Mortgagee

A mortgagee is either a bank or an individual that lends money to a borrower, for the purpose of purchasing or refinancing a home or other real property. By placing a mortgage on the property, the lender ensures that it will receive repayment for the money lent. If those payments are not made by the mortgagor (the borrower), the lender is within its right to foreclose on the property and sell it, in order to collect the monies due. To explore this concept, consider the following mortgagee definition.

Definition of Mortgagee

Noun

1. An entity that has loaned money to an individual for the purpose of purchasing or refinancing a piece of property.

Origin

1575-1585       mortgage + -ee

What is a Mortgagee

A mortgagee is an entity that lends money to borrowers who want to either purchase a new home or refinance their existing homes. For example, a mortgagee that loans money to a borrower to buy a new house wants to ensure that it will be paid back for the significant sum of money that was lent. By placing a mortgage on the property, the mortgagee has more of a guarantee that the borrower will actually repay his debt, as the house is used as collateral in order to secure the mortgage.

Mortgagee Clause

A mortgagee clause is a provision that establishes a kind of protection for the mortgagee. The mortgagee clause promises that the mortgagee will be provided with advance written notice in the event the homeowner’s insurance policy on the property is going to be canceled for some reason. Further, the mortgagee clause establishes that any loss experienced by the property is payable to the mortgagee named in the policy, rather than to the mortgagor.

A mortgagee clause also continues the insurance coverage for the benefit of the mortgagee, should the mortgagor do something to void the policy. In this case, the clause would instruct the mortgagee on what to do insofar as its obligations in continuing coverage. This is to protect the mortgagee in the event the mortgagor commits a crime like arson, or some other such attempt to illegally cash out the policy.

In the event that a piece of property is lost to arson or some other similar situation, the mortgagee would be expected to notify the insurer of any changes in ownership or occupancy. The mortgagee would also be responsible to pay any premiums that are due, as well as submit a sworn statement of loss in a timely fashion. Without a mortgagee clause being put in place, financial institutions would be less likely to loan the significant amounts of money necessary for mortgagors to purchase property.

Relationship Between Mortgagor and Mortgagee

Depending on the type of agreement being drafted, the relationship between a mortgagor and mortgagee can vary slightly. In most agreements, however, the relationship between a mortgagor and mortgagee is solely one of debtor and creditor. For example, the mortgagee (lender) should not be expected to fulfill a fiduciary duty to the mortgagor, because the lender does not owe any fiduciary duty to the mortgagor (borrower).

In agreements of this nature, nothing written in the mortgage, nor in any of the accompanying loan documents, should be construed to suggest that the relationship between the mortgagor and mortgagee is anything other than that of debtor and creditor. This means that the responsibilities of both parties are limited to the roles they have been assigned, and neither should expect more from the other than one would normally do in such a role.

Mortgagee Example Involving a Mortgage and a Note

An example of a mortgagee in an older case can be found in a case that began on March 5, 1867. Here, Mahala and Jesse Longan signed a promissory note to Jacob Carpenter in the amount of $980 (more than $15,000 in modern currency), to be paid, with interest, within six months. It was agreed that the Longans would pay an interest rate of 3.5 percent per month until the note was paid in full. Simultaneously, Mahala acted as a mortgagee to Jacob for a mortgage on a separate parcel of real estate.

On July 24, 1867, just two months shy of the note’s maturity date, Jacob transferred both the note and the mortgage to B. Platte Carpenter. Because the note had not yet reached maturity, B. Platte filed a petition against Mahala in the District Court of Jefferson County to foreclose on the mortgage. Mahala answered the petition and alleged that, when she executed the mortgage to Jacob, she had delivered to him wheat and flour. These items he had supposedly promised to sell, in order to apply the profits to the repayment of the note.

Mahala also claimed that, not only had she paid the amount due on the note, but she had also demanded the return of the note, mortgage, wheat, and flour — all of which Jacob had allegedly refused. Mahala accused Jacob of using the wheat and flour for his own personal gain, and that he was fully aware of what was to be done with both upon receiving them.

After testimony was taken from both sides, it was proven that the wheat and flour were actually in the possession of Miller & Williams, warehousemen located in Denver. Further, it was proven that Miller & Williams had sold a part of their stock, and that the money they received and the remainder of the stock were both lost by them. The question that therefore remained was: who was to blame for this loss, the Longans or Jacob?

The district court ultimately ruled in Jacob’s favor for the full amount of the note, plus interest. The supreme court of the territory then reversed the lower court, holding that the value of both the wheat and the flour should be deducted from the full amount. On further appeal, the U.S. Supreme Court agreed to hear the case. The question, for the Court’s purposes, then became whether Jacob should have been assigned the mortgage as he was assigned the note – that is, free from further obligations.

The Court held:

“The contract as regards the note was that the maker should pay it at maturity to any bona fide endorsee, without reference to any defenses to which it might have been liable in the hands of the payee. The mortgage was conditioned to secure the fulfillment of that contract.

To let in such a defense against such a holder would be a clear departure from the agreement of the mortgagor and mortgagee, to which the assignee subsequently, in good faith, became a party. If the mortgagor desired to reserve such an advantage, he should have given a nonnegotiable instrument. If one of two innocent persons must suffer by a deceit, it is more consonant to reason that he who ‘puts trust and confidence in the deceiver should be a loser rather than a stranger.’ “

Further, the Court stated:

“Upon a bill of foreclosure filed by the assignee, an account must be taken to ascertain the amount due upon the instrument secured by the mortgage. Here the amount due was the face of the note and interest, and that could have been recovered in an action at law. Equity could not find that less was due … A decree that the amount due shall be paid within a specified time, or that the mortgaged premises shall be sold, follows necessarily.”

Ultimately, the Court reversed the lower court’s decision, and remanded the case with directions to enter a judgment reflecting the Court’s decision. Said the Court in its conclusion:

“Matthews v. Wallwyn is usually much relied upon by those who maintain the infirmity of the assignee’s title. In that case, the mortgage was given to secure the payment of a nonnegotiable bond. The mortgagee assigned the bond and mortgage fraudulently and thereafter received large sums which should have been credited upon the debt. The assignee sought to enforce the mortgage for the full amount specified in the bond.

The Lord Chancellor was at first troubled by the consideration that the mortgage deed purported to convey the legal title, and seemed inclined to think that might take the case out of the rule of liability which would be applied to the bond if standing alone. He finally came to a different conclusion, holding the mortgage to be a mere security. He said, finally:

‘The debt therefore is the principal thing, and it is obvious that if an action was brought on the bond in the name of the mortgagee, as it must be, the mortgagor shall pay no more than what is really due upon the bond; if an action of covenant was brought by the covenantee, the account must be settled in that action. In this Court, the condition of the assignee cannot be better than it would be at law in any mode he could take to recover what was due upon the assignment.’

The principle is distinctly recognized that the measure of liability upon the instrument secured is the measure of the liability chargeable upon the security. The condition of the assignee cannot be better in law than it is in equity. So neither can it be worse.”

Related Legal Terms and Issues

• Collateral – Something of value pledged as security for repayment of a loan.
• Foreclosure – The act of forcing a mortgagor to sell his mortgaged property when he fails to keep up his mortgage payments as agreed.
• Premium – An amount to be paid toward an insurance policy, typically monthly.
• Promissory – Containing, implying, or having the nature of a promise.