Finally, with the creation Post-Land Registration Act 2002, under s2391) a: - of the Land Registration Act 2002 the only way a mortgage of registered land can be created is by registered charge. The law on the creation of mortgages will be substantially affected by the introduction of electronic conveyance. This is because the mortgage will come into legal effect at the same time it is created. The present law allows a gap between creation of the mortgage and it taking effect at law. Under the 2002 Act it will only take effect in law when it is entered on to the title of registered land.
- s.27 (1) ‘If a disposition of a registered estate or registered charge is required to be completed by registration, it does not operate at law until the relevant registration requirements are met.
- (2) In the case of a registered estate the following are the disposition which are required to be completed by registration - (f) The grant of a legal charge’
With an equitable mortgage there a three ways they can be created. A contract to create a mortgage; equity will treat a contract to create a mortgage as an enforceable mortgage if it satisfies s2 of the Law of Property (Miscellaneous Provisions) Act 1989. The contract states:-
s2:- “A contract for sale or other disposition of an interest in land can only be made in writing by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged in each”.
This basically means to create a mortgage the contract must be in writing. Before 1989 it would have been possible to accidentally create an equitable mortgage because they did not create a legal mortgage by deed or they failed to satisfy the formalities necessary for a deed, such as having the signatures witnessed.
Secondly, an equitable mortgage can be created by the deposit of title deeds whereby, before 1989 it was possible to deposit title deeds in unregistered land with the lender and that would create a mortgage. This method had its merits as it was possible to create a short-term mortgage without having to comply with strict formalities. The case of United Bank of Kuwait v Sahib [1997] whereby, an attempt to create a mortgage by unwritten contract. The 2002 Act has removed any doubt in relation to registered land because land certificates will no longer be used, and without a certificate to deposit it would then be impossible to create mortgages in this way.
Lastly, mortgages of equitable interests the borrower may only have an equitable estate in property because he is an equitable owner behind a trust. In each case he can only create an equitable mortgage. ‘The mortgagor can mortgage that which he owns.’ The mortgage is created by transferring the whole of the interest to the lender with a provision for re-transfer of the interest once the debt has been repaid. There are formalities to be satisfied. The transfer must satisfy s53 (1) (c|) of the LPA 1925 which requires that the transfer should be in writing.
With all these different variations the lender has to be careful, when providing a mortgage. Generally land is used as the main form of security in the UK. This gives a greater scope for lenders as they have a greater margin of potential gains, if the mortgage goes into default. Whereas, with stocks and shares the debtor transfers the ownership into the name of the lender when trying to acquire a legal mortgage, this must also be accompanied by a memorandum of deposit, which explains the purpose of the transfer. There is a disadvantage if the lender holds partly paid shares as they can be called up to pay the uncalled portion of the shares if the debtor is unable to. Extra measures have to be taken, as a forged signature can be used in the transfer, which will make the bank become liable. With an equitable mortgage it can created quickly and easily. The borrower has to deposit the documents title with the lender, and a memorandum has to be written, but the shares remain in the name of the debtor. This allows the debtor to carry on dealing with his/her portfolio. The lender would have to keep a close eye on this as share prices are highly volatile and could reduce the overall value of the security. Further problems, which do not arise with legal mortgages, are that the increase in rights issues or bonuses which will go straight to the owner, and consequently reduce the value of the shares. Moreover, the equitable mortgagee cannot sell the shares without the permission of the debtor or the courts. As additional security the lender will ensure the memorandum contains a promise by the debtor to execute a legal mortgage on demand, this can also be further strengthened with a blank transfer. (Without the date)
Furthermore, more benefits with respect to shares are that the value can be checked at any point of time, and that large amount of holdings is generally considered to be secure. The overall strength and weaknesses of these can be considered to be plausible, whereas with regards to land, it can be considered the safest option for the lender. As the lender can sell the property or appoint a receiver to collect the rents. Foreclose whereby, the lender has to get permission from the court; this is fairly rare these days as a sale is usually ordered. The mortgagee usually has the right to possession of the mortgaged property. This is a right which arises as soon as the mortgage is made and is not dependant on default. In some mortgages the mortgagee agrees not to take action to seek possession unless the mortgagor defaults on repayment or some other obligation.
Both securities have an array of disadvantages, land requires a report on title, for unregistered land, which is relatively time consuming and costly. Fees are high when registering a full legal mortgage of registered land. Whereas, with shares, share certificates can be stolen and sold on, most money makers come with high risk and may mean that their share value may not be listed, so therefore hard to find a price of the shares. Land valuation is also difficult point to tackle, as there are many factors that can reduce the value of the homes such as, road widening and motorway construction. These tend to be out of the hands of the mortgagee’s control.
In conclusion, both securities can be seen as beneficial to lenders and borrowers. For lenders in terms of costs and less admin, stocks and shares seem to have the least, but would also be the least common. Lending has to be done responsible with regards to the financial institution. If they want to increase market share, they go into poor lending, which is high risk. Poor lending comes from badly trained, malicious or fraudulent employees subverting procedures and controls. This is where branch staff has a huge role in the discovery and prevention of mortgage fraud. Whereas, with land, homeowners have to make sure they have the necessary insurance for their houses and lenders clarify this as it is in their best interests.