If you live in Illinois you know that the Economy has been sputtering: struggling valiantly but with little to show for it. Case in point: Is your home still underwater? For most people the answer is still yes – even as markets around the country rebound. So today we address a deceptively simple question: What is a mortgage and how does it work? Why don’t mortgages relate to the value of our homes? Here are a few things to consider: a mortgage is a loan secured by real estate. While the term “mortgage” is used colloquially to refer to both the loan and the security, there are actually 2 separate legal documents at work here: a Note and a security instrument – the Mortgage lien.
Note: When money is borrowed to purchase real estate, some States title the underlying property in the name of the Lender and permit that interest to hypothetically transfer over time to the Borrower. The arrangement is a bit like lay-a-way. These States are using the “Title Theory.” But Illinois, like many other States, places the underling property in the name of the homeowner and gives the Lender a lien on the owner’s interest – these States are using the “Lien Theory.”
The Note is the borrower’s promise to repay their loan for the purchase of the property on a specific schedule subject to certain terms including interest charges (the amortization schedule). Most Notes are freely transferable from the original Lender to other companies. Many Lenders count on selling to companies designed to service loans (Servicers) rather than make them. This may happen directly or through the bundling and sale of a large group of mortgage in the securities markets (Securitization).
Businesses that buy and sell bundles of securitized mortgages account for about 70% of the nation’s mortgage business. Rather than lend directly, these Servicers purchase mortgages from Lenders and other debt-buyers. The Note specifies that the Borrower must repay its holder, which can obviously differ over time.
The Mortgage Lien
The Mortgage lien is a legal document separate and distinct from the Note, which pledges the underlying property as collateral for repayment. This security instrument may be in the form of a classic mortgage, a deed of trust, or a trust deed, depending on its form and the State in which the property is located. The Mortgage lien is filed with the County Recorder of Deeds to establish the interest of the mortgagee Lender. This establishes the mortgagee’s rights in the property relative to others, including subsequent lenders, judgment creditors, etc. The majority of Mortgages are recorded using a private company known as the Mortgage Electronic Registration System (MERS). The validity of MERS’ processes has been the subject of much legal controversy.
Default refers to the borrower’s failure to honor a requirement of the Note or Mortgage such as timely payments and is the prelude to Foreclosure. While technical defaults are possible, the typical default is a failure to make payments. The outcome following Default depends on terms of the Note and Mortgage, as well the degree of delinquency, the borrower’s overall financial situation, the value of the property and amount outstanding on the Note, the servicer’s economic interests, and constraints placed on the servicer by contract and applicable laws.
The form of security instrument used also affects the Foreclosure process. If property is in a State that uses the Lien Theory, such as Illinois, the homeowner retains title to the property until a Court gives title to the mortgagee Lender. As a result the Foreclosure process will take significantly longer and cost much more for the Lender than it would in States that use the Title Theory. In those States, Foreclosure is like announcing that the Lender is taking back its own property, rather than taking the property of the homeowner.
Wrapping It Up
Thank you for spending a few minutes with us to learn about Notes and Mortgages. Have a question? In a tight spot? Call us in confidence at 630-378-2200 or reach out to us via e-mail anytime at mhedyat[at]mha-law.com.