What is the main cause of the current economic crisis in the US?In: Investing and Financial Markets, 2008 Federal Bailout, 2008 Economic Crisis [Edit categories]

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[Edit] The mortgage collapse was the final "straw that broke the camel's back", but this is merely a symptom of concentration of wealth.

An excellent collection of articles on Federal tax policies and their effects from the Center on Budget and Policy Priorities is given in the links below.

One of those papers states: " Not since 1928, just before the Great Depression, has the top 1 percent held such a large share of the nation's income. " from Income Concentration at Highest Level Since 1928, By Chye-Ching Huang and Chad Stone (linked below).

Wikipedia has a good article on Distribution of wealth - see the link below for the entire article. The next snip is from this article.

In the United States

In the United States at the end of 2001, 10% of the population owned 71% of the wealth, and the top 1% controlled 38%. On the other hand, the bottom 40% owned less than 1% of the nation's wealth.

In describing tax systems, it is important to distinguish between the percent of taxes paid on a given income, and the percent of taxes paid by a person with a given income. For example, if a person earns $1,000,000 and is taxed at a rate of 10%, they will owe $100,000 in taxes. On the other hand, if a person earns $10,000 and is taxed at a rate of 20%, they will owe $2000 in taxes. The person with the greater income is taxed at a lower rate but pays a higher tax. The person with the lesser income is taxed at a higher rate but pays a lower tax. The United States has a tax system which is a mixture of progressive taxation and regressive taxation. The income tax is progressive, capital gains tax, at a lower rate than the income tax, is regressive, as is the sales tax, since the less wealthy spend a greater percentage of their income. In 2003, the one percent with the highest salaries paid more than 34% of the nation's federal income tax; the ten percent with the highest salaries paid more than 66% of the total income tax; the top 25% of paid 84% of the income taxes; and the upper half accounted for virtually the entire U.S. income tax revenue (nearly 97%). This is an inevitable consequence of the concentration of wealth. People who do not have much money cannot pay high taxes, even when they pay a greater percentage of their earnings in taxes.

The above clip gives ecomomic reasoning that explains why the Constitution of the United States originally forabade direct taxes (income taxes).

This country's growth and success are the result of giving everyday people the right to "life, liberty, and the pursuit of happiness". That growth would have been even greater, and probably built on a more solid base if the Native and enslaved population had been given those same rights. This country will continue to deteriorate economically and socially if those rights are not restored.

You have this fairly continuous downward trend from 1929, until just about the mid-1970s. Since then, things have really turned around, and the level of wealth inequality today is almost double what it was in the mid-1970s.

Above quoted from linked article below: "The Wealth Divide".

The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the Congressional Budget Office shows.

The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher.

The total income of the top 1.1 million households was $1.8 trillion, or 18.1 percent of the total income of all Americans, up from 14.3 percent of all income in 2003. The total 2005 income of the three million individual Americans at the top was roughly equal to that of the bottom 166 million Americans, analysis of the report showed.

See the NY Times article linked below for the rest of the above article.

"The last quarter of the twentieth century witnessed some disturbing changes in the standard of living and in equality in the United States. ... Between 1973 and 1993 the real wage declined by 14 per cent, though it has since risen by 7 percent from 1993 to 2000, for a net change of -8 per cent. .... Despite falling real wages, living standards were maintained for a while by the growing labor force participation of wives....

excerpt-

Another troubling change... Inequality in the distribution of family income .. virtually unchanged since the end of World War II until the late 1960s, has increased sharply since then.... The poverty rate, which had fallen by half from a postwar peak in 1959 (the first year the poverty rate was computed) to 1973, has since risen.

excerpt-

The first series is the top marginal tax rate (the marginal tax rate faced by the richest tax filers). Back in 1944, the top marginal tax rate was 94 per cent! After the end of World War II, the top rate was reduced to 86.5 per cent (in 1946) but during the Korean War it was soon back to 92 per cent (in 1953). Even im 1960, it was still at 91 per cent. This

generally declined over time, as tax legislation was implemented by Congress. It was first lowered to 70 per cent in 1966, then raised to 77 per cent in 1975, then to 50 per cent in 1983 (Ronald Regan's first major tax act). and then again to 28 per cent in 1986 (through the famous Tax Reform Act of 1986). Since then, it has trended upward, to 31 per cent in 1991 (under President George Bush) and then to 39.6 per cent in 1993 (under President Bill Clinton).

Above from Recent Trends in Living Standard in the United States, in Edward N. Wolff see below

Obama has proposed a raise in the top marginal tax rate. Some are screaming about it but it correlates to healthier economic times.

Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises...from 37.9 percent to roughly 48 to 50 percent. "High" is in the eye of the beholder, but these are tax rates not seen since before the Tax Reform Act of 1986.

(see Manikaw economics blog linked below)

Taxation can be utilized by the governement to facilitate the redistribution of wealth. See the Wikipedia article and the related question:

How has the Income Tax contributed to the economic crisis of 2008? Short Answer: Bad Mortgage Lending Practices not mandated by the goverment If you ask me put your money into a money market mutual fund.

Sources.

http:/mutualfunds.about.com

http:/www.amfi.com/types/money-market-mutual-funds

Deregulation of the mortgage lending and investment banking industries.

Um - or is it over regulation because the "liberals" bought their votes by helping people afford homes?

No, really, wait .... it's because the SEC isn't enforcing the regulations we have.

No! No! No! It's because the politicians have trashed the Constitution and we are being held hostage by "THEM", the ones that own the FEDERAL RESERVE.

I agree with many of the answers to this question. The "root" cause for this financial melt down is "GREED." Money has never been the problem. It has been the love of money. Because of this greedy love for money organizations that lacked morals began creating lending programs, fraudulently inflating property values and even committing mortgage fraud to get people qualified that could not afford to buy.

What causes me more worry for me is that our government thinks that the solution is to give the banks more money to get more people to borrow.

Here is a Fact...

If the nation is incapable of paying their debt today, what make us think that consumers will be able to re-pay even more debt in the future? The key to resolving this problem is not loaning more money. It is teaching and empowering the nation's consumers to get debt free. People need to learn how to be GOOD STEWARDS of their money.

Let us focus on helping one another to make the right decisions and get out of this mess.

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The Mortgage problem is the result of corporate greed run amuck. And the damage caused in the '90s by changing banking regualtions is small change compared to the fleecing of the middle class with the tax code. That's why they can't pay a mortgage.

See: How has the Income Tax contributed to the economic crisis of 2008?

and: What is the main cause of the current economic crisis in the US?

Answer:

Basically what happened is that in the late 1990s the Republican Congress did away with a lot of regulations in the financial industry that had been put in place in the 1930s during the Great Depression. Without these regulations, it became easier for a lot of questionable banking and lending practices to take place. Lenders started making money by giving out mortgages to people they knew or should have known could not actually afford the houses they were buying; the lenders assumed that housing prices would continue to rise, so in the case of foreclosure the lender would still make money.

Millions of people ended up in these kinds of mortgages, called subprime mortgages; knowingly or not, these people ended up not being able to repay their mortgages. At the same time, housing prices started to fall. So imagine this: you buy a $500,000 house with mortgage of $475,000 and a down payment of $25,000. With the initial interest rate, your mortgage payment each month was only $400. But then interest rates rose (and these people had mortgages with adjustable, instead of fixed, rates on them), and so your payments went up to $600 or $800. The problem is you don't have enough income to pay that each month, so you can't afford to make your mortgage payments. Meanwhile, the

value of your house falls to $400,000. That means that, even if you sell your house, you will still owe the $100,000 difference. The result of this is that people in this situation go bankrupt, and the lender ends up owning the house.

This problem has happened millions of times in the U.S. but also in other countries where the same lax practices were taking place, e.g. Spain, Canada, the U.K., etc.

Answer

Lenders that gave out too many mortgages of this type then found themselves having a lot of people not be able to pay back their mortgages. The lender then ends up with the foreclosed house, but it can't sell the house for very much because housing prices are falling. This means that the lender has lost a LOT of money on the one house. If banks loose $200,000 on a million homes, that's already $2 billion in lost money.

This is all simplified, of course.

Answer

The other problem is that these mortgages were being bundled into investment opportunities that companies like Lehman Brothers and other companies then sold shares in to investors. All these people are now also loosing their money.

The results are that bank in trouble don't have enough assets to stay in business; the problem is so massive that only government bail-outs can keep the banks in business. Because so many banks have so many bad mortgages, which are a kind of loan, so they have bad loans, it's hard for any bank to offer credit/loans for any reason right now--they just don't have enough cash to cover everything.

The problem then turns to businesses: small businesses rely on credit to expand, make payroll, etc., and without credit business starts to shrink, jobs are lost, and the economy overall tanks because no one can get any credit at all, so the economy is being forced to switch to a cash economy: if you don't have the money already, you can't buy anything.

Answer

The fundamental reason: Financial Leverage was misused to manipulate markets for decades. Organizations were never regulated and compelled to hire more ethical traders and managers rather than B-School MBA Grads who have just learned to make money at any cost. US officials while rescuing the global giants claim it is just a real estate correction due to bad debts in banking system. Whatever the case, the market sentiment have changed forever, and valuations will come under immense pressure from now on...be it real estate, equity, debt, bond, products, services, or...anything

A man jumping from top floor out of a 100 storey building can feel flying with joy until his reaches the ground floor with a big bang. This is the case with most inflated companies and their greedy management, we only know when they actually burst. We should watch and regulate them starting from their intention to climb that building from ground zero!

Some Food for Thought: The golden rule is "do not expect the market to behave and act for your profit". They are playing for their own profit. Win-Win is only a term used to convince or induce not-so-smart investors. There will still be a bunch of guys who have profited from these crashes. After all, nobody is throwing money into the Atlantic Ocean, if you lose someone else gains. Unfortunately, incentives for playing smart (mostly doing bad) are huge and accepted by legal systems, regulators, government and modern society at large.

American Debt They have been spending money that doest exist. they have now spent so much that the collateral they put up wont cover the debt. and in order to keep spending, even modestly, they have to loan more money, the lender knowing they are unable to repay are nervous about lending the money. as a result the organizations that provide work cant get the finance they need to continue and end up having to put people of. This has a snowballing effect. For instance America has been buying cheep goods from China for years with American money. and china has been lending it back to them and making interest on the deal. If the US dollar losses value then the Chinese will have to ask for higher interest in order to recoup for Chinese imports into the US. The tentacles go every where. For every dollar the US owns They are about 200 dollars in debt.The price of self regulation, human greed and corruption.

nothing other than SUB PRIME lOSS.....it is nothing,US bank issused Home loans to all the people without enquiring their credit background......which lead to non-repayment of many loans......this is one of the reason for US crisis

The USA was spending money it borrowed from China, China lent money to America so they would buy their goods. Something had to give. The economy of the world is based on toasters and ever improving mobile phones.

Answer:

The current crisis is both economic and financial. It may be better to have an understanding of what causes these crises in general, rather than getting tied down in endless details regarding the current crises. The causes of the Great Depression are still being debated over seventy years later. It is unlikely a consensus will be reached regarding the specific chain of events leading to the current crises.

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The underlying cause of all financial crises is due to a drop in the rates of return on investments, falling equity prices and/or a rise in defaults on loans.

Such changes can put a chill on the investment markets, thus driving down the current prices paid for units of investment instruments. As investors see 'paper' losses mount ('paper' value is the stated value of the investment at a given time, usually based on the most recent price paid for a unit of that investment by the last buyer), a feedback process may ensue in which falling 'paper' values lead to more risk aversion, which in turn leads to a further drop in 'paper' values.

For this reason, understanding the difference between 'paper' losses and real losses is important, though it appears many investors do not understand the difference. Real losses are only experienced when an asset is sold for less than what was paid for it (assuming the interest or dividends paid on the investment kept up with inflation). Many investors do not know whether or not they are experiencing real losses because they generally do not keep track of what they paid for the assets to begin with. Rather, they believe they have lost money simply because last price paid for a unit of the investment by a buyer is less than the previous price paid for a similar unit by an earlier buyer. This is much like believing you've lost half the value of your house because your neighbor sold his extremely similar house for half of what his neighbor sold his extremely similar house for.

When 'paper' losses occur, sophisticated investors and their agents realize that assets had been overvalued in the first place and that promised rates of return were unsustainable. In a severe crisis and armed with this truth, many begin looking for answers as to why prices and expected rates of return had been so high in the first place. In some cases, the answers are used to punish those who 'caused' the meltdown. In other cases, the answers are used to justify legislative and regulatory changes meant to prevent a recurrence of such errant valuations.

As stability returns to the financial economy, prices and rates of return on investments will be based, as they should be, on more realistic estimates of the expected profitability of enterprises that produce goods and services for the economy.

A sizable financial crisis will generally lead to a decline in funding for riskier investments. The deeper the crisis, the more severe the decline in funding.

Real economic growth - especially that which comes from new or improved goods, services and technologies - depends on funding provided by risk-taking investors. If investors are hiding from risk en mass, such economic growth will decline or cease (and the economy may be even shrink) until funding for riskier investments in real economic activity increases.

An economic crisis occurs when there is a substantial drop in resource utilization. Resources fall into three categories: labor, capital and raw materials.

A substantial drop in resource utilization might be caused by loss of or reduced access to one or more resources. For example, an economic crisis can be triggered by a sudden lack of access to oil.

Declining resource utilization may also be caused by declining demand for some goods and services. As demand for some goods and services decline, so does demand for the resources that produce those goods and services.

Generally, a decline in resource utilization is considered a crisis when the resource in question is labor and the decline is sudden and substantial.

Of course, unused resources are available to be utilized to produce other goods and services, assuming that demand for them either exists or is projected to exist, and assuming that investment monies are available to fund the creation of new enterprises or the expansion of existing enterprises.

Because the financial economy consists of numeric valuations of economic realities, it is viable only to the degree it renders an accurate numeric portrayal of the real economy. Therefore, a real economic decline should be reflected by declines in the financial economy - unless government and other actors seek to mask the economic crisis with actions that result in bogus valuations in the financial economy.

Therefore, a financial crisis might be the numeric representation of a crisis in the real economy, or it might be the result of the financial system 'correcting' previous overvaluations of real assets (i.e. - removing overly-speculative influences from those valuations). In some cases, an economic crisis may trigger financial 'over-correction', thus magnifying the overall effect of the economic crisis and perhaps prolonging it.

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An economic crisis will inevitably lead to a financial crisis - unless governments and other agents manipulate financial valuations in an attempt to avoid devaluations based on real declines in economic potential. Attempts of this sort usually lead to even greater financial crises later that are manifest as damaging levels of inflation or deflation. This occurs as the financial economy, in order to remain viable, inevitably seeks to establish accurate valuations of the real economy.

All financial valuations are stated in terms of numbers and those numbers represent money. As such, a financial crisis can be triggered by too much or too little growth (or decline) in the money supply. Such disruptions can, and often do, lead to disruptions in the real economy as well. However, these 'disruptions' may be quite frequent, though little noticed because they are so small. Major monetary mismanagement will lead to major financial disruptions, which can then lead to disruptions in the real economy.

The worst scenario is when an economic or financial crisis is large enough to set up a feedback cycle between the two aspects of the economy, thus pushing each toward further decline. A financial crisis can thus lead to an economic decline which further perpetuates the financial decline, which in turn perpetuates the economic crisis. In such a situation, risk aversion may become more important than making money on investments, leading to abandonment of risk-taking investments.

Assuming an adequate supply of funds available for investment and continued access to real resources, economic crises are prolonged solely by continued widespread aversion to risk on the part of those with funds available for investment.

Any crisis emerges from changes in the real economy and/or from the need for the financial economy to 'correct' itself in order to render more accurate valuations of the real economy. The beginnings of the crisis are due to real disruptions in the real economy, the financial economy and/or the money supply, but the longevity of that crisis is increasingly based, as time goes by, on the unwillingness of holders of wealth to invest in real economic activity.

This question should be merged with

http://wiki.answers.com/Q/What is the main cause of the current economic crisis in the US

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The Dollar Causing World Financial Crisis

By admin on October 29, 2008

Over the last three months we have seen the world go through its worst financial and economic crisis. The icons of banking have gone bankrupt and there is uncertainty in the financial markets of the entire world. Stock markets have been crashing day after day reaching their lowest in years. Investors and the public have lost trillions of dollars. Why? Why has this happened? What is the reason?

The reason for the entire crisis is the fact that the United States of America holds the world to ransom by controlling the international currency of exchange. Let me explain why I say so.

After the Brettonwoods conference in 1944 it was decided that the dollar would be used as the international currency of exchange and trade. This meant that all currencies would be pegged against the dollar. As time went by, the United States of America became the single largest consumer in the world accounting for 30% of world consumption. Therefore it also became the largest consumer of the dollar. This means that today, the United States controls both the supply and demand side of world money.

If one analyses the events of the last three months, one will find some startling findings. The crisis was caused by America because of its greed and failed policies in the banking sector which resulted in the collapse of Wall Street. However if you notice, since then, the dollar has been becoming stronger and stronger and other currencies have reduced up to 20% of their value. This means that the rest of the world will have to pay more for their imports and purchases from now on.

Whether or not America does anything to support the dollar, the world will not let the dollar fall. Why? The reason is simple. All the foreign exchange reserves of the world are in dollars. So if the dollar drops in value then in effect everybody loses money. Therefore

countries will continue to make efforts to keep the dollar strong.

China is the largest buyer of the dollar in the world. It buys the dollar to keep the Yuan low to promote it exports. It has 1.8 trillion dollars of forex reserves. China is the largest stakeholder in Freddie Mac and Freddie Mae and America owes 30% of its debt to China. Therefore if the American economy collapses it will take China down along with it.

The US has recently instituted the 700 billion dollar bail out package for its banking sector. Where did that money come from? It was “Fiat Money”. Fiat money is “Money which has no intrinsic value and cannot be redeemed for specie or any commodity, but is made legal tender through government decree.” In the normal scenario all currency issue has to be backed by gold. However in the case of the 700 billion dollar package the money was just created out of thin air without any backing of gold. Now issuing fiat money reduces the value of the currency, in this case the dollar and also cause inflation. Promoting inflation is one of the ways for an economy to avoid going into recession and this to some extent is working for America. However the dollar did not become weaker but instead is growing stronger. Therefore America never faced the downside of issuing Fiat money.

As long as the dollar is the currency of world trade and America is the largest consumer in the world, America can just sit back and live beyond its means and the world will keep funding it. The world needs to figure out an alternative to the dollar or it will continue to be held at ransom by the United States of America.

MortgageFrom Wikipedia, the free encyclopedia

Jump to: navigation, searchThis article is about the legal mechanisms used to secure the performance of obligations, including the payment of debts, with property. For loans secured by mortgages, such as residential housing loans, and lending practices or requirements, see Mortgage loan.

Property law

Part of the common law series

Acquisition

Gift · Adverse possession · Deed

Conquest · Discovery · Treasure

Trove

Lost, mislaid, and abandoned property

Alienation · Bailment · License

Estates in land

Allodial title · Fee simple · Fee tail

Life estate · Defeasible estate

Future interest · Concurrent estate

Leasehold estate · Condominiums

Conveyancing

Bona fide purchaser

Torrens title · Strata title

Estoppel by deed · Quitclaim deed

Mortgage · Equitable conversion

Action to quiet title · Escheat

Future use control

Restraint on alienation

Rule against perpetuities

Rule in Shelley's Case

Doctrine of worthier title

Nonpossessory interest

Easement · Profit

Covenant running with the land

Equitable servitude

Related topics

Fixtures · Waste · Partition

Riparian water rights

Lateral and subjacent support

Assignment · Nemo dat

Property and conflict of laws

Other common law areas

Contract law · Tort law

Wills, trusts and estates

Criminal law · Evidence

v • d • e

A mortgage is the transfer of an interest in property (or the equivalent in law - a charge) to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.

The term comes from the Old French "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.[1]

In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than on other property (such as ships) and in some jurisdictions only land may be mortgaged. 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. See mortgage loan for residential mortgage lending, and commercial mortgage for lending against commercial property.

The cost to the borrower is measured by the annual percentage rate (APR), which is an effective annual rate of interest and fees paid by the borrower.

In many countries, though not all (Bali, Indonesia is one exception[2]), it is normal for home purchases to be funded by a mortgage. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Ireland, Spain, the United Kingdom, Australia and the United States.

Contents

[hide] 1 Participants and variant terminology 2 Mortgage lender 3 Borrower

o 3.1 Borrowing for investment purposes 4 Other participants 5 Default on divided property 6 Legal aspects

o 6.1 Mortgage by demise o 6.2 Mortgage by legal charge o 6.3 Equitable mortgage

7 History 8 Foreclosure and non-recourse lending 9 Mortgages in the United States

o 9.1 Types of mortgage instruments 9.1.1 The mortgage 9.1.2 Security deed 9.1.3 The deed of trust

o 9.2 Mortgage lien priority 10 See also

11 Notes and references

[edit] Participants and variant terminology

Legal systems in different countries, while having some concepts in common, employ different terminology. However, in general, a mortgage of property involves the following parties.

[edit] Mortgage lender

Mortgagee is a party to whom property is mortgaged, usually a lender. Mortgage provides security to the lender. Given the large sum of money involved in financing a property, a mortgage lender will usually want security for the loan that will provide a claim upon that security and will take precedence over other creditors. A mortgage accomplishes this security.

The lender loans the money and registers the mortgage with the title to the property. The borrower gives the lender the mortgage as security for the loan, receives the funds, makes the required payments and maintains possession of the property. The borrower has the right to have the mortgage discharged from the title once the debt is paid. If the mortgagor fails to repay the loan according to the conditions set forth by the lender, then the mortgagee reserves the right to foreclose on the property.

[edit] Borrower

Mortgagor is a party who mortgages property. A mortgagor owes the obligation secured by the mortgage. Generally, the debtor must meet the conditions of the underlying loan or other obligation and the conditions of the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the mortgage by the creditor to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan.

Most buyers of real property would have difficulty saving enough money to make an outright purchase of real estate. The use of debt increases a buyer's ability to buy through a combination of down payment and debt. As a result a real estate transaction seldom occurs without buyers relying on borrowed funds.

[edit] Borrowing for investment purposes

Aside from the absence of large amount of available money, there are several reasons why an investor (including a buyer of real estate) might borrow funds. Some of these include:

To diversify investments and reduce overall risk by using only part of the available funds for any one investment. However the mortgage loan enables him to purchase more assets than he would otherwise been able to, and therefore in general increases investment risk rather than reducing it.

To invest the borrowed funds at a higher rate of interest (yield) than the borrowing rate; for example, a sum is borrowed at an annual interest rate of 7% per year and used to invest in a project that returns 10% per year. This is likely to be speculative and there is usually a possibility that the project may turn out to return less than 7% per year or to lose money.

To free up equity for other purposes; for example, a commercial enterprise may prefer to use funds to purchase inventory or equipment instead of investing only in land and buildings.

To obtain a tax benefit. In some countries (such as Canada), mortgage interest is not tax deductible, but loans made for investment purposes are.

[edit] Other participants

Because of the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation. The terminology varies with legal jurisdiction; see lawyer, solicitor and conveyancer.

Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor, typically by finding the most competitive loan.

The debt is, in civil law jurisdictions, referred to as hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.

[edit] Default on divided property

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.

When a mortgaged tract of land is split up and sold, upon default, the mortgagee first forecloses on lands still owned by the mortgagor and proceeds against other owners in an 'inverse order' in which they were sold. For example, A acquires a 3-acre (12,000 m2) lot by mortgage then splits up the lot into three 1-acre (4,000 m2) lots (A, B, and C), and sells lot B to X, and then lot C to Y, retaining lot A for himself. Upon default, the mortgagee proceeds against lot A first, the mortgagor. If foreclosure or repossession of lot A does not fully satisfy the debt, the mortgagee proceeds against lot B, then lot C. The rationale is that the first purchaser should have more equity and subsequent purchasers receive a diluted share.

[edit] Legal aspects

Mortgages may be legal or equitable. Furthermore, a mortgage may take one of a number of different legal structures, the availability of which will depend on the jurisdiction under which the mortgage is made. Common law jurisdictions have evolved two main forms of mortgage: the mortgage by demise and the mortgage by legal charge.

[edit] Mortgage by demise

In a mortgage by demise, the mortgagee (the lender) becomes the owner of the mortgaged property until the loan is repaid or other mortgage obligation fulfilled in full, a process known as "redemption". This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption.

Mortgages by demise were the original form of mortgage, and continue to be used in many jurisdictions, and in a small minority of states in the United States. Many other common law jurisdictions have either abolished or minimised the use of the mortgage by demise. For example, in England and Wales this type of mortgage is no longer available, by virtue of the Land Registration Act 2002.

[edit] Mortgage by legal charge

In a mortgage by legal charge or technically "a charge by deed expressed to be by way of legal mortgage",[3] the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.

To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. 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.

This type of mortgage is most common in the United States and, since the Law of Property Act 1925,[3] it has been the usual form of mortgage in England and Wales (it is now the only form – see above).

In Scotland, the mortgage by legal charge is also known as Standard Security.[4]

In Pakistan, the mortgage by legal charge is most common way used by banks to secure the financing.[citation needed] It is also known as registered mortgage. After registration of legal charge, the bank's lien is recorded in the land register stating that the property is under mortgage and cannot be sold without obtaining an NOC (No Objection Certificate) from the bank.

[edit] Equitable mortgageSee also: Security interest#Types of security

In an equitable mortgage the lender is secured by taking possession of all the original title documents of the property and by borrower's signing a Memorandum of Deposit of Title Deed (MODTD). This document is an undertaking by the borrower that he/she has deposited the title documents with the bank with his own wish and will, in order to secure the financing obtained from the bank.

[edit] History

At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were met – usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word "mortgage" (a legal term in French meaning "dead pledge"). The debt was absolute in form, and unlike a "live pledge" was not conditionally dependent on its repayment solely from raising and selling crops or livestock or simply giving the crops and livestock raised on the mortgaged land. The

mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no further steps to be taken by the creditor, such as acceptance of crops and livestock in repayment.

The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it or refuse to reconvey it to the borrower, who was in a weak position. Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on reconveyance on redemption. This right of the borrower is known as the "equity of redemption".

This arrangement, whereby the lender was in theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many jurisdictions as being awkwardly artificial. By statute the common law's position was altered so that the mortgagor would retain ownership, but the mortgagee's rights, such as foreclosure, the power of sale, and the right to take possession, would be protected.

In the United States, those states that have reformed the nature of mortgages in this way are known as lien states. 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.

[edit] Foreclosure and non-recourse lending

In most jurisdictions, a lender may foreclose on the mortgaged property if certain conditions – principally, non-payment of the mortgage loan – apply. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt.

In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt, through a deficiency judgment. In some jurisdictions, first mortgages are non-recourse loans, but second and subsequent ones are recourse loans.

Specific procedures for foreclosure and sale of the mortgaged property almost always apply, and may be tightly regulated by the relevant government. In some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.

At the start of 2008, 5.6% of all mortgages in the United States were delinquent.[5] By the end of the first quarter that rate had risen, encompassing 6.4% of residential properties. This number did not include the 2.5% of homes in foreclosure.[6]

[edit] Mortgages in the United States

[edit] Types of mortgage instruments

Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.[7]

[edit] The mortgage

In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt.[citation needed]

[edit] Security deed

The deed to secure debt is a mortgage instrument used in the state of Georgia. Unlike a mortgage, however, a security deed is an actual conveyance of real property in security of a debt. Upon the execution of such a deed, title passes to the grantee or beneficiary (usually lender), however the grantor (debtor) maintains equitable title to use and enjoy the conveyed land subject to compliance with debt obligations.

Security deeds must be recorded in the county where the land is located. Although there is no specific time within which such deeds must be filed, the failure to timely record the deed to secure debt may affect priority and therefore the ability to enforce the debt against the subject property.[8]

[edit] The deed of trust

The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee.[9] It is also possible to foreclose them through a judicial proceeding.[citation needed]

Most "mortgages" in California are actually deeds of trust.[10] 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. Because the foreclosure does not require actions by the court the transaction costs can be quite a bit less.[citation needed]

Deeds of trust to secure repayments of debts should not be confused with trust instruments that are sometimes called deeds of trust but that are used to create trusts for other purposes, such as estate planning. Though there are superficial similarities in the form, many states hold deeds of trust to secure repayment of debts do not create true trust arrangements.[citation needed]

[edit] Mortgage lien priority

Except in those few states in the United States that adhere to the title theory of mortgages,[11] either a mortgage or a deed of trust will create a mortgage lien upon the title to the real property being mortgaged. The lien is said to "attach" to the title when the mortgage is signed by the mortgagor and delivered to the mortgagee and the mortgagor receives the funds whose repayment the mortgage secures. Subject to the requirements of the recording laws of the state in which the land is located, this attachment establishes the priority of the mortgage lien with respect to most other liens[12] on the property's title.[13] Liens that have attached to the title before the mortgage lien are said to be senior to, or prior to, the mortgage lien. Those attaching afterward are said to be junior or subordinate.[14] The purpose of this priority is to establish the order in which lien holders are entitled to foreclose their liens in an attempt to recover their debts. If there are multiple mortgage liens on the title to a property and the loan secured by a first mortgage is paid off, the second mortgage lien will move up in priority and become the new first mortgage lien on the title. Documenting this new priority arrangement will require the release of the mortgage securing the paid off loan.

[edit] See also

Look up mortgage inWiktionary, the free dictionary.

Trust deed Bridge financing Financing Fixed rate mortgage Promissory note Loan origination Subprime lending Mortgage calculator Refinancing Foreign currency mortgage Americans for Fairness in Lending National Mortgage News Mortgage insurance collateralized mortgage obligation - CMO Subprime mortgage crisis

[edit] Notes and references

1. ̂ Coke, Edward. Commentaries on the Laws of England. "[I]f he doth not pay, then the Land which is put in pledge upon condition for the payment of the money, is taken from him for ever, and so dead to him upon condition, &c. And if he doth pay the money, then the pledge is dead as to the Tenant