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An overview on Real Estate Transactions and Mortage Law

Property signifies dominion or right of use, control, and disposition which one may lawfully exercise over things, objects, or land. One of the basic dividing lines between property is that between real property and personal property. Generally, the term real property refers to land. Land, in its general usage, includes not only the face of the earth but everything of a permanent nature over or under it. This includes structures and minerals.

There are further divisions within the real property classification. The most important are freehold estates, nonfreehold estates, and concurrent estates. (Others are future interests, specialty estates, and incorporeal interests). Freehold estates are those in which an individual has ownership for an indefinite period of time. An example of a freehold estate is the "fee simple absolute", which is inheritable and lasts as long as the individual and his heirs wants to keep it. Another example is the "life estate", in which the individual retains possession of the land for the duration of his or her life. Nonfreehold estates are property interests of limited duration. They include tenancy for years, tenancy at will, and tenancy at sufferance. Concurrent estates exist when property is owned or possessed by two or more individuals simultaneously.

For the most part, states have exclusive jurisdiction over the land within their borders, and their law concerning the kind of interests that can be held and how they are created is not subject to federal law, see Real Estate Transactions.

REAL ESTATE TRANSACTIONS

Real estate transactions are governed by a wide body of federal statutes and state statutory and common law. The requirements established by state law often differ significantly from one state to the next.

Real estate brokers are employed as the agent of the seller in order to obtain a buyer for their property. See Agency. The contract between the broker and seller is called a listing agreement. The agreement may be an open agreement where by the broker earns a commission only if he or she finds a buyer. A listing is exclusive if the broker is the only agent entitled to a commission for finding a buyer. Under an exclusive arrangement a broker may be entitled to a payment even if the seller finds the buyer without the brokers aid. Real estate brokers and salesperson are licensed and regulated by local state laws. See, e.g., California Civil Code § 2079. Professional organizations may also provide further guidelines.

The Federal Fair Housing Act prohibits discrimination in real estate transactions on account of race, color, religion, sex, or national origin. See 42 U.S.C. §§ 3601-3631. Real estate brokers are specifically prohibited from discriminating by the act. See § 3606 of the act.

The agreement to sell between a buyer and seller of real estate is governed by the general principles of contract law. See Contracts. The Statute of Frauds requires that contracts for real property be in writing. See, e.g., California Civil Code § 1624.

It is commonly required in real estate contracts that the title to the property sold be marketable. This requires that the seller have proof of title to all the property he or she is selling and that third parties not have undisclosed interests in the title.

A title insurance company or an attorney is often employed by the buyer to investigate whether the title is, indeed, marketable. Title insurance companies also insure the buyer against losses caused by the title being invalid.

In order to pass title, a deed with a proper description of the land must be executed and delivered. Some states require that the deed be officially recorded to establish ownership of the property and/or provide notice of its transfer to subsequent purchasers.

The most common method of financing real estate transactions is through a mortgage.

MORTGAGE LAW

A mortgage involves the transfer of an interest in land as security for a loan or other obligation. It is the most common method of financing real estate transactions. The mortgagor is the party transferring the interest in land. The mortgagee, usually a financial institution, is the provider of the loan or other interest given in exchange for the security interest. Normally, a mortgage is paid in installments that include both interest and a payment on the principle amount that was borrowed. Failure to make payments results in the foreclosure of the mortgage. Foreclosure allows the mortgagee to declare that the entire mortgage debt is due and must be paid immediately. This is accomplished through an acceleration clause in the mortgage. Failure to pay the mortgage debt once foreclosure of the land occurs leads to seizure of the security interest and it's sale to pay for any remaining mortgage debt. The foreclosure process depends on state law and the terms of the mortgage. The most common processes are court proceedings (judicial foreclosure) or grants of power to the mortgagee to sell the property (power of sale foreclosure). Many states regulate acceleration clauses and allow late payments to avoid foreclosure.

Three theories exist regarding who has legal title to a mortgaged property. Under the title theory title to the security interest rests with the mortgagee. Most states, however, follow the lien theory under which the legal title remains with the mortgagor unless there is foreclosure. Finally, the intermediate theory applies the lien theory until there is a default on the mortgage whereupon the title theory applies.

The mortgagor and the mortgagee generally have the right to transfer their interest in the mortgage. Some states hold that even when the purchaser of a property subject to a mortgage does not explicitly take over the mortgage the transfer is assumed. Mortgagees employ due-on-sale and due-on-encumbrance clauses to prevent the transfer of mortgages. These clauses allow acceleration (having the principal and interest become due immediately) of the mortgage. In 1982, Congress made these clauses enforceable nationwide by passage of the Garn-St Germain Depository Institutions Act of 1982. The law of contracts and property govern the transfer of the mortgagee's interest.

If the mortgage being foreclosed is not the only lien on the property then state law determines the priority of the property interests. For example, Article 9 of the Uniform Commercial Code governs conflicts between mortgages on real property and liens on fixtures (personal property attached to a piece of real estate).

When a mortgage is a negotiable instrument it is governed by Article 3 of the Uniform Commercial Code. See Negotiable Instruments. A mortgage may be used as a security interest by the mortgagee. See Secured Transactions.

The law of mortgages is mainly governed by state statutory and common law. Mortgagees are regulated by federal or state law or agencies depending on under whose law they were chartered or established. The Federal Home Loan Bank Board regulates savings and loan associations chartered by the government. National banks are chartered by the Office of The Comptroller of the Currency. Credit Unions are regulated by the National Credit Union Administration.

Federal agencies that purchase loans and mortgages are the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association. The federal government also insures mortgages through the Federal Housing Association and the Department of Veterans Affairs.

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