Foreclosure Part 1: Historical Background and Basic Principles
Foreclosure is the dark presence that hovers behind all negotiations to work something out when the economy or the missteps of the debtor, or a combination of the two, makes a real estate loan go south. If the creditor manages to complete the foreclosure process, the debtor loses title to, and the right to possession of, the property, often without any further rights in the property, depending on the law of the state and in some cases the manner of foreclosure.
Early History of the Mortgage. In the distant past, clever creditors easily seized the land of their necessitous debtors who failed to make a payment on a specified day, which came to be known as “Law Day.” In those rude times, landowners were part of the ruling class and creditors were often their social inferiors. It was simply unacceptable that something so prized as land could be lost so quickly and easily. The King’s trusted advisor, the Chancellor--in the early days, generally someone trained as a clergyman and conversant in Roman Law-- stepped in and gave debtors time beyond the agreed-upon fateful day to pay off their obligations. On the history of mortgage law see Stephen J. Field’s decision in McMillan v. Richards, 9 Cal. 365 (1858).
Equity of Redemption. In those days, the mortgage was a transfer of title from the debtor to the creditor, to be returned to the debtor on payment in full of the loan. The Latin word for buying back something previously sold, transferred or confiscated is “redemption.” The Chancellor’s exercise of discretion in modifying the harshness of a legal rule or contractual provision came to be known as equity and the forum in which the Chancellor exercised his discretion was the Court of Equity. The Chancellor conferred upon the hapless debtor faced with permanent loss of title to his land a right to redeem the land from the title held by the creditor. Unsurprisingly, the landowner’s right is known to us today as the “equity of redemption.”
Right to Possession: Lien and Title Theories. There were two problems with the Chancellor’s equity of redemption. In those days, as today, title to real property gives the title holder the right to possession. Possession is an incident of title. If the creditor had title, the debtor may have had a right to redeem the property, to buy it back, but until the final payment was made, the debtor had no right to possession of the land. The debtor may have had an equity of redemption, but it remained a rather hollow right. The creditor, on the other hand, may have had title and the right to possession, but his right too was vulnerable and therefore not easily transferred. Without the ability to be done with the debtor and his right to redeem, the creditor’s title was shaky. The Chancellor was sensitive to both of these problems.
To address the debtor’s dilemma, the Chancellor struggled to transform the creditor’s title into a lien, what we today would call a non-possessory security interest. The creditor no longer had the right to possession. As the right to possession meant at that time, and even today, both the right to occupancy and to collect rents from tenants, the dispossession of the creditor gave birth to the struggle for rents when the debtor falls on hard times. Today, even in states where the title theory holds sway and the creditor still has nominal title to the mortgaged property, the creditor’s right to possession is limited. In states like California, the creditor with a mortgage has only a lien and no right to possession. Civil Code §§2926 (a mortgage is a lien), 2888 (a lien transfers no title), 2920 and 2923 (lien of mortgage is independent of change of possession).
Ending the Equity of Redemption: Foreclosure. To address the creditor’s dilemma, the Chancellor developed a process for ending the debtor’s equity of redemption. After a period of time, initially set by the Chancellor, the debtor lost his right to buy back his property. See McMillan v Richards, 9 Cal. 365, 411 (1858). His equity of redemption was terminated or “foreclosed.” Over the centuries, the process of foreclosure was refined first by the Chancellor, then by the courts exercising the powers of the Chancellor. Eventually, the legislative branch put its stamp on the procedure, limiting judicial discretion and standardizing the time periods. As mortgages and foreclosure procedures are generally a matter of state law, the length of time necessary to complete a foreclosure varies from state to state, and often depends on how crowded the court dockets are.
For those interested in the evolution of the mortgage, see Story, Commentaries on Equity Jurisprudence, Section 1004 et seq. and a future blog that will go more deeply into its origins and the shadows cast even to our day by its history and development.