Hypothec is the corresponding term in civil law jurisdictions, albeit with a wider sense, as it also covers non-possessory lien.
The word is a Law French term meaning "dead pledge," originally only referring to the Welsh mortgage (see below), but in the later Middle Ages was applied to all gages and reinterpreted by folk etymology to mean that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.
A mortgage is the standard method by which individuals and businesses can purchase real estate without the need to pay the full value immediately from their own resources.
In today's world, most lenders sell the loans they write on the secondary mortgage market.
Generally, the borrower must meet the conditions of the underlying loan or other obligation in order to redeem the mortgage.
In the English-speaking world this means either a general legal practitioner, i.e., an attorney or solicitor, or in jurisdictions influenced by English law, including South Africa, a (licensed) conveyancer.
Because of the complex nature of many markets the borrower may approach a mortgage broker or financial adviser to help him or her source an appropriate lender, typically by finding the most competitive loan.
The debt instrument is, in civil law jurisdictions, referred to by some form of Latin hypotheca (e.g., Sp hipoteca, Fr hypothèque, Germ Hypothek), and the parties are known as hypothecator (borrower) and hypothecatee (lender).
In Anglo-Saxon England, when interest loans were illegal, the main method of securing realty was by wadset (ME wedset).
The difficulty with this arrangement was that the wadsetter was absolute owner of the property and could sell it to a third party or refuse to reconvey it to the reverser, who was also stripped of his principal means of repayment and therefore in a weak position.
In later years the practice—especially in Scotland and on the continent—was to execute together the wadset and a separate back-bond according the reverser an in personam right of reverter.
An alternative practice imported from Norman law was the usufructory pledge of real property known as a gage of land.
However, the royal courts increasingly did not respect shifting fees since there was no livery of seisin (i.e., no formal conveyance), nor did they recognize that tenure could be enlarged,[6] so by the 14th century the simple gage for years was invalid in England (and Scotland and the near continent[7]).
The solution was to merge the latter-day wadset and gage for years into a single transaction embodied in two instruments: (1) the absolute conveyance (the charter) in fee or for years to the lender; (2) an indenture or bond (the defeasance) reciting the loan and providing that if it was repaid the land would reinvest in the borrower, but if not the lender would retain title.
A similar effect was achieved in England and Wales by the Law of Property Act 1925, which abolished mortgages by the conveyance of a fee simple.
Attempts by the lender to carry an equity interest in the property in a manner similar to convertible bonds through contract have been therefore struck down by courts as "clogs", but developments in the 1980s and 1990s have led to less rigid enforcement of this principle, particularly due to interest among theorists in returning to a freedom of contract regime.
[10] Mortgage and foreclosure were used as a means by the Dutch and other colonists to acquire land from native peoples in North America.
[11] The debt would generally be one that the natives would be unable to pay in a reasonable time frame and thus foreclosure would be enforced, and the land acquired by the colonists.
[11] When a tract of land is purchased with a mortgage and then split up and sold, the "inverse order of alienation rule" applies to decide parties liable for the unpaid debt.
To protect the lender, a mortgage by legal charge is usually recorded in a public register.
For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage.
Specific procedures for foreclosure and sale of the mortgaged property almost always apply, and may be tightly regulated by the relevant government.
In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.
Judicial foreclosure is most often necessary as a remedy to default pursuant to mortgages within lien theory jurisdictions, and this process has been found to be cumbersome, time-consuming and costly.
This is accomplished by the inclusion of a stipulation within the loan contract to the effect that the borrower is allowed to retain legal title to the collateralized property with the express agreement that the lender may foreclose in a non- or extrajudicial manner if the borrower defaults on the loan.
A mortgage operates to collateralize real property by means of lien or through conditional conveyance of title, depending upon jurisdiction.
[25] The effective difference is that the foreclosure process can be much faster for a deed of trust than for a mortgage, on the order of 3 months rather than a year.
[citation needed] The deed of trust is a conveyance of title made by the borrower to a third party trustee (not the lender) for the purposes of securing a debt.
Even so, the Georgia Legislature has formally provided for a lender being able to secure its loan by means of having legal title to a collateralized property conveyed to it.
Hypothetically, if "absolute" or "perfect" title were held by a grantee such that the grantor did not retain the equity of redemption, then the grantee/lender would theoretically not have need to foreclose upon the grantor/borrower, but rather might cure a default by simple means of eviction or "summary reposession".