Over the years, homeowners have loosely applied the term mortgage to mean the debt they have on their house. The mortgage system has been around for over a thousand years. The term refers to any financial instrument where a borrower purchases land or real estate and uses that land or real estate as collateral to secure the debt. While consumers associate the term with their debt, the party holding mortgage is the lender, not the borrower.
A mortgage is a lien on real property. A lien is the legal right a lender or creditor has to have a debt repaid by liquidating or confiscating the property should the borrower default on the loan. Also called a mortgage is the document creating the lien. In either case, the lender holds the mortgage. When banks, investors or other lending institutions are holding mortgages, it typically refers to the outstanding loans they are holding in their portfolio. A lender might transfer the mortgage to a third party. In that case, the borrower would then owe the debt to the third party holding the mortgage.
When creating a mortgage the borrower or mortgagor gives the lender or mortgagee a promissory note, which is a written document pledging the property as collateral for a loan received by the borrower. The promissory note provides for the creation of the mortgage or lien. When the borrower repays the debt, she does not receive the mortgage back per se. Instead, the lender issues a satisfaction of mortgage to the borrower.
The remedy used under the mortgage to collect payment, should the borrower default, varies by state. In some states the mortgagee has the right to claim immediate possession of the property, should the borrower default, while other states require the lender to take formal foreclosures proceedings. Some states are title theory states, which gives the legal title in a mortgage agreement to the lender and the equitable title to the borrower. Not until the lender issues the satisfaction of the mortgage does the borrower gain legal title. This makes it possible for the lender to take immediate possession should the borrower violate the terms of the agreement. In a lien theory state, the lender does not have legal title; the lender only has a lien. The borrower has both legal and equitable title, making it necessary for the lender to foreclose, instead of taking immediate possession. Some states have an intermediate theory, which has characteristics similar to both the title and lien theory and requires foreclosure.
While the mortgage is a voluntary and specific lien, the mortgage system is not the only method used to provide a way for a party to liquidate property for repayment of a debt. Some states use the deeds of trust method. A deed of trust is a legal instrument that provides the right of a trustee the power to liquidate real property under the provisions of the trust agreement.