them in the purchaser.

Requisites for Valid Redemption

1. The redemption must be made within 12 months from the time of the registration of the sale.
2. Payment of the purchase price of the property plus 1% interest per month together with the taxes
thereon, if any, paid by the purchaser with the same rate of interest computed from the date of
registration of the sale; and
3. Written notice of the redemption must be served on the officer who made the sale and a
duplicate filed with the proper Register of Deeds.

Antichresis (Art. 2132)

Antichresis

 is a contract whereby the creditor acquires the right to receive the fruits of an immovable of his
debtor, with the obligation to apply them to the payment of the interest, if owing and thereafter
to the principal of his credit.

Characteristics

1. It is an accessory contract because it secures the performance of a principal obligation.

2. It is a formal contract because the amount of the principal and of the interest must both be in
writing, otherwise the contract of antichresis is void.

Distinction between Antichresis and Pledge

Distinction between Antichresis and Real Mortgage

Obligations of Antichretic Creditor

1) Payment of taxes and charges upon the estate. The creditor is obliged, unless there is a
stipulation to the contrary, to pay the taxes and charges upon the estate. If he does not pay the
taxes, he is, by law (Art. 1170), required to pay indemnity for damages to the debtor.
2) Application of the fruits of the estate. Another obligation of the creditor is to apply the fruits,
after receiving them to the interest, if owing, and thereafter to the principal (Art. 2132) in
accordance with the provisions of Art. 2133 or 2138. Hence, the duty of the creditor to render an
account of said fruits to the debtor and the corresponding right of the latter that the said fruits be
applied to the debt.

Remedy of Creditor in Case of Default

1. To bring an action for specific performance

2. To petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the
Rules of Court. The parties, however, may agree on an extrajudicial foreclosure in the same
manner as they are allowed in contracts of mortgage and pledge (see Art. 1307)

Chattel Mortgage (Art. 2140)

Chattel mortgage

 is that contract by virtue of which personal property is recorded in the Chattel Mortgage Register
as a security for the performance of an obligation.

Characteristics

1. It is an accessory contract because it is for the purpose of securing the performance of a principal
obligation;
2. a formal contract because for its validity, registration in the Chattel Mortgage Register is
indispensable.
3. a unilateral contract because it produces only obligations on the part of the creditor to free the
thing from the encumbrance on fulfillment of the obligation.

Distinction between Chattel Mortgage and Pledge

Offenses Involving Chattel Mortgage

 1) Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any
province or city other than the one in which it was located at the time of the execution of the
mortgage without the witten consent of the mortgagee; and
2) Selling or pledging personal property already mortgaged, or any part thereof, under the terms of
the Chattel Mortgage Law without the consent of the mortgagee written on the bank of the
mortgage and duly recorded in the Chattel Mortgage Register (Article 319, Revised Penal Code).

Subject Matter of Chattel Mortgage

1. Shares of stock in a corporation

2. Interest in business
3. Machinery and house of mixed materials treated by parties as personal property and no innocent
third person will be prejudiced thereby.
4. Vessels, the mortgage of which have been recorded with the Philippine Coast Guard in order to
be effective as to third persons
5. Motor vehicles, the mortgage of which had been registered both with the Land Transportation
Office and the Chattel Mortgage Registry is order to affect third persons
6. House which is intended to be demolished
7. Growing crops and large cattle

Creation of Chattel Mortgage

1. The law as it now stands provides for only one way for executing a valid chattel mortgage, i.e.,
the registration of the personal property in the Chattel Mortgage Register as security for the
performance of an obligation. (Art. 2140; see Art. 2085). Under the Chattel Mortgage Law, if the
property as situated in a different province from that in which the mortgagor resides, the
registration must be in both registers (Section 4, Act No. 1508); otherwise, the chattel mortgage
is void.
2. It has been ruled however that if the chattel mortgage is not recorded, it nevertheless binding
between the parties. (Art. 2125).

Effect of Registration

 The registration of the chattel mortgage is an effective and binding notice to other creditors of its
existence and creates a real right or a lien which being recorded follows the chattel wherever it
goes. The registration gives the mortgagee the symbolical possession.

Registration of Assignment and Mortgage Optional

1. There is no law expressly requiring the recording of the assignment of a mortgage. While such
assignment may be recorded, the law is permissive and not mandatory.
2. The assignee is subrogated to the rights and obligations of the assignor-mortgagee with respect
to the chattel mortgage constituted in favor of the latter. Consequently, the assignee is bound by
the terms and conditions of the chattel mortgage executed between the mortgagor and the
mortgagee.

Foreclosure of Chattel Mortgage

 The mortgagee may, after thirty (30) days from the time of the condition broken, cause the
mortgaged property to be sold at public auction by a public officer (Section 14, Act No. 1508)
1. Public Sale - if the mortgagor defaults in the payment of the secured debt or otherwise fails to comply
with the conditions of the mortgage, the creditor has no right to appropriate to himself the personal property
(Art. 2141, 2088) because he is permitted only to recover his credit from the proceeds of the sale of the
property at public auction through a public officer in the manner prescribed in Section 14 of Act No. 1508.

2. Private Sale - if there is an express stipulation in the contract.

Exception: fraud or duress

Right of Mortgagee to Recover Deficient

1. Where mortgage foreclosed. The creditor may maintain an action for the deficiency although the
Chattel Mortgage Law is silent on this point
2. Where mortgage constituted as security for purchase of personal property payable in
installments. If the chattel mortgage is constituted, whether by the debtor-vendee or a third
person, as security for the purchase of personal property payable in installments, no deficiency.
judgment can be asked and any agreement to the contrary shall be void (Article 1484).
3. Where mortgaged property subsequently attached and sold. The chattel mortgagee is entitled to
deficiency judgment in an action for specific performance (Article 1484 [1]) where the
mortgaged property is subsequently attached and sold. The execution sale in such case is not a
foreclosure sale