Mortgages and Deeds of Trust

Chapter 36 asked who is entitled to enforce the obligation. This chapter asks what the security is, how it comes into existence, and what the law refuses to let the parties do with it. The two questions are separate and must remain so: an impeccable mortgage secures nothing if the obligation has been discharged, and an impeccable obligation is unsecured if the instrument intended to encumber the land failed of its purpose.

The security interest in land is the oldest continuously litigated institution in Anglo-American property law, and it carries its history visibly. The three theories of the mortgage — title, lien, and intermediate — are sediment left by successive centuries. The equity of redemption, the most consequential single idea in the field, exists because the Court of Chancery declined to enforce the common-law forfeiture that the parties had plainly written down. The deed of trust exists because lenders sought to escape judicial supervision of the sale. None of the modern doctrine is intelligible as a set of freestanding rules; all of it is intelligible as the residue of a long contest between the letter of a conveyance and the substance of a loan.

1. A mortgage is a conveyance or lien upon an interest in real property given to secure performance of an obligation. Restatement (Third) of Property: Mortgages § 1.1 states the definition functionally: the transaction is a mortgage if it creates security in land, whatever the parties call it.
2. Security is an incident of an obligation. Without an obligation there is nothing to secure; § 5.1 and Chapter 36's analysis of the note are the same proposition seen from opposite sides.
3. Substance governs form. Equity characterizes a transaction by what it does, not by the label the drafter chose. A deed absolute given as security is a mortgage; a sale with an option to repurchase may be a mortgage; an escrowed conveyance may be a mortgage.
4. Three theories of the mortgage survive in American law. Title theory treats the mortgage as a conveyance of legal title subject to defeasance; lien theory treats it as a lien only; the intermediate theory gives the mortgagee title upon default.
5. The theory selected by a jurisdiction has narrow but real consequences. Possession before default, entitlement to rents, the effect of a co-tenant's mortgage on a joint tenancy, and the mechanics of foreclosure all vary with it.
6. The equity of redemption is the mortgagor's equitable right to discharge the obligation and reclaim the land after the law day has passed. It arose in Chancery and is the historical origin of the modern mortgage.
7. The equity of redemption cannot be clogged. A provision extinguishing or impairing the right to redeem, agreed at the time of the loan, is unenforceable; Restatement § 3.1.
8. Foreclosure exists to terminate the equity of redemption. Foreclosure is the mortgagee's answer to a right the mortgagor could otherwise exercise indefinitely; Chapter 39 develops the procedure.
9. Statutory redemption is a distinct, post-sale, legislative creation. It must not be confused with the equitable right, which ends at the foreclosure sale.
10. A deed of trust is a three-party security device: trustor, trustee, and beneficiary. Its dominant practical significance is that it ordinarily permits nonjudicial sale under a power of sale.
11. The trustee under a deed of trust is not an ordinary trustee. The office is a limited one, with duties owed to both parties in the conduct of the sale, and it is not a general fiduciary of the borrower.
12. Functionally, the mortgage and the deed of trust are treated alike. Restatement § 1.1 comment a and modern statutes assimilate them; the difference lies principally in the mode of enforcement.
13. The requisites of a mortgage are six. An obligation, a mortgagor with an interest in the land, an intent to encumber, a sufficient description, a writing, and execution satisfying the Statute of Frauds.
14. Any interest in land that may be conveyed may be mortgaged. Fee interests, life estates, remainders, leaseholds, easements appurtenant with the dominant estate, and undivided cotenancy shares are all mortgageable.
15. Delivery and, where required, acknowledgment govern effectiveness and recordability. A defectively acknowledged mortgage may bind the parties yet fail as constructive notice under the recording acts examined in Chapter 33.
16. Recording does not create the mortgage; it protects it. Priority against subsequent purchasers is the subject of Chapter 38.
17. A mortgage may secure future advances. The priority of each advance depends on whether it was obligatory or optional, and on any governing statutory maximum or notice rule.
18. Dragnet or future-advances clauses are enforceable but narrowly construed. Courts limit them by relationship-of-the-debts and reasonable-contemplation tests.
19. An equitable mortgage arises where the parties intend security but fail in form. A defective instrument, a contract to give a mortgage, or a deposit of title documents may be enforced in equity.
20. A deed absolute may be shown by parol to be a mortgage. The parol evidence rule yields; the inquiry is the parties' intent, judged by the continued existence of a debt, the adequacy of consideration, retention of possession, and the parties' conduct.
21. The mortgagor retains the beneficial ownership and, in lien states, possession before default. The mortgagor may convey, lease, further encumber, and use the land, subject to waste doctrine.
22. The mortgagee's pre-default interest is protective, not possessory. Its rights are to the security's integrity: insurance, taxes, waste, and the right to make protective advances.
23. An assignment of rents is a distinct security interest with its own perfection and enforcement rules. Whether it is absolute or collateral, and when it is activated, varies by jurisdiction and by statute.
24. Receivership and mortgagee-in-possession are the pre-foreclosure remedies for a wasting security. A mortgagee in possession assumes duties to account and to manage prudently.
25. Due-on-sale clauses are enforceable as a matter of federal law. The Garn–St Germain Act, 12 U.S.C. § 1701j-3, preempts contrary state restraints and lists exempt transfers; the topic recurs in Chapter 38.
26. Discharge of the obligation entitles the mortgagor to a release of record. Statutes in every State impose duties and penalties; § 6.4 of the Restatement states the principle.

1. State the functional definition of a mortgage and explain why substance governs form in its characterization.
2. Trace the mortgage from the common-law gage and the conditional conveyance through the Chancery invention of the equity of redemption to the modern security instrument.
3. Distinguish title, lien, and intermediate theories, and identify the specific doctrinal consequences that turn on the distinction.
4. Explain the origin, content, and duration of the equity of redemption, and distinguish it from statutory redemption.
5. Apply the anti-clogging principle to bargained-for provisions that restrict or condition the right to redeem.
6. Compare the mortgage and the deed of trust in structure, enforcement, timing, cost, and deficiency consequences.
7. State the office and duties of the trustee under a deed of trust, and identify the limits of that office.
8. Identify the requisites of a valid mortgage and analyze defects in each.
9. Determine which interests in land may be mortgaged and the consequences of mortgaging less than a fee.
10. Analyze after-acquired property, future-advance, and dragnet clauses and the limits courts impose on them.
11. Recognize an equitable mortgage and state the circumstances in which equity supplies what form omitted.
12. Apply the deed-absolute doctrine, identifying the evidentiary factors and the standard of proof.
13. Distinguish an absolute sale with a repurchase option from a disguised mortgage.
14. State the mortgagor's rights of use, possession, transfer, and further encumbrance before default.
15. Apply the doctrine of waste in the mortgage context and identify the mortgagee's remedies.
16. Analyze assignments of rents, their character, and their activation.
17. Explain the mortgagee-in-possession doctrine and the duties it imposes.
18. State the operation of a due-on-sale clause under the Garn–St Germain Act and its statutory exemptions.
19. Explain the mortgagor's right to a release upon satisfaction and the consequences of failing to give one.
20. Frame the analytical sequence that Chapters 38 and 39 presuppose: valid security, priority, then enforcement.

The security instrument is a creature of state property law, and there is no uniform act governing it. The Restatement (Third) of Property: Mortgages is therefore the closest thing to a national statement and is used throughout as the organizing text, with the caution that it states best practice as often as majority rule. Federal law intrudes at defined points, principally the Garn–St Germain Act on due-on-sale and the consumer-protection statutes that regulate the origination of residential loans.

• Restatement (Third) of Property: Mortgages §§ 1.1–1.5 (definition; instruments creating security; mortgages on various interests)
• Restatement (Third) of Property: Mortgages §§ 2.1–2.4 (obligations secured; future advances; dragnet clauses)
• Restatement (Third) of Property: Mortgages §§ 3.1–3.5 (equity of redemption; clogging; deed absolute; conditional sale)
• Restatement (Third) of Property: Mortgages §§ 4.1–4.7 (rights and duties before foreclosure; waste; possession; rents; receivership)
• Restatement (Third) of Property: Mortgages §§ 5.1–5.2 (the obligation and its security; transfer)
• Restatement (Third) of Property: Mortgages § 6.4 (discharge and release of record)
• Garn–St Germain Depository Institutions Act of 1982 § 341, 12 U.S.C. § 1701j-3 (due-on-sale preemption and exemptions)
• U.C.C. § 9-203(g) and § 9-109(b) (security follows the obligation; real-property security excluded from Article 9 except as provided)
• Statute of Frauds, 29 Car. 2, c. 3 (1677), as received and re-enacted in the several States (writing requirement)
• Uniform Assignment of Rents Act (Unif. L. Comm'n 2005) (enacted in a minority of States)

• Grant S. Nelson, Dale A. Whitman, Ann M. Burkhart & R. Wilson Freyermuth, Real Estate Finance Law chs. 1–4 (6th ed.)
• Sir Edward Coke, Commentary upon Littleton § 332 (1628) (the classical etymology and structure of the gage)
• 2 Joseph Story, Commentaries on Equity Jurisprudence §§ 1013–1032 (1836) (the equity of redemption)
• R.W. Turner, The Equity of Redemption (1931) (the standard historical monograph)
• A.W.B. Simpson, A History of the Land Law ch. 9 (2d ed. 1986)
• Ann M. Burkhart, Freeing Mortgages of Merger, 40 Vand. L. Rev. 283 (1987)
• R. Wilson Freyermuth, Modernizing Security in Rents: The New Uniform Assignment of Rents Act, 71 Mo. L. Rev. 1 (2006)
• Restatement (Third) of Property: Mortgages, Reporters' Notes to §§ 3.1–3.4 (collecting the deed-absolute cases)

A mortgage is the grant of an interest in real property as security for the performance of an obligation. Restatement (Third) of Property: Mortgages § 1.1 puts it in exactly those functional terms: “a mortgage is a conveyance or retention of an interest in real property as security for performance of an obligation.” Nothing in the definition depends upon the word used in the instrument. A document captioned “Deed of Trust,” “Security Deed,” “Trust Indenture,” or “Vendor's Lien” is a mortgage if it does what the definition describes, and a document captioned “Mortgage” is not one if there is no obligation for it to secure.

Three consequences follow immediately. First, the mortgage is derivative. It exists to serve an obligation, and its content is measured by that obligation: what is secured, in what amount, on what conditions, and until when. Chapter 36 approached the same relation from the side of the note; § 5.1 of the Restatement states it from the side of the security. Second, the mortgage is defeasible. It is designed to end — by payment, by release, by foreclosure, by the running of a limitations period — and every doctrine in this chapter is organized around the mechanics of its termination. Third, the mortgage is a property interest, not merely a contract right. It binds the land, follows it into the hands of transferees who take with notice, and is recorded in the same public records examined in Chapters 33 and 34.

It is worth stating what a mortgage is not. It is not a sale, though it was once cast in the form of one. It is not a lease, though the mortgagee in a title state was historically entitled to possession as a landlord would be. It is not an equitable lien arising by operation of law, though the two converge in the equitable mortgage. And it is not a personal guarantee: the mortgagor may or may not be personally liable, and in a purchase by a third party who takes subject to a mortgage the owner of the land is not liable on the note at all — a point Chapter 38 develops.

Finally, the term “mortgage” is used in two senses that ordinary speech conflates. In the technical sense it means the security instrument. In lay usage it means the entire loan, including the note. This treatise uses the technical sense throughout, and the reader who trains the habit will find that a large class of confusions about “who holds the mortgage” resolves itself into the more precise question of who holds the note and who is the record mortgagee.

The pattern of the table is the pattern of the chapter. Every row but the last is a mortgage because every row but the last secures an obligation. Equity's persistent project, from the seventeenth century to the Restatement, has been to prevent the last row from being manufactured out of the others by drafting.

The medieval gage was a pledge of land. In the vivum vadium, or living gage, the creditor took possession and applied the rents and profits to the debt, which extinguished itself over time. In the mortuum vadium, or dead gage, the profits went to the creditor as interest and the principal remained — hence “dead,” because the pledge was dead to the debtor. Both were awkward, and both were shadowed by the usury prohibition, which the dead gage plainly offended.

By the fifteenth century the dominant form had become the conditional conveyance. The debtor conveyed the fee to the creditor upon condition that the estate would revest if the debt was paid on a fixed day — the law day. Coke described the arrangement in Littleton § 332 and supplied the received etymology: if the debtor pays, the pledge is dead as to the creditor; if the debtor fails, the land is dead to the debtor. The common law enforced the condition with complete rigor. Payment one day late, or at the wrong place, or in the wrong form, worked an absolute forfeiture of land often worth several times the debt.

The Court of Chancery began, in the early seventeenth century, to relieve against that forfeiture. Initially the relief was confined to accident, mistake, and special hardship. By the Chancellorships of Nottingham and Hardwicke it had hardened into a right: the mortgagor might redeem after the law day upon payment of principal, interest, and costs, and the right existed as an incident of the transaction rather than as a discretionary indulgence. That right — the equity of redemption — is the single most important development in the history of the subject, and it inverted the instrument. What the parties had written as a conveyance became, in substance, a security.

Chancery then had to protect its own creation. If the right to redeem could be waived in the mortgage itself, lenders would require the waiver in every transaction and the reform would be nullified within a season. Hence the anti-clogging rule: “once a mortgage, always a mortgage,” and no provision agreed at the time of the loan may cut off or burden the right to redeem. And having conferred a perpetual right on the mortgagor, Chancery had to give the mortgagee a means of ending it, which is strict foreclosure and, later, foreclosure by sale. The modern law of mortgages is the working out of those three moves.

American law received this structure with the common law and then modified it in two great waves. In the nineteenth century, legislatures added statutory redemption after sale and, in many States, converted the security into a lien by statute. In the twentieth, the deed of trust and the power of sale substantially displaced judicial foreclosure in the West and South, and federal regulation reached the residential mortgage market at both origination and servicing.

The table is not antiquarian. Each stage left a rule that is still applied. Title theory is the conditional conveyance; the equity of redemption is Chancery's relief; foreclosure is the answer to that relief; statutory redemption is the legislature's second answer to foreclosure; and the deed of trust is the lender's answer to judicial supervision.

A jurisdiction's theory of the mortgage answers a single formal question: where does legal title reside between execution and foreclosure? Under title theory, legal title passes to the mortgagee, subject to defeasance on payment; the mortgagor holds the equity of redemption. Under lien theory, title remains in the mortgagor and the mortgagee has only a lien. Under the intermediate theory, title remains in the mortgagor until default and passes to the mortgagee thereafter.

The great majority of American States are lien-theory jurisdictions, either by statute or by decision. A minority — concentrated in New England and including several States with security-deed practice — retain title theory in name, though most have curtailed its practical incidents. The intermediate theory survives in a handful of jurisdictions and is chiefly of interest because it isolates default as the operative moment.

The consequences are narrower than the doctrinal drama suggests, but they are real. The most important is possession before default: in a title state the mortgagee is theoretically entitled to possession immediately, a right that is almost always waived by the instrument and is in several States abolished by statute; in a lien state the mortgagor is entitled to possession until the foreclosure sale, or until the expiration of any statutory redemption period. Rents follow possession in the classical analysis, which is why assignments of rents are drafted so carefully and why their treatment varies so sharply.

A second consequence concerns concurrent estates. In a title state, one joint tenant's mortgage was traditionally held to sever the joint tenancy, because it operated as a conveyance of that tenant's title; in a lien state, the majority holds that the mortgage does not sever, because no title passes, though the lien's survival after the mortgagor's death then becomes contested. Chapter 17 examined the severance rules; the mortgage theory of the jurisdiction is the variable that drives them.

A third consequence concerns marital property, homestead, and dower-substitute regimes, in which the characterization of the mortgagee's interest may determine whether a non-signing spouse's interest is reached. A fourth is terminological but consequential in drafting: title-theory instruments use conveyancing language and a defeasance clause, while lien-theory instruments grant a lien and typically recite a power of sale.

The Restatement takes the position that the theories should be treated as vestigial and that outcomes should be reasoned functionally from the security purpose of the transaction. That is the sound modern approach and is followed in this chapter, with the caution that a practitioner must still know which theory the forum professes, because the older cases and several statutes are written in its vocabulary.

The practical lesson is that theory rarely decides a case standing alone. It supplies a default that the instrument, a statute, or a functional analysis usually displaces. Where it still matters most is in the pre-default relations examined in Part V.

The deed of trust is a security instrument in which the borrower (trustor or grantor) conveys the land, or a power over it, to a third party (the trustee) to hold for the benefit of the lender (the beneficiary), with authority to sell the land upon default and apply the proceeds to the debt. Its structural point is the trustee: by interposing a third party with a power of sale, the parties obtain a mechanism for realizing on the security without a judicial proceeding.

That mechanism is the whole of its practical significance. A nonjudicial sale is ordinarily faster and cheaper than a judicial foreclosure — measured in months rather than years in most States — and it does not require the lender to establish its case before a court in the first instance. The corresponding costs fall on the borrower and, less obviously, on the buyer at the sale: procedural protections are statutory and often minimal, defenses must be raised affirmatively by an action to enjoin the sale, and title acquired at a nonjudicial sale is more vulnerable to later attack than title confirmed by decree.

Deficiency consequences also differ. Several States that permit nonjudicial sale bar or limit a deficiency judgment following one, on the theory that the lender who chooses the summary route forgoes the personal remedy. Others require the lender to elect between remedies, or apply a fair-value limitation to any deficiency. These rules are examined in Chapter 39; they are noted here because they are frequently the reason a sophisticated lender chooses judicial foreclosure even where a power of sale is available.

The trustee's office is limited and is misunderstood in proportion to its name. The trustee under a deed of trust is not a general fiduciary of the borrower and owes no duty to protect the borrower's economic interests in the loan. What the trustee owes is a duty of impartiality and good faith in the exercise of the power of sale: to comply strictly with the statutory and instrument requirements for notice and conduct of the sale, to refrain from self-dealing, to sell in a commercially reasonable manner where the jurisdiction so requires, and to distribute the proceeds correctly, including any surplus to the trustor. Many States allow the beneficiary to substitute the trustee at will, which makes the office practically an instrument of the lender and is a principal reason courts scrutinize sale procedure rather than trustee loyalty.

Because the two instruments are functionally equivalent, the Restatement and modern statutes treat them alike for substantive purposes: creation, the obligation secured, the equity of redemption, anti-clogging, transfer, and discharge apply without regard to form. Where they diverge is in the enforcement machinery, and a reader who keeps that division in mind will not be surprised by a jurisdiction that calls its instrument a deed of trust and applies mortgage doctrine to it wholesale.

Any comparison of this kind is jurisdictional. Several States permit powers of sale in mortgages, several require judicial foreclosure of deeds of trust in defined circumstances, and the deficiency rules are almost entirely statutory. The table states tendencies, not law in any particular forum.

The installment land contract, or contract for deed, is a sale in which the seller retains legal title until the buyer completes a schedule of payments, with the traditional remedy for default being forfeiture: the buyer loses the land and the payments made. It performs the economic function of a purchase-money mortgage while avoiding foreclosure, and for most of the twentieth century it was the principal vehicle for low-value and credit-impaired transactions.

Courts and legislatures have steadily assimilated it to the mortgage. Restatement § 3.4(b) states the modern position bluntly: a contract for deed creates a mortgage. Jurisdictions that have not adopted that rule outright reach comparable results by requiring notice and a grace period, by allowing restitution of the buyer's equity, by treating substantial performance as defeating forfeiture, or by requiring foreclosure where the buyer's equity is substantial. The doctrinal engine is the same anti-forfeiture impulse that produced the equity of redemption three centuries earlier.

Several other devices belong in the same frame. The absolute deed with a separate written defeasance is a mortgage as a matter of course; if the two writings are executed together, they are read together. The conditional sale — a conveyance with an option to repurchase — may or may not be a mortgage, and § 3.3 makes the presence of a continuing obligation the decisive factor. The sale-leaseback with an option to repurchase is a mortgage where the economics are a loan and the rent is a return on advanced money. The negative pledge, by contrast, is not a mortgage at all: it is a covenant not to encumber, enforceable in contract, creating no interest in the land.

A vendor's lien arises by implication in favor of a seller who conveys without receiving full payment, and an equitable lien may be imposed where a party's funds have been used to acquire or improve land under circumstances making retention unjust. Both are security interests arising by operation of law rather than by grant, and both are enforced by a foreclosure-like proceeding. They are treated here because they are frequently pleaded in the alternative when a purported mortgage fails for defect of form.

A mortgage requires six things: an obligation to be secured; a mortgagor holding a mortgageable interest; an intention to make that interest security; an adequate description of the land; a writing satisfying the Statute of Frauds; and execution and delivery. Acknowledgment is ordinarily required not for validity between the parties but for recordability, and therefore for the constructive notice that determines priority under Chapter 33.

The obligation may be a promissory note, an oral loan (in most States), a guarantee, an indemnity, a performance obligation, or a contingent liability. It must be identifiable, though not necessarily fixed in amount at the time of execution: a mortgage may secure an obligation that fluctuates, such as a line of credit, and may secure future advances. What it may not do is float free. A mortgage granted with no obligation whatever secures nothing and is subject to cancellation.

The mortgagor must have an interest in the land, and the mortgage reaches no more than that interest. A life tenant mortgages a life estate, and the mortgagee's security ends with the life. A remainderman may mortgage the remainder; the mortgagee must wait. A cotenant may mortgage an undivided share, which subjects that share to the security and, on partition, follows the share into the allotted parcel. A lessee may mortgage a leasehold, in which case the mortgagee's interest is subject to every infirmity of the lease, including forfeiture for breach — the reason leasehold mortgagees insist on notice-and-cure provisions from the fee owner.

The intention to create security is the crux of the characterization cases in Part IV. Between competent parties using standard forms it is rarely litigated; where the transaction was cast as a sale, or was documented informally, or occurred among relatives, it is often the whole case.

The description must identify the land with sufficient certainty, applying the standards developed in Chapter 32 for deeds. A description adequate to convey is adequate to encumber; a description so vague that no land can be identified renders the mortgage void, though extrinsic evidence may cure a latent ambiguity and reformation may correct a mutual mistake. Errors in the description are among the most common defects, and the recording consequences — an instrument outside the chain of title imparts no constructive notice — were examined in Chapter 34.

Delivery is required in the same sense and for the same reasons as in the law of deeds: the instrument must be put beyond the grantor's control with the intent that it operate. In practice, delivery is presumed from execution and recording and is contested only in fraud and forgery cases. A forged mortgage is void, not merely voidable, and confers nothing even on a subsequent purchaser for value — the principle that governs the wild-deed and forged-instrument cases alike.

A mortgage may secure advances made after its execution. The device is indispensable to construction lending, revolving credit, and home-equity lines, and its central problem is priority: does a later advance take the priority of the original mortgage, or the priority of its own date, against an intervening lienor?

The traditional answer distinguishes obligatory from optional advances. If the mortgagee is contractually bound to advance — as under a construction loan agreement with conditions the borrower has satisfied — the advance relates back to the recording of the mortgage and takes its priority. If the advance is optional, the majority rule subordinates it to an intervening lien of which the mortgagee had actual notice at the time of the advance. Restatement § 2.3 restates the rule and, characteristically, simplifies it in favor of relation-back with a notice cutoff.

Many States have displaced the distinction by statute, protecting advances made within a stated maximum amount recited in the mortgage, or within a stated period, or until the mortgagee receives written notice from the intervening lienor. The recital of a maximum principal amount is the common statutory technique and is the reason such recitals appear on the face of commercial mortgages.

A dragnet clause — more politely a cross-collateralization or future-obligations clause — purports to secure not only the identified loan but all other obligations of the mortgagor to the mortgagee, present and future. Courts enforce such clauses but construe them narrowly. The dominant limitations are the relationship-of-the-debts test, under which the clause reaches only obligations of the same class or arising from the same relationship, and the reasonable-contemplation test, under which it reaches only obligations the parties can be shown to have had in mind. Consumer transactions attract additional scrutiny, and several States restrict dragnet clauses in residential mortgages by statute.

The practical drafting lesson is that generality is self-defeating. A clause reciting a maximum amount, identifying the class of obligations covered, and cross-referencing the loan documents by date is far more likely to be enforced as written than an all-encompassing recital.

An equitable mortgage is a security interest that equity recognizes although the parties failed to create one at law. Four situations recur. The first is the defective instrument: a mortgage void for want of acknowledgment, or bearing an inadequate description, or executed by an agent without written authority, will often be enforced between the parties as an equitable mortgage on the ground that the intent was clear and the defect is formal. The second is the contract to give a mortgage: a written promise to execute a mortgage, supported by consideration, is enforced in equity as though performed, on the maxim that equity treats as done that which ought to be done.

The third is the equitable lien arising from advances: where a lender's funds are used to acquire or improve land in circumstances making unsecured retention unjust, equity may impose a lien, and where the lender's money discharged a prior encumbrance the doctrine of subrogation may place the lender in the discharged lienor's position. Subrogation is treated in Chapter 38, where it functions principally as a priority doctrine.

The fourth is the deposit of title deeds, historically important in England and of little modern American significance, in which the delivery of the muniments of title as security created an equitable charge.

Two limits are essential. First, an equitable mortgage binds the parties and those who take with notice, but it is ordinarily unrecordable and therefore vulnerable to a subsequent bona fide purchaser for value without notice — the recording-act analysis of Chapter 33 applies directly. Second, equity supplies the absence of form, not the absence of intent. A lender who never bargained for security does not receive it because the loan has gone bad.

The doctrine is simply stated and endlessly litigated: a deed absolute on its face may be shown by extrinsic evidence, including parol evidence, to have been given as security, and if it was, it is a mortgage. Restatement § 3.2 states the rule; every American jurisdiction accepts it in some form; and it is the clearest available demonstration that in this field substance governs form.

The parol evidence rule does not bar the proof. The reason is not that the rule has an exception for real property but that the evidence is not offered to vary the terms of a written agreement; it is offered to establish the character of the transaction, which equity has always treated as an inquiry into whether the writing is what it purports to be. The Statute of Frauds is likewise no obstacle: the grantor is not asserting an oral conveyance but resisting a forfeiture.

The standard of proof is elevated. The great majority of jurisdictions require clear and convincing evidence, and a few speak of evidence that is clear, unequivocal, and convincing. The burden is on the party asserting that the deed is a mortgage, and the presumption favors the instrument as written.

The factors are stable across the cases. The existence of a continuing debt is the most important: if the grantor remained personally liable after the conveyance, the transaction is almost certainly security, because a sale extinguishes rather than continues an obligation. Gross inadequacy of consideration relative to the land's value points strongly toward a mortgage. Retention of possession by the grantor, and the grantor's continued payment of taxes, insurance, and maintenance, point the same way. So does the parties' relationship — particularly a pre-existing debtor-creditor relationship — the grantor's financial distress at the time, the existence of a contemporaneous repurchase option at a price equal to the debt plus interest, and the parties' subsequent conduct, including accounting entries and tax treatment.

The consequences of recharacterization are complete. The grantee holds a mortgage, not a fee. It must foreclose to realize on the land. The grantor holds the equity of redemption and, until foreclosure, remains the owner. Any purported forfeiture is void; any conveyance the grantee made to a purchaser with notice is subject to the equity; and the grantee must account for rents and profits received.

The counterweight is the bona fide purchaser. If the grantee under the deed absolute conveys to a purchaser for value without notice of the security character, the purchaser takes free — the record shows an absolute deed, and there is nothing to alert an examiner. That is the practical reason a borrower should never accept this structure and the reason, examined in Chapter 34, that possession inconsistent with the record is itself a notice event in most jurisdictions.

No factor is dispositive. The continuing-obligation factor is the closest to one, because the presence of a debt is the definitional requirement of a mortgage: where there is a debt, there is something to secure, and equity's inclination is to find that the conveyance secures it.

The conditional sale is the deed absolute's more sophisticated relative. A owns land; B pays A a sum; A conveys to B; and B grants A an option to repurchase within a stated period at a stated price. If the substance is a loan, the transaction is a mortgage and A holds the equity of redemption. If the substance is a sale, A holds an option and nothing more, and the expiration of the option ends A's interest.

Restatement § 3.3 makes the presence of an obligation decisive: if the grantor is under a duty to pay, the transaction is a mortgage; if the grantor merely has the privilege of repurchasing, it may be a sale. But the inquiry does not stop at the label of the option, because a nominal option coupled with a repurchase price computed as principal plus interest, a grantor who remains in possession, and consideration far below value is a loan whatever the drafting.

The sale-leaseback with an option to repurchase raises the same question in commercial dress. The economic test asks whether the “rent” is a return on capital advanced, whether the repurchase price amortizes toward a nominal figure, whether the “seller” bears the risks and rewards of ownership, and whether the “buyer” has any residual interest beyond the return of its money with a yield. Where the answers point to financing, courts recharacterize, and the consequences — foreclosure required, equity of redemption preserved, usury exposure — follow.

There is a legitimate space for genuine sale-leasebacks and genuine repurchase options, and the cases do not condemn them. What the cases condemn is the use of the sale form to obtain, at the moment of the loan, the forfeiture remedy that equity has denied to mortgagees for three hundred years. That is the vice, and the anti-clogging principle of the next section is its direct expression.

The equity of redemption is the mortgagor's right, arising in equity and incident to every mortgage, to discharge the secured obligation and reclaim the land free of the security after the date fixed for performance has passed. It is a property interest, not a mere privilege. It may be conveyed, devised, inherited, levied upon by the mortgagor's creditors, and mortgaged again — the junior mortgage being, in the classical analysis, a mortgage of the equity of redemption.

Its content is fixed. To redeem, the mortgagor must tender the entire secured obligation, with accrued interest and the mortgagee's proper costs and protective advances. Redemption is not partial and is not a right to reinstate by curing arrears; reinstatement is a separate right created by contract or statute and, where it exists, permits the borrower to cure a default and restore the loan to current status without paying the accelerated balance. Distinguishing the two is essential in practice, because the sums involved differ by an order of magnitude.

Who may redeem is broader than one might expect. The mortgagor may, obviously. So may a successor in interest to the equity, a junior lienor protecting its position, a surety or guarantor, a spouse with a homestead or marital interest, and in most jurisdictions any person whose interest in the land would be extinguished by foreclosure. A junior lienor who redeems is subrogated to the senior position, a point that recurs in Chapter 38.

The right endures until it is terminated. The classical means of termination is foreclosure, which exists for precisely that purpose. It may also end by release, by the mortgagor's conveyance of the equity to the mortgagee in a genuine and separately bargained transaction (a deed in lieu, discussed below), by merger where the two interests unite without an intervening interest, and by the running of a statute of limitations on the underlying obligation in jurisdictions where that bars enforcement of the security.

The distinction between equitable and statutory redemption is not a technicality. The equity of redemption exists before the sale and ends at it. Statutory redemption exists after the sale, is a nineteenth-century legislative creation adopted in roughly half the States, permits the mortgagor or specified others to reclaim the property from the purchaser by paying the sale price plus statutory interest within a fixed period, and has no counterpart in equity. A litigant who conflates them will misstate both the deadline and the amount.

The anti-clogging rule holds that a provision in or contemporaneous with a mortgage that impairs, restricts, or extinguishes the mortgagor's right to redeem is unenforceable. Restatement § 3.1 states it, and its rationale is the one Chancery gave three centuries ago: a borrower in need will agree to anything, and a right that may be bargained away at the moment of the loan is no right at all.

The rule invalidates several recurring provisions. A waiver of the equity of redemption in the mortgage is void. So is a contemporaneous deed held in escrow for delivery on default, which is nothing but the old forfeiture in a new envelope. So is an option in the mortgagee to purchase the land at a fixed price upon default. So, generally, is a provision granting the mortgagee a share of appreciation conditioned on default rather than on the passage of time, and a term making the mortgagor's right to redeem conditional upon performance of collateral obligations unrelated to the debt.

What the rule does not invalidate is a later, separate, and genuinely bargained transaction in which the mortgagor sells or surrenders the equity to the mortgagee for fair consideration. The deed in lieu of foreclosure is the standard instance. Courts scrutinize such transactions carefully — examining independent consideration, the passage of time since the loan, the absence of coercion, the mortgagor's access to advice, and the adequacy of the price — because the same lender who cannot take the equity at the outset has an obvious incentive to take it later on the same terms.

Nor does the rule forbid ordinary commercial terms that have nothing to do with redemption: prepayment premiums, lockout periods, default interest within reason, late charges, acceleration clauses, and due-on-sale clauses are enforceable subject to their own doctrines. Equity is protecting a specific right, not policing the price of credit generally.

Two related doctrines deserve mention. Equitable subrogation prevents an unintended forfeiture where one party's funds discharge another's lien. And the doctrine of merger — by which a mortgage held by one who acquires the fee may be extinguished — is applied in modern law only where merger serves the parties' intent and does not prejudice intervening interests; the Restatement and the leading commentary both counsel against mechanical application.

Before default, the mortgagor is the owner in every sense that matters. The mortgagor possesses (in lien States as of right, in title States as a practical matter by the instrument's terms), uses, receives rents, and may convey, lease, or further encumber. A transferee takes subject to the recorded mortgage, and a junior lender takes a security interest in the equity. None of this requires the mortgagee's consent, subject to the due-on-sale clause discussed below.

The mortgagor's principal duty is to refrain from impairing the security. The law of waste, examined in Chapter 11 in the life-estate context, applies here in a modified form: the mortgagor commits waste by physical injury, by failing to maintain, by removing fixtures, by failing to pay taxes so as to expose the land to a superior tax lien, and in some jurisdictions by failing to insure. Restatement § 4.6 restates the doctrine, and the mortgagee's remedies include an injunction, damages measured by the impairment of the security rather than by the injury to the land, the appointment of a receiver, and, if the instrument so provides, acceleration.

The mortgagee's pre-default position is protective. It may inspect where the instrument permits, may make protective advances for taxes, insurance, and necessary repairs and add them to the secured debt, and may enforce the instrument's covenants. It may not possess, in a lien State, and in a title State the entitlement is nearly always waived. A mortgagee that does take possession — by consent, by abandonment, or under a title-theory right — becomes a mortgagee in possession, which is a real office with real burdens: a duty to account strictly for rents and profits, to apply them to the debt, to manage prudently, to make ordinary repairs, and to answer for losses caused by mismanagement. Because those duties are onerous, sophisticated lenders prefer a receiver.

Assignments of rents are the principal pre-default battleground in commercial lending. An assignment may be drafted as absolute, with a license back to the mortgagor to collect until default, or as collateral, creating a security interest activated on default by demand, notice, receivership, or possession. The characterization matters for whether the rents are property of a bankruptcy estate and for what the lender must do to capture them. Jurisdictions differ sharply; the Uniform Assignment of Rents Act supplies a coherent regime of perfection by recording and enforcement by notice, and has been adopted in a minority of States.

The due-on-sale clause permits the lender to accelerate on a transfer of the land. State courts once resisted it as an unreasonable restraint on alienation, and the Garn–St Germain Act of 1982, 12 U.S.C. § 1701j-3, resolved the conflict by preempting those restrictions and making such clauses generally enforceable. The statute exempts a defined list of transfers, principally intrafamily transfers on death, transfers to a spouse or child, transfers incident to divorce, transfers into an inter vivos trust in which the borrower remains a beneficiary, junior encumbrances that do not transfer occupancy, and leases of three years or less without an option to purchase. Chapter 38 examines the clause again in the context of transfers of mortgaged property.

Finally, satisfaction. When the obligation is paid, the mortgage is discharged and the mortgagor is entitled to a release or satisfaction of record. Every State imposes a duty to record the release within a stated period and provides penalties, often statutory damages plus fees, for failure. Restatement § 6.4 states the principle. The importance of the release is a title question rather than a debt question: an unreleased mortgage is a cloud that will appear in the examination described in Chapter 34 and will be excepted from the policy described in Chapter 35.

The questions below are the sequence a careful analyst runs on any transaction said to create security in land. They proceed from characterization through validity to scope and, finally, to the enforcement questions Chapters 38 and 39 answer. They are written so that a negative answer at any stage redirects the analysis rather than ending it.

1. Is there an obligation? Identify it, its amount, its terms, and the writing that evidences it.
2. Does the instrument create an interest in land as security for that obligation, whatever it is called?
3. If the form is a sale, does the substance disclose a continuing debt, inadequate consideration, retained possession, or a repurchase option priced as principal plus interest?
4. What interest did the grantor hold, and what interest has therefore been encumbered?
5. Is the instrument in writing, signed, sufficiently descriptive, delivered, and — for recording — properly acknowledged?
6. Was it recorded, when, and in a manner that places it within the chain of title?
7. What obligations does it secure: the identified loan only, future advances, or, through a dragnet clause, other obligations?
8. If future advances are secured, are they obligatory or optional, and does a statutory maximum or notice rule govern their priority?
9. What theory of the mortgage does the forum follow, and does any issue in the case actually turn on it?
10. Is the instrument a mortgage or a deed of trust, and what enforcement machinery does that entail?
11. If a deed of trust, who is the trustee, was the trustee validly appointed or substituted, and what does the governing statute require of the sale?
12. Does any provision purport to waive, condition, or shorten the equity of redemption?
13. If the mortgagee has taken a deed or an option from the mortgagor, was it contemporaneous with the loan or a later, separately bargained transaction supported by fair consideration?
14. Who holds the equity of redemption now, and who else would be cut off by foreclosure and may therefore redeem?
15. Is the borrower seeking redemption or reinstatement, and what does each require in this forum?
16. Who is in possession, and is the mortgagee at risk of becoming a mortgagee in possession with accounting duties?
17. Is there an assignment of rents, is it absolute or collateral, and what act activates it?
18. Has the security been impaired by waste, nonpayment of taxes, or lapse of insurance, and what remedy fits?
19. Has a transfer occurred that triggers a due-on-sale clause, and does a Garn–St Germain exemption apply?
20. Has the obligation been satisfied, and if so has a release been recorded within the statutory period?

Questions one through eight establish that there is a valid security interest and what it secures. Questions nine through thirteen determine the machinery and the limits equity imposes. Questions fourteen through twenty describe the live relationship between the parties. Only when all twenty are answered does the priority analysis of Chapter 38 and the foreclosure analysis of Chapter 39 become tractable.

Each illustration isolates one variable. Unless the facts state otherwise, the jurisdiction is a lien-theory State that permits both judicial foreclosure of mortgages and nonjudicial sale under deeds of trust, and that follows the Restatement (Third) of Property: Mortgages.

The propositions below recur in pleadings, in transactional practice, and in lay advice. Each is stated as it is usually put and then corrected by authority.

1. “The bank owns my house until I pay it off.” In the substantial majority of States, which follow lien theory, the borrower is the owner and the lender holds a lien. Even in title-theory States, the mortgagee's title is defeasible and exists only to secure the obligation; the borrower holds the equity of redemption, which is a full property interest, devisable, alienable, and mortgageable.
2. “A deed of trust is not a mortgage.” It is a mortgage in substance and is treated as one for nearly every doctrinal purpose. Restatement § 1.1 comment a. The differences are procedural: three parties instead of two, and enforcement by nonjudicial sale rather than by judicial foreclosure.
3. “The trustee under a deed of trust is my fiduciary.” The trustee's office is limited to conducting the sale impartially and in strict compliance with the statute and instrument. It owes no duty to protect the borrower's economic interest in the loan, and in most States the beneficiary may substitute the trustee at will.
4. “What the document is called determines what it is.” Equity characterizes by substance. A deed absolute given as security is a mortgage; an installment land contract is treated as a mortgage under Restatement § 3.4(b) and by a growing body of statutes; and a document captioned “Mortgage” securing no obligation is nothing.
5. “The parol evidence rule prevents proving that a deed was really a mortgage.” It does not. The evidence establishes the character of the transaction rather than varying the terms of a writing, and equity has admitted it for three centuries. The burden is heavy — clear and convincing evidence — but the door is open.
6. “A borrower can validly waive the right to redeem in the loan documents.” No. The anti-clogging rule voids any contemporaneous provision extinguishing or impairing the equity of redemption, including escrowed deeds and default-triggered purchase options. Restatement § 3.1. A later, separately bargained conveyance for fair consideration is a different matter.
7. “The equity of redemption and statutory redemption are the same thing.” They are distinct in source, timing, amount, and effect. The equitable right precedes the foreclosure sale and requires payment of the whole obligation; statutory redemption follows the sale, exists only where a legislature has created it, and requires payment of the sale price plus statutory interest.
8. “Redemption and reinstatement are interchangeable.” Redemption requires the entire accelerated obligation with interest and costs. Reinstatement, where contract or statute provides it, requires only the arrears, fees, and costs, and restores the loan to current. Conflating them misstates both the deadline and the sum.
9. “Foreclosure is what gives the lender its rights.” Foreclosure destroys a right rather than creating one: it terminates the mortgagor's equity of redemption and the interests of junior claimants. The lender's rights arise from the obligation and the security instrument; foreclosure is the machinery for realizing on them.
10. “Recording creates the mortgage.” Recording protects priority against subsequent takers; it does not create the security interest. An unrecorded mortgage is fully valid between the parties and against those with notice, and its weakness appears only when a protected purchaser or lienor arrives.
11. “A dragnet clause secures everything the borrower will ever owe the lender.” Courts construe such clauses narrowly, confining them to obligations of the same class or arising from the same relationship and to those the parties reasonably contemplated. Consumer transactions attract further statutory limits.
12. “A mortgage of an interest less than a fee is worthless.” It is not worthless; it is limited. A mortgage of a life estate, remainder, leasehold, or undivided share is fully valid and reaches exactly the interest mortgaged, with all of that interest's contingencies — which is why leasehold mortgagees bargain for notice and cure rights.
13. “The lender can take possession as soon as the borrower misses a payment.” In lien States the mortgagor retains possession until the sale, and often through a statutory redemption period. A mortgagee that does take possession assumes the duties of a mortgagee in possession, including a strict duty to account. Most lenders seek a receiver instead.
14. “A due-on-sale clause is an unenforceable restraint on alienation.” State-law resistance was preempted by the Garn–St Germain Act, 12 U.S.C. § 1701j-3. Such clauses are generally enforceable, subject to the statute's list of exempt transfers, principally intrafamily and estate-planning transfers that do not change occupancy.
15. “Once the loan is paid, the mortgage disappears from the record automatically.” The lien is discharged as a matter of substantive law, but the record does not clear itself. The mortgagee must record a release, and statutes impose deadlines and penalties. Until it is recorded, the mortgage is a cloud that a title examiner will find and a title insurer will except.

This chapter took up the second instrument of the financed transaction. A mortgage is a conveyance or retention of an interest in real property as security for the performance of an obligation, and that functional definition governs the whole field: the label on the instrument is evidence of nothing, and equity will characterize a transaction by what it does.

The history explains the doctrine. The medieval gage became the conditional conveyance, whose common-law rigor produced forfeitures that Chancery would not enforce; the relief hardened into the equity of redemption; the anti-clogging rule protected that right against waiver; and foreclosure was invented to terminate it. Title, lien, and intermediate theories are sediment from the same process, and although the Restatement rightly counsels functional reasoning, the theory a forum professes still governs possession, rents, and the effect of a cotenant's mortgage.

The deed of trust was examined as the dominant American variant: three parties rather than two, a trustee holding a power of sale, and nonjudicial enforcement that is faster and cheaper for the lender and correspondingly thinner in procedural protection, often at the cost of the deficiency remedy. The trustee's office was described as a narrow one — impartiality and strict compliance in the conduct of the sale, not general fiduciary loyalty to the borrower.

Creation was treated element by element: an obligation, a mortgageable interest, an intent to secure, a sufficient description, a writing, execution, delivery, and — for the notice consequences of Chapter 33 — acknowledgment and recording. Future advances and dragnet clauses were analyzed for scope and priority, and the equitable mortgage was placed where it belongs: as equity's supply of form where intent was clear, not as a remedy for a lender who never bargained for security.

Characterization received extended treatment because it is where the field's animating principle is visible. The deed absolute may be shown by parol to be a mortgage on clear and convincing evidence, with the continuing obligation the dominant factor; the conditional sale and the sale-leaseback are tested by the same economics; and the anti-clogging rule invalidates contemporaneous devices — waivers, escrowed deeds, default-triggered options — while permitting a genuine later purchase of the equity such as a deed in lieu.

Finally, the pre-default relationship was mapped: the mortgagor possesses, uses, transfers, and encumbers, subject to the duty not to impair the security and to the due-on-sale clause preserved by the Garn–St Germain Act; the mortgagee's rights are protective, with waste remedies, protective advances, receivership, and the burdensome office of mortgagee in possession; assignments of rents were distinguished by character and activation; and satisfaction was tied to the mortgagor's right to a release of record.

Chapter 38 — Priority, Subordination, and Transfer of Mortgaged Property, already published, takes the valid security interest established here and asks how it ranks against competing claims, how purchase-money priority, subordination agreements, and equitable subrogation reorder that ranking, and what happens when the land is sold subject to or with an assumption of the mortgage. Chapter 39 — Foreclosure and Redemption then supplies the machinery by which the equity of redemption is at last terminated and the security converted into money. The discipline to carry forward is the one this chapter has enforced throughout: identify the obligation, identify the interest encumbered, and ask what the transaction does rather than what it is called.

• Grant S. Nelson, Dale A. Whitman, Ann M. Burkhart & R. Wilson Freyermuth, Real Estate Finance Law chs. 1–4 (6th ed.) (the standard American treatment)
• Restatement (Third) of Property: Mortgages §§ 1.1–4.7 and comments (Am. L. Inst. 1997) (the organizing modern text)
• R.W. Turner, The Equity of Redemption (1931) (the definitive historical study)
• A.W.B. Simpson, A History of the Land Law ch. 9 (2d ed. 1986) (the gage and the conditional conveyance)
• 2 Joseph Story, Commentaries on Equity Jurisprudence §§ 1013–1032 (1836) (the classical American statement of redemption and clogging)
• Sir Edward Coke, Commentary upon Littleton § 332 (1628) (the etymology and the common-law structure)
• Ann M. Burkhart, Freeing Mortgages of Merger, 40 Vand. L. Rev. 283 (1987) (why merger should not be applied mechanically)
• R. Wilson Freyermuth, Modernizing Security in Rents: The New Uniform Assignment of Rents Act, 71 Mo. L. Rev. 1 (2006)
• Uniform Assignment of Rents Act (Unif. L. Comm'n 2005) and its prefatory note
• Garn–St Germain Depository Institutions Act of 1982 § 341, 12 U.S.C. § 1701j-3, and the implementing regulations at 12 C.F.R. pt. 191