MORTGAGE

Mortgage is a legal arrangement where a person transfers their interest in a specific property
to secure a loan or debt, or to fulfill a financial obligation. The person transferring the interest
is called the 'mortgagor', and the recipient is the 'mortgagee'. The money owed, along with
any interest, is called the mortgage-money, and the document that formalizes this transfer is
the 'mortgage-deed'.
In a mortgage, the mortgagor retains ownership of the property but transfers an interest in it.
This means that while the mortgage is in place, the mortgagee has the right to take possession
of the property if the mortgagor fails to repay the loan. However, in most cases, the
mortgagor retains possession unless it's a usufructuary mortgage where possession is also
transferred to the mortgagee.
ESSENTIALS OF A MORTGAGE:
Essential features of a mortgage include the loan amount, which can cover existing and future
debts, a creditor-debtor relationship between the bank and the mortgagor, the possibility of
future debts being covered by the mortgage, the effective date of the mortgage, and the need
for a supplemental registration deed if the mortgage needs to cover enhanced loan limits.
Once the debt is repaid, the mortgage is no longer valid.
TYPES OF MORTGAGE:

Mortgages are diverse and tailored to meet specific needs. The Transfer of Property Act,
1882 (The Act), in Sections 58(b) to 58(g), defines various types of mortgages:

1. Simple Mortgage (Section 58B): In a simple mortgage, the mortgagor does not deliver
possession of the property but binds themselves to pay the mortgage money. The
mortgagee has the right to sell the property if the mortgagor defaults, but this sale requires
court intervention. The mortgagee cannot use the rents or profits from the property.
2. Mortgage by Conditional Sale (Section 58C): Here, the mortgagor sells the property
conditionally, with the sale becoming absolute in case of default. The mortgagee can
apply for a decree of foreclosure, and the mortgagor has no personal liability beyond the
property.
3. Usufructuary Mortgage (Section 58D): In this type, the mortgagor delivers possession
of the property to the mortgagee, who retains possession until the mortgage money is
repaid. The mortgagee can use the rents and profits from the property and has no personal
liability.
4. English Mortgage (Section 58E): The mortgagor transfers the property to the mortgagee
with the provision for re-transfer upon repayment. The mortgagor has personal liability to
repay on a specified date.
5. Equitable Mortgage or Mortgage by Deposit of Title Deeds (Section 58F): An
equitable mortgage, also known as a mortgage by deposit of title deeds, is a type of
mortgage where the borrower pledges their property as security for a loan by depositing
the property's title deeds with the lender. Unlike a legal mortgage, which requires a
formal mortgage deed, an equitable mortgage is created through the deposit of title deeds
alone, without the need for additional formalities or documentation.

Key Features of Equitable Mortgage:

  Debt Requirement: There must be a debt, either existing or future, for which the
property is pledged as security. The deposit of title deeds is intended to secure this
debt.
 Deposit of Title Deeds: The borrower must deliver or deposit the property's title
deeds with the lender or its agent. This can be done physically or through
constructive delivery.
 Intention to Create Security: There must be a clear intention that the title deeds
are being deposited as security for the debt. Mere delivery of title deeds without
this intention does not create an equitable mortgage.
 Territorial Restrictions: Equitable mortgages can only be created in specific
towns or areas designated by the State Government, such as Calcutta, Madras, and
Bombay. Depositing title deeds outside these areas will not create a valid
equitable mortgage.
 Formality and Registration: Unlike legal mortgages, which require a written
mortgage deed and registration, equitable mortgages do not require writing or
registration. The deposit of title deeds is sufficient to create the security.
 Enforcement: In case of default by the borrower, the lender can enforce the
equitable mortgage by filing a suit for sale of the property. The lender has the
right to sell the property and recover the debt without the need for court
intervention, similar to the powers granted under the SARFAESI Act for banks
and financial institutions.

6. Anomalous Mortgage (Section 58G): Any mortgage that does not fall into the categories
above is considered an anomalous mortgage.

SECTION 69 OF THE ACT AND SARFAESI ACT

Section 69 of the Act, safeguards the rights of mortgagors by providing them with the
opportunity to redeem their mortgaged property. It allows the mortgagor to reclaim the
property by repaying the mortgage money at any time before the mortgage is foreclosed. This
provision ensures that the mortgagor has a fair chance to retain ownership of the property by
settling the debt.
Whereas, the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI Act), was introduced to empower banks and financial
institutions to recover their dues more efficiently. The SARFAESI Act grants these
institutions the authority to take possession of the secured assets and sell them without the
intervention of the court if the borrower defaults on the loan.
The SARFAESI Act's provisions supersede those of Section 69 of the Transfer of Property
Act, 1882, specifically for banks and financial institutions. This means that while mortgagors
still have the right to redeem their property, banks and financial institutions can enforce their
security interest under the SARFAESI Act without having to go through the lengthy and often
cumbersome legal process.
This aspect of the SARFAESI Act is particularly beneficial for banks and financial
institutions as it allows them to recover their dues in a timely manner, reducing the burden of
non-performing assets on their balance sheets. However, critics argue that this provision
creates a disparity between secured creditors, such as banks and financial institutions, and
other creditors who do not have the same powers granted by the SARFAESI Act.
MORTGAGE DEED

A mortgage deed is a legal document that outlines the terms and conditions of a mortgage
agreement between a borrower (mortgagor) and a lender (mortgagee). It serves as evidence of
the mortgage and provides the lender with legal rights over the property pledged as security
for the loan.

Key Components of a Mortgage Deed:

 Parties Involved: The mortgage deed identifies the mortgagor (borrower) and
mortgagee (lender), specifying their names and details.
 Description of the Property: The deed includes a detailed description of the
property being mortgaged, including its location and boundaries.
 Recitals: These are introductory statements that set out the background and
intentions of the parties entering into the mortgage agreement.
 Covenants: These are the promises or agreements made by the parties, such as the
repayment terms, interest rates, and conditions for foreclosure.
 Habendum: This clause defines the nature and extent of the interest being
transferred from the mortgagor to the mortgagee.
 Redemption Clause: This clause outlines the conditions under which the
mortgagor can redeem the property by repaying the loan.
 Possession: It specifies whether the mortgagor retains possession of the property
or if it is transferred to the mortgagee.
 Title Deeds: Details regarding the transfer of title deeds from the mortgagor to the
mortgagee for the duration of the mortgage.
 Registration and Stamp Duty: The deed must be registered with the relevant
authority and appropriate stamp duty must be paid for it to be legally valid.
 Other Clauses: Depending on the specific agreement, the mortgage deed may
include clauses related to insurance, maintenance of the property, and other
relevant matters.

Importance of a Mortgage Deed:

 Legal Protection: The deed provides legal protection to both parties by clearly
outlining their rights and obligations.
 Enforceability: It ensures that the terms of the mortgage agreement can be
enforced in a court of law if necessary.
 Record Keeping: It serves as a record of the mortgage transaction, documenting
the details of the loan and the property involved.
 Clarity: It helps to avoid misunderstandings by clearly stating the terms and
conditions of the mortgage agreement.
 HYPOTHECATION
Hypothecation, as defined in the Securitization and Reconstruction of Financial Assets &
Enforcement of Security Interest Act, 2002, is a charge created by a borrower on movable
property, existing or future, in favor of a secured creditor, without delivering possession of
the property to the creditor. It serves as security for financial assistance and includes the
concept of a floating charge, which can crystallize into a fixed charge on movable property.
Under Section 77 of the Companies Act, 2013, if a company is the hypothecator, the
hypothecation needs to be registered with the Registrar of Companies. This registration is
done by filing Form CHG-1.
Hypothecation is similar to a pledge in that the assets remain in the custody of the borrower
and are not kept under lock and key by the creditor. However, the borrower must submit
stock statements at prescribed intervals as per the terms of the bank's sanction. Additionally,
the borrower or any person connected to them cannot utilize the hypothecated assets for their
own benefit or sell them without the bank's consent.
Section 77 of the Companies Act, 2013, requires companies to register all types of charges,
whether within or outside India, on their property or assets or any of their undertakings,
tangible or otherwise, situated in or outside India, with the Registrar of Companies within 30
days of their creation.
Types of Hypothecation:
1. Mortgage Hypothecation:
o Definition: In mortgage lending, the borrower uses real estate (such as a
house) as collateral for the loan. The borrower retains ownership of the
property but risks losing it if they fail to repay the loan.
2. Auto Loan Hypothecation:
o Definition: Similar to mortgage hypothecation, auto loan hypothecation
involves using a vehicle as collateral for a loan. The lender can repossess the
vehicle if the borrower defaults on the loan.
3. Margin Trading Hypothecation:
o Definition: In margin trading, investors borrow funds from a brokerage to buy
securities. The securities purchased act as collateral for the loan. If the value of
the securities falls below a certain level, the broker may issue a margin call
and sell the securities to cover the loan.
Benefits of Hypothecation:
 Access to Financing: Hypothecation allows borrowers to access funds by using their
assets as collateral.
 Lower Interest Rates: Secured loans often have lower interest rates than unsecured
loans due to the reduced risk for the lender.
  Retained Ownership: Borrowers retain ownership and use of the pledged asset,
unlike in other forms of collateralization.

Rehypothecation and its Impact:

Rehypothecation is a financial practice where banks and brokers use assets pledged by their
clients as collateral for their own transactions, with the clients' agreement. This practice
allows institutions to secure lower borrowing costs or receive rebates on fees. However,
rehypothecation is regulated by the Securities and Exchange Commission (SEC), and banks
and lenders must have permission from the owner of the assets to engage in this practice.
This is crucial to protect clients' interests and ensure transparency in financial transactions.

Impact of Rehypothecation: Rehypothecation was a common practice before the 2008

financial crisis but has since become less common due to its adverse impacts. During the
financial crisis, the practice of rehypothecation contributed to systemic risk by magnifying
the effects of the crisis. As a result, regulators have imposed stricter rules and limits on
rehypothecation to prevent similar issues in the future.

Difference Between Hypothecation and Mortgage:

1. Hypothecation:
o Definition: Hypothecation is the pledging of an asset as collateral for a loan,
without transferring the property's title to the lender.
2. Mortgage:
o Definition: In a mortgage, the property purchased is used to secure the loan,
but the lender holds the title to the property.