assignment by way of mortgage

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Mortgage Assignment Laws and Definition

(This may not be the same place you live)

  What is a Mortgage Assignment?

A mortgage is a legal agreement. Under this agreement, a bank or other lending institution provides a loan to an individual seeking to finance a home purchase. The lender is referred to as a creditor. The person who finances the home owes money to the bank, and is referred to as the debtor.

To make money, the bank charges interest on the loan. To ensure the debtor pays the loan, the bank takes a security interest in what the loan is financing — the home itself. If the buyer fails to pay the loan, the bank can take the property through a foreclosure proceeding.

There are two main documents involved in a mortgage agreement. The document setting the financial terms and conditions of repayment is known as the mortgage note. The bank is the owner of the note. The note is secured by the mortgage. This means if the debtor does not make payment on the note, the bank may foreclose on the home. 

The document describing the mortgaged property is called the mortgage agreement. In the mortgage agreement, the debtor agrees to make payments under the note, and agrees that if payment is not made, the bank may institute foreclosure proceedings and take the home as collateral .

An assignment of a mortgage refers to an assignment of the note and assignment of the mortgage agreement. Both the note and the mortgage can be assigned. To assign the note and mortgage is to transfer ownership of the note and mortgage. Once the note is assigned, the person to whom it is assigned, the assignee, can collect payment under the note. 

Assignment of the mortgage agreement occurs when the mortgagee (the bank or lender) transfers its rights under the agreement to another party. That party is referred to as the assignee, and receives the right to enforce the agreement’s terms against the assignor, or debtor (also called the “mortgagor”). 

What are the Requirements for Executing a Mortgage Assignment?

What are some of the benefits and drawbacks of mortgage assignments, are there any defenses to mortgage assignments, do i need to hire an attorney for help with a mortgage assignment.

For a mortgage to be validly assigned, the assignment document (the document formally assigning ownership from one person to another) must contain:

• The current assignor name.
• The name of the assignee.
• The current borrower or borrowers’ names. 
• A description of the mortgage, including date of execution of the mortgage agreement, the amount of the loan that remains, and a reference to where the mortgage was initially recorded. A mortgage is recorded in the office of a county clerk, in an index, typically bearing a volume or page number. The reference to where the mortgage was recorded should include the date of recording, volume, page number, and county of recording.
• A description of the property. The description must be a legal description that unambiguously and completely describes the boundaries of the property.

There are several types of assignments of mortgage. These include a corrective assignment of mortgage, a corporate assignment of mortgage, and a mers assignment of mortgage. A corrective assignment corrects or amends a defect or mistake in the original assignment. A corporate assignment is an assignment of the mortgage from one corporation to another. 

A mers assignment involves the Mortgage Electronic Registration System (MERS). Mortgages often designate MERS as a nominee (agent for) the lender. When the lender assigns a mortgage to MERS, MERS does not actually receive ownership of the note or mortgage agreement. Instead, MERS tracks the mortgage as the mortgage is assigned from bank to bank. 

An advantage of a mortgage assignment is that the assignment permits buyers interested in purchasing a home, to do so without having to obtain a loan from a financial institution. The buyer, through an assignment from the current homeowner, assumes the rights and responsibilities under the mortgage. 

A disadvantage of a mortgage assignment is the consequences of failing to record it. Under most state laws, an entity seeking to institute foreclosure proceedings must record the assignment before it can do so. If a mortgage is not recorded, the judge will dismiss the foreclosure proceeding. 

Failure to observe mortgage assignment procedure can be used as a defense by a homeowner in a foreclosure proceeding. Before a bank can institute a foreclosure proceeding, the bank must record the assignment of the note. The bank must also be in actual possession of the note. 

If the bank fails to “produce the note,” that is, cannot demonstrate that the note was assigned to it, the bank cannot demonstrate it owns the note. Therefore, it lacks legal standing to commence a foreclosure proceeding.

If you need help with preparing an assignment of mortgage, you should contact a mortgage lawyer . An experienced mortgage lawyer near you can assist you with preparing and recording the document.

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Prior to joining LegalMatch, Daniel worked as a legal editor for a large HR Compliance firm, focusing on employer compliance in numerous areas of the law including workplace safety law, health care law, wage and hour law, and cybersecurity. Prior to that, Daniel served as a litigator for several small law firms, handling a diverse caseload that included cases in Real Estate Law (property ownership rights, residential landlord/tenant disputes, foreclosures), Employment Law (minimum wage and overtime claims, discrimination, workers’ compensation, labor-management relations), Construction Law, and Commercial Law (consumer protection law and contracts). Daniel holds a J.D. from the Emory University School of Law and a B.S. in Biological Sciences from Cornell University. He is admitted to practice law in the State of New York and before the State Bar of Georgia. Daniel is also admitted to practice before the United States Courts of Appeals for both the 2nd and 11th Circuits. You can learn more about Daniel by checking out his Linkedin profile and his personal page. Read More

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Introduction to Security

What is Security

Taking effective security over an asset means that the security holder can, on the insolvency of the borrower, take possession of that asset and use the proceeds to repay the loan. This puts the security holder in a stronger position than the unsecured creditors.

What does the security holder want?

Basically, a security holder has three aims. It wants to ensure that:

The security is effective on the insolvency of the borrower.

The security will take priority over anyone else who obtains a proprietary interest in the asset concerned.

The security can be enforced when required, even if the borrower is in insolvency proceedings.

A creditor may also want to know to what extent security can arise by operation of law and what alternatives there are to taking security.

Categories of Security under English law

There are four primary categories of security under English law as follows:

The term 'mortgage' and 'charge' tend to be used interchangeably but there are some technical differences.

This form of security involves the transfer of title to an asset in order to secure obligations, typically a debt on the condition that it will be re-transferred when the secured obligations are discharged. The assets secured can be tangible or intangible and physical possession of the mortgaged asset is not a requirement.

Depending on whether the necessary formalities have been complied with and whether the borrower has legal title to the asset, a mortgage can be legal or equitable.

Under an equitable mortgage, only a beneficial interest will pass to the mortgagee whereas under a legal mortgage legal title will pass to the mortgagee.

The transfer of title under a legal mortgage operates to prevent the mortgagor from disposing of the asset and assist in the creditor's ability to realise the security if required.

A legal mortgage is the most secure form of security interest and cannot (unlike an equitable mortgage) be taken over future property.

Mortgages over intangible assets such as choses in action (eg. Rights under a contract) are typically taken by an assignment by way of security which can be legal or equitable depending on the formalities complied with. See section 136 Law of Property Act 1925 ( LPA ) for requirements of a legal assignment.  An assignment by way of security transfers certain rights from the assignor to the assignee as security for the discharge of the obligations of the assignor or a third party. You cannot have multiple assignments running concurrently.

While under a mortgage title to the asset will pass to the mortgagee, under a charge title does not pass and the chargee instead  obtains an equitable proprietary interest in the security provider's assets e.g. the right to appropriate the charged assets in satisfaction of the debt, the right to restrict the security provider from dealing with the asset freely and a right to the proceeds of sale. There is no right to possession.

Charges can be fixed or floating. A fixed charge will attach immediately to the (definite and identifiable) charged asset while a floating charge hovers over a pool of assets (present and /or future) until conversion or 'crystallisation' (when it fastens onto and becomes a fixed charge over assets). The distinguishing feature of a fixed charge is that the chargor is not free to deal with the charged assets in the ordinary course of its business. The key characteristic of a fixed charge is that the lender has control over the charged asset. Control is crucial to the nature of a fixed charge. A floating charge on the other hand is a charge over a shifting class of assets which the chargor is free to deal and so permits the continuation of the business operations of e.g. a trading company.

Over certain assets e.g. stock-in-trade or inventory, only a floating charge can be created. This is because it would be impractical for a debtor not to be able to deal freely with its stock as this would cause cash-flow problems. The floating charge is normally therefore a catch-all provision for assets not specifically charged and will typically be granted over the whole undertaking.

In the case of present and future receivables, a fixed charge can, in practice, only be effectively taken if the proceeds of the receivables are paid into an account which is strictly operated as a blocked account (National Westminster Bank plc v Spectrum Plus Limited and others [2005] UKHL41) .

Liens generally arise by operation of law and are more common in commercial transactions e.g. when goods are being supplied, repaired or transported. They are accordingly more of benefit to trade creditors rather than financial creditors e.g. a creditor has a lien over goods until thay have been paid for by the security provider. However, creditors do need to think about doing due diligence in respect of any existing or future liens affecting assets that they might take security over as some will rank ahead of even prior mortgages e.g. a maritime lien.

In addition, it is possible to take a bill of sale over chattels owned by an individual under the Bills of Sale Acts 1878 and 1882, but rarely used because if you get it wrong you not only have invalid security , but the secured debt is also extinguished.

Quasi-security

Quasi-security applies to methods by which a creditor might try to enhance its position on the insolvency of the borrower without taking a full security interest.

Quasi-security includes:

Guarantees and indemnities from third parties

Comfort Letters from third parties e.g. the parent. Are they legally binding or merely expressions of intent?

Set-off and netting arrangements . Netting is a form of contractual set-off. Set-off is mandatory on insolvency for mutual credits, mutual debits and other mutual dealings. Banker's set-off-the general right of the bank to combine two or more accounts held by the same entity.

Bank guarantees and bonds. This is the bank's paper so bank has to pay absent fraud.

Standby Letters of Credit. Operate like a bank guarantee.

Retention of Title (RoT) - Romalpa clauses. Again, a lender needs to do due diligence to see whether its borrower's stock –in-trade actually belongs to the borrower or a third party supplier.

Flawed asset arrangements. This is a mandate arrangement between the bank and the borrower whereby the borrower agrees that the bank does not have to pay what it owes the borrower until the borrower pays what it owes the bank. It was held to be effective on a liquidation in BCCI No 8 [1997] 3 WLR 909 .

Negative Pledges. This a covenant by the borrower not to encumber its assets. These should preserve unencumbered assets for the general creditors. It is questionable whether they bind third parties and what effect a negative pledge has on a third party.

Hire purchase and finance lease. Title is with the lender not the borrower so no risk to the lender on the insolvency of the 'borrower'. This is an alternative method to the loan and mortgage for funding.

II. TYPES OF ASSET WHICH MAY BE SUBJECT TO SECURITY

Mortgage - includes securities, chattels and rights under a contract (via an assignment by way of security). Note that a legal mortgage can generally not be taken over most types of intangible property with the exception of: (i) documents that transfer title to the intangible property (e.g. bills of exchange) and (ii) intangibles that can be transferred into the name of the mortgagee and registered in that mortgagee's name (e.g. shares).

Charge - includes land (usually expressed to be a charge by way of legal mortgage, but a charge nonetheless), contracts, book debts, plant and machinery, goodwill, IP rights and licences.

Pledge - includes items of tangible property capable of being delivered (including documents of title to property such as bearer securities).

Lien - any asset.

III. TYPE OF OBLIGATIONS THAT MAY BE SECURED

Under English law, security may secure obligations of any kind (i.e. not just monetary obligations), including future obligations.

IV. LEGAL FORMALITIES REQUIRED

A Legal Mortgage or Charge over land must be created by way of deed (section 52(1) LPA).

A charge by way of legal mortgage over land must be executed as a deed i.e. it must state that it is a deed and be signed, witnessed and delivered as a deed.

Any mortgage or charge of land or other property (whether legal or equitable) must be by deed if the mortgagee or chargee is to have the statutory power of sale and the statutory power to appoint a receiver. Also, a power of attorney must be by deed.

A deed is a written instrument that requires more than a simple signature to be enforceable. A deed is distinguishable from a simple contract for two main reasons: (i) the limitation period for actions brought under simple contract is six years from the date of accrual of action whereas the period is generally twelve years for a deed; and (ii) deeds do not have to be supported by consideration to be enforceable.

For assignments by way of security of debts or other choses in action, the assignment must be in writing.

Pledge - in order for a pledge to be valid, the creditor must be in actual or constructive possession of the asset. A pledge can only be granted over a tangible chattel, excluding real property. No documentation is required but it is obviously preferable that the pledgor and pledgee enter into a letter or memorandum of pledge to record the terms of the pledge including the circumstances when the pledgee might sell the pledged asset.

Lien - no validity requirements as these normally arise by operation of law, although some liens depend on retention of the asset over which the lien is claimed.

Quasi-security - guarantees must be in writing and signed by the guarantor (section 4 Statute of Frauds 1667).

V. PUBLICITY/REGISTRATION REQUIREMENTS

Almost all security (other than pledges) created by English companies and LLPs must be registered at Companies House within the strict 21 day (extended to 31 days during covid, but now back to 21 days) time period. Companies House is a central registry for companies in England and Wales and a public registry.

In addition, charges by way of legal mortgage over land must be registered at the Land Registry regardless of whether it is a corporate or individual granting the charge.

Various other types of asset have their own registration requirements under different regimes e.g. IP rights, ships, aircraft and bills of sale over chattels. Art security can also be registered at the Art Loss Registry.

VI. OTHER PERFECTION REQUIREMENTS

An assignment is perfected when notice of assignment is given to and received by the other contracting party ( Dearle v Hall ( 1823-28) 3 Russ1). In the case of an assignment of the general partner's right to make capital calls on limited partners in funds finance, you cannot register security against an English Limited Partnership so the only way to perfect is by giving notice to the limited partners.

For pledges and liens, these are perfected merely by the creditor holding and continuing to hold the secured asset.

VII. COSTS OF SET UP AND REGISTRATION OF SECURITY

Any security registered at Companies House costs £15 to register online and £23 to register a hard copy.

The fee to register a charge at the Land Registry (assuming it is not registered simultaneously with the transfer of land where no fee is charged) is between £40 to £250 for each title charged depending on the amount secured.

VIII. TIMING FOR PUBLICITY/REGISTRATION

Security has to be registered at Companies House within 21 days (temporarily increased to 31days during covid) of its creation counting from the day after creation. Dire consequences if you fail to do so including the charge being void against the company's other creditors including its liquidator and administrator and the secured debt becoming immediately repayable. If you fail to register, you can apply to the court for registration of the charge out of time (unless in the meantime the company has gone into administration or liquidation) or take a new charge (subject to potential set-aside until the relevant ' hardening periods have expired).

No specific deadline for registering at the Land Registry, but for priority purposes, best to do so within the priority period afforded by the pre-completion searches. Registering security within this period will ensure priority over subsequently registered charges.

Timing for submitting registration and obtaining proof of registration is almost simultaneous with online registration at Companies House and between one and two weeks in the case of a paper registration. In the case of the Land Registry the time period is approximately two weeks depending on how busy they are.

XI. LEX SITUS

Generally speaking, any security must be created under, and be in accordance with, the law of the jurisdiction where the asset is located, notwithstanding that this may be different to the jurisdiction in which the security provider is incorporated.

Mortgages -To create a valid mortgage over real property located in England and/or Wales, the mortgage has to be created under the laws of England and Wales.

To create a valid mortgage or charge over a chattel you normally have to have your security document governed by the law of the jurisdiction where the chattel is located.

X. WHAT TYPES OF RIGHTS DOES A SECURED CREDITOR HAVE?

Before enforcing its security, the holder must generally make a formal demand for payment on the borrower. The effect of a demand is to make the sums due under the loan facility payable. This is particularly important in the context of some of the enforcement rights implied under common law and statute which do not arise until the secured liabilities become payable (expressly granted enforcement rights will normally be exercisable on an event of default occurring under the loan agreement).

In relation to each type of security the following enforcement rights are available:

Legal Mortgage- Foreclosure (a court process whereby the mortgagor's rights in the secured asset are extinguished (i.e. the mortgagor's equity of redemption is extinguished) and that asset becomes vested in the mortgagee). This rarely occurs these days, although under the Financial Collateral Regulations there is a foreclosure equivalent which doesn’t involve any court process; Taking possession; Power of sale (provided the security document contains an express power of sale or is made by deed, in which case the power of sale is implied); and Appointment of a receiver (again available if express power to appoint or is made by deed in which case the power is implied).

and Appointment of receiver (same as for legal mortgage above). Note that on a sale an equitable mortgagee cannot transfer more than an equitable interest in the mortgaged asset.

For assignments by way of security where the secured property comprises choses in action (e.g. contractual rights), the assignee may exercise its power of sale (provided as above)  and/ or appoint a receiver (provided as above).

Charge -Taking possession (available provided the security document contains an express power to that effect); Power of sale (provided same as for legal mortgage above); Appointment of Administrative Receiver (only available to holder of pre-15 September 2003 floating charge over all or substantially all the chargor's assets); Appointment of Receiver (available provided circumstances relating to legal mortgages exist); Appointment of Administrator (available only to holders of a qualifying floating charges (QFCHs). A qualifying floating charge is a charge created by instrument that states that paragraph 14 of Schedule 18 to the Insolvency Act 1986 applies to it or that it purports to appoint an administrator or administrative receiver. A QFCH is generally a holder of qualifying charge which relates to the whole or substantially the whole of the company's property at the time of appointing the administrator.

Pledge -Power of Sale (available where the power is given either expressly in the security document or impliedly where the pledgor is in default and reasonable notice has been given to him).

Lien -Power of Sale (a lien holder may apply to court for an order of sale where: (i) the lien is equitable or (ii) there is a reason why a quick sale of the assets subject to the lien is preferable (e.g. perishable assets); Appointment of Receiver (available to holders of equitable liens, who may apply to the court for an order to appoint a receiver).

Compulsory Liquidation - a secured creditor can seek to have a company wound up if it has served a statutory demand for a debt in excess of £750 and the debtor fails to pay or if it can show that the debtor is insolvent.

XI. ENFORCEMENT

Foreclosure -This is a lengthy, two-stage court process that is rarely used in practice. First an order for foreclosure nisi must be obtained by the mortgagee and then the mortgagor is given a chance to pay the debt. If payment is not forthcoming, an order for the foreclosure to be made absolute can be sought. Little used because its effect is to deprive the mortgagor of its equity of redemption and it would be a very time-consuming process.

Taking Possession- in most cases a court order is required. Where a secured creditor is entitled to obtain possession of real estate, it can do so by either: i) taking physical possession of the secured property if possession is granted voluntarily; or (more commonly) ii) by bringing an action in the county court for a possession order. This can be a lengthy process e.g. up to two years.

A mortgagee in possession may incur unforeseen liabilities to third parties (e.g. the cost of environmental remediation) and owes certain duties (e.g. to the borrower to account for any income and profit actually received or which should have been received).

Power of Sale -Normally a court order is not required unless the mortgage does not include an express power of sale or is not made by way of deed. Also, a mortgagee may prefer to obtain a court order for sale if there are some issues concerning the consideration for the sale. Otherwise, a mortgagee can sell without a court order, but it does have a duty to get the best price reasonably obtainable and cannot itself buy the mortgaged property without the sanction of a court order.

Appointment of Administrative Receiver and Receiver -These are out of court processes. These can be appointed quickly by notice to and acceptance by, the Administrative Receiver/Receiver.

Appointment of Administrator -Some court involvement is always necessary. Administrators can be appointed in two ways: either simply by filing documents at court (the out of court route); or by making a formal application to the court, and (following a hearing) obtaining a court order (the court route).

Using the court route, the appointing creditor must first issue an application at the court, when a hearing date will be set, the timing of which vary depending  on the court calendar. Notice must then be given to a number of interested parties not less than five business days before the hearing. If appointed, the administrator's appointment may commence at the time of the hearing.

The out of court route is only available to QFCHs and the court route is available to all other creditors.

Using the out of court route, if there are no prior-ranking QFCHs, the appointing creditor can simply file the appointment documents at court and the appointment will commence from the time of filing. If there are prior-ranking QFCHs, the appointing creditor must serve notice of intention to appoint on the prior ranking QFCHs two business days before the appointment. If this period expires or the prior ranking QFCH consents, the appointing creditor can then appoint by filing the necessary documents at court. It is important to use the correct documents otherwise your purported administrator could end up being liable for damages as a trespasser.

Financial Collateral Arrangements (FCAs)- The Financial Collateral Regulations 2003 ( FCRs ) were brought into force to implement Directive 2002/47/EC of the European Parliament and Council and modify existing EU insolvency law in relation to FCAs, to give parties to FCAs certain rights in priority to other parties on the insolvency of the collateral giver, to dispense with registration requirements at Companies House and to permit out of court forfeiture. Briefly, an FCA applies where security over financial collateral (i.e. cash, financial instruments including shares or certain types of monetary claims) is provided by an entity (ie. not an individual) to a financial institution which must have possession or control of such financial collateral. It can also apply to stock-lending and repo arrangements.

Under the FCRs, the collateral taker can enforce an FCA even where an administrator is in place, and without having to account to (ordinarily prioritised) preferential creditors and unsecured creditors. The rights of administrators and liquidators in relation to FCAs are much more limited. For example, they have no right to dispose of the collateral, disclaim the FCA, and avoid the FCA even if it occurred after the commencement of the winding-up or to remove an administrative receiver of the financial collateral. In addition, if the FCA allows, the collateral taker can appropriate the collateral without having to obtain a court order for foreclosure.

Compulsory Liquidation -court sanctioned process. The creditor issues a petition at court to commence the process. A date for hearing is fixed at this point. Notice then must be given to the creditor at least five business days before the hearing. It is possible to obtain a winding up order within about six weeks of issuing the petition.

XII. LEGAL CONCERNS/PROHIBITIONS RELATED TO GRANTING/TAKING SECURITY

Corporate Benefit -Where security is given by a company in respect of the obligations of a third party company, the security provider, in its board minutes approving the transaction, must be able to confirm that it is in the company's interests to enter into the transaction. It is common for such third party security to be approved by unanimous ordinary resolution of the shareholders of the company in order to avoid the risk of the shareholders in the company challenging the grant of the security as being ultra vires the directors. In addition, the lender might require the directors to give a certificate of solvency in an effort to avoid the security being attacked as a transaction at an undervalue.

Security for Loans to Directors -Certain restrictions apply to the making of loans, and to related dealings such as the provision of security for loans, by a company, either to its directors, or to directors of its holding company or to persons connected with those directors. Basically a company cannot make a loan to its director or the director of its holding company or give a guarantee or provide security in connection with a loan made to a director unless it is approved by a resolution of the members of the company and (if the director is a director of the company's holding company) a resolution of the members of the holding company as well. There are additional restrictions covering quasi-loans and credit transactions to or for the benefit of directors and their connected persons   and guarantees and security for such loans in the case of a public company or a company associated with a public company where, again, approval by resolution of the members of the company and, if applicable, its holding company is required.

Taking Security over Shares in a Publicly Quoted Company

Another point to watch when taking security over shares in publicly quoted companies from its directors are the disclosure and notification requirements involved. For example, the  Market Abuse Regulations ( MAR ) (Article 19(1) and (7)) imposes notification obligations on any person discharging managerial responsibilities ( PDMR ) or their closely associated persons, within a company to which MAR applies. If a PDMR, or a person closely associated with a PDMR, grants security over his or her shares he/she must disclose the transaction to the company. The company then has to notify the market.

MAR (Article 19(11)) imposes 'closed periods' on PDMRs , or their closely associated persons, within a company to which MAR applies on dealing with its shares (including the grant of security). Clearance may only be provided in exceptional circumstances (e.g. severe financial difficulty).

The AIM Rules include certain disclosure obligations and restrictions on dealing in the company's shares for directors and their families. The AIM Rules also contain significant shareholder disclosure obligations and dealing restrictions for directors and applicable employees during closed periods.

The Takeover Code may apply to the company. If it does, there are potential disclosure obligations under Rule 8 if a charge is taken over 1% or more shares in the company. Security taken over 30% or more of the voting rights of the company could trigger a mandatory takeover offer when enforced.

Part 22 of the Companies Act 2006 allows a public company to serve notice on those 'interested' in its shares which could include a security holder. The notice can require the security holder to give information not only about its own interest but any concurrent interest of which the security holder has knowledge. Failure to comply with the notice entitles to company to obtain a court order that the shares be subject to restrictions.

Part 28 of the Companies Act 2006  contains 'squeeze out' and 'sell out' rules applying when an offeror has unconditionally agreed to acquire 90% in value of a target's shares giving the offeror the statutory right to buy out the remaining minority shareholders. This right cannot be excluded.

Under the FCA DTA disclosure regime, the holder of shares (or the voting rights in those shares) in UK companies whose shares are listed on the main market or AIM are required to notify the company (using a TR1-notification of major shareholding) once they reach the 3% threshold and each 1% change thereafter. If a lender therefore forecloses on shares under the FCRs or exercises its voting rights in respect of shares held by it as collateral the DTA disclosure regime can apply. For any questions please contact Brad Isaac .

XIII. RIGHTS OF CHALLENGE FOR THE SECURITY PROVIDER/THIRD PARTIES

General- The security provider might contest the debt, or contend that the debt was not due and owing (i.e. that the holder of the security had not made a proper demand) or that the security was invalid or not improperly perfected, or that the relevant appointment documents were invalid, or that the relevant notice requirements were not followed.

Limitation- A limitation period of 12 years from the cause of action applies where the document is executed as a deed. This is reduced to six years where the security document is signed under hand.

Conflicting arrangements- Security may not be enforceable if there is an inter-creditor or standstill deed in place governing the enforcement of the security which prohibits or delays enforcement.

Challengeable transactions- A liquidator and an administrator can, in certain circumstances, challenge and have security arrangements set aside, making the security unenforceable. Reviewable transactions include security arrangements that constitute: i) a preference, ii) a transaction at an undervalue; or iii) a (wholly or partly) invalid floating charge.

Briefly, a preference occurs when a debtor has done something or allowed something to be done which has the effect of putting a creditor into a better position in the liquidation, administration or bankruptcy of the debtor than he would have been if the thing had not been done. Such a transaction is challengeable if it was done within 6 months of the insolvency or two years if the relevant parties were connected with debtor (e.g. in the case of  a debtor company, directors, shadow directors, associates of such directors or shadow directors and associates of the company and, in the case of an individual, a relative or life partner of such individual); the debtor was insolvent at the time or as a result of the transaction and the debtor had a desire to put the creditor in a better position than he would have been if the thing had not been done (section 239 Insolvency Act 1986 ( IA )). A classic example of this type of transaction is where the directors of a company have given a guarantee to a bank and then the company gives security for the previously unsecured debt within a short time of the company entering into formal insolvency. From a lender's standpoint, the main point to notice is that the transaction creating the preference has to be done voluntarily so if the lender exerts pressure on the debtor it should never be a preference.

Again briefly, a transaction at an undervalue occurs (section 238 IA) when a debtor enters into a transaction (e.g. a gift or guarantee) for a consideration the value of which, in monetary terms, is significantly less than the value of the consideration provided by the debtor. Such a transaction can be set aside if:

where the debtor is a company, the transaction took place within 2 years before the commencement of its winding-up and the debtor was insolvent or became insolvent as a consequence of entering into the transaction

where the debtor is an individual, the transaction took place within 5 years of the before the commencement of his bankruptcy and , if the bankruptcy occurs in the third, fourth or fifth years, the debtor was insolvent or became insolvent as a consequence of the bankruptcy (i.e. if the bankruptcy occurs within 2 years of the transaction, there is no need for an insolvency practitioner to prove that the debtor was insolvent or became insolvent as a consequence of entering into the transaction).

Where the debtor is a company, there is a defence if it can be shown that :

the debtor entered into the transaction in good faith and for the purpose of carrying out its business; and

when it did so, there were reasonable grounds for believing that the transaction would benefit the company.

When taking a guarantee from a company, it is therefore common practice to do the following:

Detail in the board minutes the benefits to the company in entering into the guarantee (to assist demonstrating that the transaction benefitted the company);

have the entering into the guarantee blessed by a unanimous resolution of the members (to prevent the transaction being ultra vires the directors); and

have the directors make a declaration of solvency (so that , if correct, the transaction could never be a transaction at an undervalue).

The position from the lender's standpoint is more difficult if the debtor is an individual especially if the bankruptcy occurs within the first two years of the transaction.

Under section 245 of the IA a floating charge created by a debtor company will be invalid in its liquidation or administration if it was created in favour of a connected person within 2 years before the commencement of insolvency proceedings or a non-connected person within I year of its administration or liquidation except to the extent of the value of the consideration of the floating charge which comprises money paid, goods or services supplied or debts discharged at the time of or after the creation of such floating charge. The section does not however apply to FCRs (described above).

Undue Influence- Where the security provider can show that he/she entered into the security document whilst under the influence of another, the security will be unenforceable. Undue influence can be implied where there exists a relationship of trust and confidence between the parties to a contract. Certain types of relationship gve rise to a presumption of undue influence and these include parent and child and husbands and wives. The issue for a lender is that if it can be shown that there was undue influence by the debtor on the guarantor even if the lender was unaware of such undue influence, the transaction involving the lender (e.g. a guarantee) can be set aside. If a lender is taking a guarantee in circumstances where there is no commercial relationship between the debtor and the guarantor, a lender needs to protect itself by:

requiring the guarantor take independent legal advice on the guarantee;

providing the guarantor's solicitor with sufficient financial information to be able to advise the guarantor appropriately; and

obtaining confirmation from the solicitor that he/she has advised the guarantor appropriately before the guarantor entered into the guarantee.

(See the leading cases of Barclays Bank v O'Brien [1994] 1 AC 180 and Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773)

Lien - Statute provides that liens over the books, papers and records of a borrower are unenforceable to the extent that enforcement would deny their possession to a  liquidator and administrator.

XIV. SECURED CREDITORS' POSITION IN INSOLVENCY

Rights to and conditions required to continue/initiate security enforcement in insolvency

Perfection (as previously mentioned) is necessary to ensure that the security has the intended priority over the other creditors of the security provider, although perfection does not always guarantee validity and priority in all circumstances (for example, where a transaction is challengeable by an insolvency practitioner).

Further, when a chargor enters into administration or liquidation, unsecured  creditors must lodge formal notice of the debt owed to them, called a proof of debt, to the administrator or liquidator. A secured creditor can rely entirely on its security and not submit a proof or surrender its security and prove for the whole amount of the debt or place a value on its security and prove for the balance of the debt.

Administration- An automatic moratorium is imposed at the start of the administration which prevents creditors from enforcing security without the consent of the administrator or permission of the court, unless the FCRs apply to the security. A secured creditor is however, generally speaking, entitled to be repaid from the proceeds of sale of the secured assets. It may then claim as an unsecured creditor (who will receive a share of the assets proportionate to the size of the company's debt to the unsecured creditors) for any balance. Note that a company cannot enter into administration if an administrative receiver is in office.

Compulsory Liquidation- Compulsory liquidation provides a moratorium preventing creditors from enforcing security without permission of the court. A liquidator acts primarily in the interests of unsecured creditors and shareholders, but must distribute the assets in accordance with the following priority:

First: Fixed charge holders

Second: Administrators and Liquidators (for expenses in administration or winding up) Note that under the moratorium procedure introduced by the Corporate Insolvency and Governance Act 2020 if a company enters into administration or winding-up within 12 weeks of the end of a Part A1 moratorium, any unpaid moratorium debts or pre-moratorium debts (where the company does not have the benefit of a payment holiday for these) will benefit from super-priority (i.e. they will rank before administration or liquidation expenses).

Third: Ordinary Preferential Debts (e.g. employees' wages), Second Preferential Debts (e.g. claims from HMRC such as VAT, PAYE, employee NICs and Construction Industry Scheme deductions) and then the Prescribed Part up to a maximum of £800,000 for floating charges created on or after 6 April 2020).

Fourth: Floating Charge holders

Fifth: Ordinary unsecured creditors including all other taxes e.g. corporation tax (pro rata)

Sixth: Shareholders (receive any surplus).

Secured creditors' rights in influencing decisions in the creditors assembly

Receivership- The receiver only owes duties to the secured creditor who appointed him; there is no meeting of creditors.

Administration- The views of the secured creditor may be taken into consideration by the court when considering the appointment of the administrator. However, an administrator owes a duty to act in the interests of the creditors as a whole.

Compulsory Liquidation- A secured creditor may be able to exert some influence on the choice of liquidator by voting at creditors meetings, or if appointed to the liquidation committee, may take some limited further control over the liquidator's actions. If you have any questions, please contact Andrew Evans or your usual Banking contact.

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Understanding the Assignment of Mortgages: What You Need To Know

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A mortgage is a legally binding agreement between a home buyer and a lender that dictates a borrower's ability to pay off a loan. Every mortgage has an interest rate, a term length, and specific fees attached to it.

Written by Attorney Todd Carney .  Updated November 26, 2021

If you’re like most people who want to purchase a home, you’ll start by going to a bank or other lender to get a mortgage loan. Though you can choose your lender, after the mortgage loan is processed, your mortgage may be transferred to a different mortgage servicer . A transfer is also called an assignment of the mortgage. 

No matter what it’s called, this change of hands may also change who you’re supposed to make your house payments to and how the foreclosure process works if you default on your loan. That’s why if you’re a homeowner, it’s important to know how this process works. This article will provide an in-depth look at what an assignment of a mortgage entails and what impact it can have on homeownership.

Assignment of Mortgage – The Basics

When your original lender transfers your mortgage account and their interests in it to a new lender, that’s called an assignment of mortgage. To do this, your lender must use an assignment of mortgage document. This document ensures the loan is legally transferred to the new owner. It’s common for mortgage lenders to sell the mortgages to other lenders. Most lenders assign the mortgages they originate to other lenders or mortgage buyers.

Home Loan Documents

When you get a loan for a home or real estate, there will usually be two mortgage documents. The first is a mortgage or, less commonly, a deed of trust . The other is a promissory note. The mortgage or deed of trust will state that the mortgaged property provides the security interest for the loan. This basically means that your home is serving as collateral for the loan. It also gives the loan servicer the right to foreclose if you don’t make your monthly payments. The promissory note provides proof of the debt and your promise to pay it.

When a lender assigns your mortgage, your interests as the mortgagor are given to another mortgagee or servicer. Mortgages and deeds of trust are usually recorded in the county recorder’s office. This office also keeps a record of any transfers. When a mortgage is transferred so is the promissory note. The note will be endorsed or signed over to the loan’s new owner. In some situations, a note will be endorsed in blank, which turns it into a bearer instrument. This means whoever holds the note is the presumed owner.

Using MERS To Track Transfers

Banks have collectively established the Mortgage Electronic Registration System , Inc. (MERS), which keeps track of who owns which loans. With MERS, lenders are no longer required to do a separate assignment every time a loan is transferred. That’s because MERS keeps track of the transfers. It’s crucial for MERS to maintain a record of assignments and endorsements because these land records can tell who actually owns the debt and has a legal right to start the foreclosure process.

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Assignment of Mortgage Requirements and Effects

The assignment of mortgage needs to include the following:

The original information regarding the mortgage. Alternatively, it can include the county recorder office’s identification numbers. 

The borrower’s name.

The mortgage loan’s original amount.

The date of the mortgage and when it was recorded.

Usually, there will also need to be a legal description of the real property the mortgage secures, but this is determined by state law and differs by state.

Notice Requirements

The original lender doesn’t need to provide notice to or get permission from the homeowner prior to assigning the mortgage. But the new lender (sometimes called the assignee) has to send the homeowner some form of notice of the loan assignment. The document will typically provide a disclaimer about who the new lender is, the lender’s contact information, and information about how to make your mortgage payment. You should make sure you have this information so you can avoid foreclosure.

Mortgage Terms

When an assignment occurs your loan is transferred, but the initial terms of your mortgage will stay the same. This means you’ll have the same interest rate, overall loan amount, monthly payment, and payment due date. If there are changes or adjustments to the escrow account, the new lender must do them under the terms of the original escrow agreement. The new lender can make some changes if you request them and the lender approves. For example, you may request your new lender to provide more payment methods.

Taxes and Insurance

If you have an escrow account and your mortgage is transferred, you may be worried about making sure your property taxes and homeowners insurance get paid. Though you can always verify the information, the original loan servicer is responsible for giving your local tax authority the new loan servicer’s address for tax billing purposes. The original lender is required to do this after the assignment is recorded. The servicer will also reach out to your property insurance company for this reason.  

If you’ve received notice that your mortgage loan has been assigned, it’s a good idea to reach out to your loan servicer and verify this information. Verifying that all your mortgage information is correct, that you know who to contact if you have questions about your mortgage, and that you know how to make payments to the new servicer will help you avoid being scammed or making payments incorrectly.

Let's Summarize…

In a mortgage assignment, your original lender or servicer transfers your mortgage account to another loan servicer. When this occurs, the original mortgagee or lender’s interests go to the next lender. Even if your mortgage gets transferred or assigned, your mortgage’s terms should remain the same. Your interest rate, loan amount, monthly payment, and payment schedule shouldn’t change. 

Your original lender isn’t required to notify you or get your permission prior to assigning your mortgage. But you should receive correspondence from the new lender after the assignment. It’s important to verify any change in assignment with your original loan servicer before you make your next mortgage payment, so you don’t fall victim to a scam.

Attorney Todd Carney

Attorney Todd Carney is a writer and graduate of Harvard Law School. While in law school, Todd worked in a clinic that helped pro-bono clients file for bankruptcy. Todd also studied several aspects of how the law impacts consumers. Todd has written over 40 articles for sites such... read more about Attorney Todd Carney

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Out-law / your daily need-to-know.

Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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Taking security over IP: counting the cost

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Martin Yells

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13 January 2020

Intellectual property – commercial drivers

Intellectual property (IP) rights protect a person's ideas and products of their creativity from unauthorised use by another person. IP includes registered rights such as patents and trademarks, and unregistered rights such as copyright and design rights. It has often been classified as a chose in action. However, unlike normal choses which are enforceable against a single debtor, IP consists of absolute rights which may be asserted against anyone.

Lenders wish to take security over the most valuable assets held by the borrower. Traditionally, these assets have been tangible (eg machinery or land). However, within the last few decades there has been a shift in lenders' acceptance towards using intangible assets to form the basis of security, or as part of a package. The IP portfolio of many companies, especially start-up technology companies, forms an important part of their assets.

The World Intellectual Property Office has estimated that global commerce in the IP asset class is worth US $300 billion worldwide annually, and 80% of corporate value is now represented by intangible assets. Digital service providers such as Google, marketplace operators such as Amazon and eBay, and other social networking providers hold no significant real assets, but have shown dramatic value creation over time, due to their intangible assets.

Although IP is becoming increasingly valuable, it is an intangible asset. Particular challenges are therefore presented regarding the security package. In transactions where the IP is of significant value, careful consideration is required as to what, where, when, and how security interests are to be created.

Forms of IP

Patents protect a person's inventions. They are registered rights and are governed by the Patents Act 1977 (PA 1977). In order to be patentable, inventions must:

• be new (not already publicly available)
• involve an inventive step (the invention cannot be obvious to a person skilled in the art, taking into account other inventions and products on the market)
• be capable of industrial application
• not be excluded (exclusions are listed in the PA 1977).

Patents can be used to protect either a product or a process. They provide the owner with 20 years of protection (subject to annual renewal), during which time nobody else can produce the product or make use of the process that is protected.

A patent must be registered to be valid. The inventor (or company if the invention was generated in the course of an employee's employment) will apply for the patent to be registered in their name.

Due to the registered nature of patents and the length of protection they grant the owner, patents can be highly valuable. It is therefore common to take security over them.

Trademarks are another form of registered IP right. Trademarks may be registered over logos, words, numerals, colours, letters, shapes, packaging and even sounds and smells. They are governed by the Trade Marks Act 1994 (TMA 1994).

Registration under the TMA 1994 gives the owner of the relevant trademark an indefinite monopoly on its use (subject to renewal every 10 years). However, registration of trademarks is not mandatory. Unregistered trademark rights are inextricably linked with goodwill. However, in the UK unregistered trademarks can only be enforced and protected under the common law tort of passing-off.

A downside of using trademarks as security is that their value will be utterly dependent on the borrower's business value.

Copyright and design rights

Copyright is an unregistered IP right and rests in original works (eg music, art, books, articles, computer programmes) arising on creation of the work.

Copyright gives the relevant author a monopoly on the substantial copying of that work, and can generate royalties for the owner on exploitation (eg by way of licence).

Design rights protect the appearance of a product, and can include the 3D shape as well as the 2D surface decoration. They can be registered or unregistered. The latter in the UK is a species of copyright.

Exploitation of IP

To increase the value of IP and generate revenue, the owner of IP has various options. It can:

• License the IP: this gives the licensee the right to use the owner's IP. Licences can be exclusive or non-exclusive; perpetual or limited; for a one-off fee rather than a royalty stream.
• Sell/assign the IP: this will transfer the ownership of the IP to the buyer, usually for a fee
• Use the IP as security: if of sufficient value, it could be used as security for a loan.

Due diligence

At the initial stage of a transaction, the lender must satisfy itself that the borrower's IP portfolio constitutes a viable asset on which a loan can be secured. It will therefore require the borrower to produce a detailed schedule of its IP assets.

At the same time, the lender will also carry out an independent IP audit, to verify the assets owned by the borrower; and, if any, the assets licensed by the borrower. It can be a useful starting point to conduct searches of IP databases to see what rights are registered, eg the UK IPO for trademarks and design rights, Espacenet/EPO for patents, and the EUIPO register for EU registered rights (also known as OHIM).

For unregistered IP rights, such as copyright, the verification process is more difficult. The lender's best bet may be to take representations from the borrower in the loan agreement concerning its ownership of unregistered rights.

All relevant registrations will need to be checked to ensure that they are up-to-date.

A prudent lender should also determine whether there are any infringement claims or actions affecting the value of IP. Some of the most valuable forms of IP, such as patents, may be most likely to be those subject to infringement proceedings.

The lender should beware of external contractors and consultants being used by the borrower to create (eg software). Unless their work is expressly assigned to the borrower, they may be the owner of any copyright.

A lender should confirm that there are no earlier security interests registered against the assets, or any licences (particularly exclusive licences). This would significantly impact on the resale value of the IP should the lender's security need to be realised.

Lenders must also be wary of collaboration agreements (where multiple businesses work together to create new IP). There is often confusion over who owns the IP in the deliverables created by the collaboration, and who therefore has the right to grant security over it.

Considerations following due diligence

If the borrower is a licensee of various valuable IP rights, it would be prudent for the lender to consider entering into a tripartite agreement between themselves, the borrower and the licensor (owner) of the IP. This guarantees that the owner has provided express consent for the borrower to use the IP as security.

Certain valuable rights may need to be registered, and these registrations will also need to be maintained. If IP is assigned to the lender as part of the security package (see below), this may fall to the lender. If the borrower remains responsible for maintaining the relevant IP registrations, this can increase the risk to the lender, as the borrower may not renew IP and its value may reduce.

Taking security over IP: difficulties

As the value and potential of IP grows, lenders are beginning to be more confident with taking security over this asset class. However, there are many general issues and considerations which must be taken into account when determining whether a lender should seek to take security over a borrower's IP.

Firstly, the value of the IP must be ascertained to determine whether it will be a good basis for providing security. This is difficult, as IP can have a different value to different entities; a lender may not have the skills/expertise to use IP if they need to enforce it. IP specific to a particular industry may be enormously valuable to the borrower but of little value to a lender who does not trade within that industry.

We also note that a considerable gap exists between the value of IP assets examined for a collateralisation or internal evaluation and the value attached to IP assets in an actual transaction. Low creditor confidence in intellectual property as security and the lack of standards in the valuation of IP assets are two major impediments to the continued growth of IP financing.

Maintenance

Maintaining IP rights requires constant vigilance. Trademarks and patent registrations will lapse permanently if not renewed. Unregistered trademarks and copyright will become worthless if a third party successfully claims that its rights have been infringed. A failure to defend valuable IP by taking legal action against bootleggers and piracy may lead to the same outcome.

International considerations

Companies operating in a global market will often have a multi-jurisdictional IP portfolio. While security can be taken over the entirety of the portfolio by a single English law security agreement, there are a number of issues that will arise:

• Some jurisdictions do not recognise the concept of a charge. Under Norwegian law, security may only be taken over IP registered in the jurisdiction by way of a mortgage or as part of a floating charge over the borrower's assets.
• Recording the lender's security interest may not be possible in all jurisdictions, even those where the concept of a charge is recognised.
• The cost of recording security interests in a number of jurisdictions can be prohibitively expensive.
• There is no concept of 'equity' in civil law jurisdictions. In countries such as Spain, where it may not be possible to record the lender's security interest, while this will be recognised as a contractual right as between lender and borrower, enforcing the security against third parties (even those with prior knowledge of the transaction) will not be possible.

Types of Security

A mortgage is generally the preferred route, and if the IP right is unregistered, a legal mortgage is desirable. This is effected by way of an assignment by way of security. The assignment should include warranties that the borrower owns the IP, there are no claims for infringement against the borrower or prior security interests, and all renewals are up-to-date. Legal title to the IP will be transferred to the lender, while simultaneously the borrower will retain a beneficial equitable interest in the mortgaged IP (the equity of redemption).

The borrower will be entitled to the re-conveyance of the legal title upon the full discharge of its debt. At the same time, a licence will be granted back to the borrower, to allow it to use the IP. Licence-back should be an exclusive or sole licence, which is royalty-free, limited, and revocable. It should contain an obligation on the borrower not to do anything which may damage or reduce the value of goodwill in the IP. The lender should also be permitted to terminate the licence if the borrower defaults on the loan.

The benefits of taking a mortgage include:

• preserving priority for the lender
• lender protection from disposal of the IP right by the borrower
• lender ease in enforcing any default by the borrower by selling or licensing the IP without the need for borrower consent.

The disadvantages of taking a mortgage include:

• higher maintenance costs (although an agent can be appointed to manage the IP portfolio)
• the lender being required to be a named party in infringement proceedings
• the mortgage not applying to future IP; and complex documentation will be involved, which will be costly and cause the process to be longer.

As patents and trademarks are registered IP rights, and can have a high value, a mortgage should be taken over these. Equally, lenders seeking to take security over unregistered IP of commercial value (for example, copyright in the computer programmes developed by an IT company) should do so by way of a legal mortgage.

Fixed charge

General charging wording in a security document will usually be enough to cover IP where security is taken over a number of assets of the borrower, which will include the IP. The usual wording includes a charge over present and future IP rights concerning the portfolio of the borrower's IP rights.

If the borrower's IP is the main or only asset over which security is taken, any charging provisions should be revised so they are specific to the IP that security is being taken over. The same applies to the warranties and representations in the security documentation e.g. covenants requiring the borrower to maintain the IP, and a warranty that no other parties have any claims over or security interests in the IP.

If a fixed charge is being taken, the charging provisions must contain information in relation to how the lender will control the IP. If these arrangements are absent, the security will be considered to be a floating charge. The lender should consider taking an assignment of the IP, which agreement would be held in escrow by the lender, to be used if the borrower defaults and enforcement is required.

Alternatively, the lender could obtain a power of attorney from the borrower to enable it to enforce security should the need arise. By way of example in relation to software being charged, sometimes the lender and the borrower enter into an escrow arrangement whereby an escrow agent agrees to hold the software in escrow and to release it to the lender in the case of enforcement. This process can be costly and an administrative burden, since it needs to be maintained during the life of the security.

However, it can be beneficial for borrowers sensitive to disclosing their software to any third parties. Lenders will also require a copy of the software to be given to them (and further copies, each time such software is updated) along with copies of relevant user guides. This would ensure that any receiver would have a copy of the software. Whether this is appropriate would depend on how sensitive a borrower is to allowing such information to remain in the possession of the lender.

The benefits of a fixed charge include:

• no maintenance requirements for the lender as the lender does not own the IP
• priority over other lenders
• simpler and quicker to put into place
• applies to future rights
• the lender retains control of the secured IP and can sell the IP, appoint a receiver, or receive royalties.

However, one major disadvantage of taking a fixed charge over IP is that the borrower could sell the IP to an assignee without notice.

Floating charge

A floating charge will only be relevant if the IP assets of the borrower can only be identified as a group, not as an individual asset.

For example, the borrowers 'brand' could be secured by way of a floating charge. This would include unregistered trademarks, and copyright in the logo, domain name, or website. The lender will not have any maintenance requirements over the IP. However, the borrower could sell the IP without notice, and the lender will fall lower in the order of priority.

Perfection and registration of security

If a lender takes an assignment, licence or security interest in a registered IP right this will need to be registered at the appropriate registry as soon as possible after the transaction.

Security should also be registered with the Registrar of Companies. If the lender takes an assignment of a patent or trade mark as part of its security package, a lender that fails to register the assignment six months from the date of the underlying transaction would not be able to claim damages for infringements occurring whilst the assignment is unregistered. This lender will only be able to claim damages or an account of profits in respect of infringement as from the date its ownership is recorded.

Further, if not recorded in a register, relevant documents may not be useful as evidence of title in a court of law. Registration may assist in fending off a third party purchaser.

Enforcement

A lender taking security over IP must be aware of enforcement routes, should it need to enforce following a default by the borrower.

If the lender has taken a mortgage over IP it will own the IP, and will therefore be able to sell the IP, grant a licence to a third party and terminate the licence to the borrower, or exploit the IP itself.

If a fixed charge has been taken, the lender will take ownership of the IP by dating the assignment it is holding in escrow, or the lender can exercise the power of attorney it has been granted, to assign the IP. Once the IP has been assigned the lender can sell it, grant a licence over it, or exploit the IP itself.

Alternatively, the lender could appoint a receiver to take possession of the IP or sell the IP and this may be a convenient route if the security covers other assets of the business. Without an express power of sale, the lender will have to apply to court for an order of sale or the appointment of a receiver.

If a floating charge has been taken, the lender will only be able to exercise their right to appoint an administrator, who would likely sell the borrower's business and use the sale proceeds towards repayment of the debt.

IP rights are a commercially valuable asset to any business that derives goodwill from its brand or associated IP interests, and so too may it be to a lender. Because IP is intangible, it poses particular challenges for a lender wishing to take security over it. IP specific to a particular industry may be valuable to the borrower but of little value to a lender who does not trade within that industry.

Consequently, it is often of indeterminate resale value, and therefore, as discussed in this article, before taking a security interest over IP (be that by mortgage, fixed charge, or floating charge) the lender should explore how it would exploit that IP if it had to enforce its interest, and be mindful of the practical steps needed to make good that security, such as registration formalities (both at Companies House and the UK/EU Intellectual Property Office).

Nevertheless, when presented with an IP-rich borrower, taking security over IP should be a key consideration when acting for either borrower or lender.

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Assignment of Lease vs. Mortgage of Lease

This article may only be applicable in certain jurisdictions.

When lenders consider their real property security options, their analysis often goes beyond simply taking a mortgage from a debtor who owns real estate. A debtor's interest in real property leases (whether as landlord or tenant) means a lender often obtains either an Assignment of Lease or a Mortgage of Lease as additional security. Like any other specific security agreement, these agreements facilitate the orderly and more effective enforcement of the Lender's security in the underlying debtor asset.

Assignment of Lease

In cases where the debtor owns real property but does not occupy it, the revenue stream from third party leases is a significant asset that should be secured. Although most mortgage standard charge terms include at least a brief paragraph related to assignment of leases, they do not provide the benefit of the more fulsome provisions typically contained in a stand alone specific Assignment of Lease (in cases where there may be a significant tenant) or a general Assignment of Lease (securing all present and future leases without reference to a specific tenant).

The debtor's interest as landlord is secured by registration against title to the debtor's real property, typically immediately following the registration of the mortgage of land. It should be noted that in order to register a specific Assignment of Lease, there first requires the registration of a Notice of Lease in respect of the lease that is being specifically assigned. The Assignment of Lease also has a personal property component that cannot be overlooked. The rents and leases that are secured by the Assignment of Lease fall within the definition of personal property under the personal property security legislation; and as such require the registration of a financing statement against the debtor.

An Assignment of Lease document includes certain generally accepted provisions.

The debtor assigns to the lender (as collateral security for the payment of principal and interest under the mortgage of land) all rents and other monies due to it by tenants and the benefit of all tenant covenants under all current and future leases.

The debtor typically covenants to not collect rent more than one month in advance (to ensure that the normal revenue stream is available to the lender on enforcement) and not amend any material terms of the leases without the lender's approval. In the case of a specific Assignment of Lease, it is prudent to also obtain similar covenants from the tenant itself and an acknowledgement that the tenant will attorn to the Lender in the event of default by the debtor.

The debtor is permitted to continue to collect rent according to the terms of the leases until an event of default occurs pursuant to the mortgage of land, after which the Lender may give notice to the tenants to pay all future rents to the lender directly.

Mortgage of Lease

In cases where the debtor does not own real estate but rents space instead, the right to occupy the premises may be a key asset of the debtor that is secured. Although it is typical that a general security agreement includes a reference to leasehold interests in the description of the charged collateral, the general security agreement does not provide the benefit of the more complete language in a stand alone specific Mortgage of Lease document.

The debtor's interest as tenant is secured by registration against title to the debtor's leasehold interest in the real property. This requires the prior registration of a Notice of Lease in respect of the lease that is being secured.

It should be noted that if there is a real property mortgage on title granted by the owner/landlord to another lender prior to the lease, and if the tenant/debtor or tenant's lender has not obtained a non-disturbance agreement from the owner/landlord, the Mortgage of Lease will be no better security than the lease itself (i.e., subject to being terminated at the option of the prior mortgagee in the event of default under the real property mortgage). Most leases will contain a prohibition against mortgaging the lease, so it will be necessary to obtain the landlord's consent to a Mortgage of Lease.

A Mortgage of Lease document typically contains some basic standard provisions.

As in a mortgage of land, the Mortgage of Lease specifies a principal amount, interest rate, payment dates, and contains charging language whereby the debtor's leasehold interest is security for payment of the principal and interest.

Similarly, in the event of default, the lender has the ability to exercise a power of sale and sublease or assign the leasehold interest to a third party.

The debtor covenants to not pay rent more than one month in advance, to not amend any material terms of the leases without the lender's approval, to not terminate or surrender the term of the lease and to hold possession of the premises in trust for the lender.

Most lender mortgage standard charge terms contain flexible language that contemplates use of the terms for both cases where the chargor owns a freehold interest in the property or a leasehold interest in the property.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

Related Content

• checklists (4)
• practice notes (69)
• precedents (17)
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Assignment (by way of security) definition

What does assignment (by way of security) mean, view the related checklists about assignment (by way of security), perfecting security in real estate finance transactions—checklist.

Perfecting security in real estate finance transactions—checklist This Checklist sets out the steps which property lawyers need to take to perfect security in a real estate finance transaction. Real estate finance lenders will typically want to take a full security package over all of the assets relating to the real estate. A real estate lawyer in a multi-disciplinary team will likely be responsible for arranging or inputting into the following securities and documentation: • security over the land, rental income, insurance proceeds, development and construction and contractual rights • reviewing the management agreement and negotiating a duty of care agreement (although in a multi-disciplinary team, this is sometimes handled by the banking and finance lawyer) • dealing with completion undertakings and post completion registration of the legal charge at Companies House and HM Land Registry as well as giving third party notices regarding rent payment, notice of charge where necessary of assignment of contractual rights or warranties See Practice Notes: Security in real estate finance transactions, Taking security over land...

Real estate finance—checklist

Real estate finance—checklist This checklist sets out the key issues to consider when acting for the lender or the borrower on a real estate finance transaction. It assumes that the property being acquired and/or developed is situated in England or Wales. Principal issues include: • ensuring that the documents received from the seller of the property are sufficient to obtain good title to, and effect registration of, the property • confirming that the parties have the power and authority to enter into the transaction • considering whether the transaction involves any entities incorporated or formed overseas that want to buy, sell or otherwise transact with the property. See Practice Note: The register of overseas entities and its impact on loan transactions (Economic Crime (Transparency and Enforcement) Act 2022), and • considering whether the transaction involves the development of a property and whether, in particular, it involves a ‘higher-risk building’. See Practice Note: Building Safety Act 2022—implications for finance transactions involving real estate and real estate development • Ensure that the following...

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Priority between security interests—practical examples.

Priority between security interests—practical examples This Practice Note sets out examples of how the rules on priority could work in practice with reference to the relevant priority rules under English law. It complements and should be read in conjunction with our other Practice Notes on priority. Additional examples are added to this Practice Note on a regular basis. If you come across a priority situation in practice that you would like us to include, please use the LexisAsk function to let us know. Practice Note: Priority between security interests sets out the rules on priority from a more technical perspective and should be used for information about the black letter law which underpins the practical examples in this Practice Note. It is important to note that English law priority rules are complex and are generally accepted not to be clear in every respect. The rules can also be affected by the actions of the parties meaning that law firms will often not give an opinion on the...

Ireland—Key features of debentures

Ireland—Key features of debentures Debentures are used in many types of financing where it is desirable to take security over all of the assets of a particular entity. They are a form of umbrella document, incorporating many types of security over a broad range of assets. What is a debenture and when do you use one? What is a debenture? In the context of secured lending, the term 'debenture' means a form of security agreement that grants security interests over a broad range of the security provider's assets as collateral for either the security provider's own obligations or the obligations of a third party. The term 'debenture' can also refer to a document that either creates or acknowledges a debt. This Practice Note deals with debentures as a form of security in the context of secured lending. In particular, it considers: • the formalities required for a debenture • the legal principles to be considered • the fixed security normally secured in a debenture • the floating security under a...

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Assignment of intellectual property rights (asset purchase) (long form).

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Ireland—Debenture: single company chargor—bilateral—all monies

Bilateral debenture for a chargor incorporated as a limited company in Ireland to secure the chargor’s obligations to the lender on an all monies basis Using this Precedent Debenture This is a precedent bilateral Debenture which can be used to take security over all of the assets of a company. This drafting note explains the context in which this precedent Debenture might be used as well as the features of this precedent Debenture and the assumptions on which it is based. Negotiating a security package—general principles A lender's primary concern is that it is repaid. If a borrower fails to repay a loan the lender may have to go to court to obtain a judgment for payment of the sum owed to it. Even if it obtains such judgment this does not mean that the lender will be repaid in full or even in part. For example, if the borrower is insolvent, the lender may have to share the borrower's available assets with other creditors and will only receive part...

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How could the funder of a ‘first purchaser’ of a construction development obtain rights against the construction/design team.

How could the funder of a ‘first purchaser’ of a construction development obtain rights against the construction/design team? It is standard market practice for warranties to be provided by the construction/design team to the following beneficiaries: • funder of the development • any first purchaser of the whole or a substantial part • any first tenant of the whole or a substantial part • employer (if the warrantor is a consultant or sub-contractor) • freeholder Where a purchaser is the 'first' purchaser from the employer/developer, a typical construction contract will provide, therefore, that the first purchaser will be entitled to receive a collateral warranty equivalent (ie on the same terms) to that given to the employer/developer, from the same contractor/consultant/sub-contractor. Any other beneficiaries not listed above, ie the funder of a first purchaser, would be considered unusual and the warrantor would be likely to resist providing any such additional warranty (although the funder could always request one, the warrantor may agree). See: Collateral warranties—checklist. This differs to the...

Subject to post-Brexit potential changes in enforcing foreign judgments, is it possible to state with certainty that: A) an EU judgment will be enforced against an English company in English courts B) an EU debenture affecting an English company would be enforceable in English courts.

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Insurance & reinsurance monthly highlights—august 2019.

This month’s edition of Insurance & Reinsurance monthly highlights includes analysis of the decision of the High Court to refuse Prudential Assurance Company’s Part VII FSMA 2000 transfer of a portfolio of annuity business. It also includes other news highlights reported over the past month, including items on Brexit; cladding risks; cyber insurance and motor insurance. There is also news on the latest regulatory developments, together with dates for your diary and case trackers.

Corporate weekly highlights—2 August 2018

This week’s edition of Corporate highlights includes LSE guidance for AIM companies on new corporate governance requirements that apply from 28 September 2018, revised FRC guidance for companies preparing strategic reports, and FCA amendments to the Listing Rules and Disclosure Guidance and Transparency Rules.

Read the latest 4 News articles on Assignment (by way of security)

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• The Legally Invalid Assignment Defense to Foreclosure

People who are facing the possibility of a foreclosure on their home may want to investigate the history of their mortgage. If the assignment to the foreclosing party is not valid, this may be a viable defense to a foreclosure. In some states, you can demand that the foreclosing party produce a written assignment of the mortgage. If it does not have an assignment or failed to record it as required by state law, this may result in the dismissal of the foreclosure action. Recording rules may require that the foreclosing party record the assignment before starting the foreclosure.

Courts in other states are more lenient in their review of assignments. Since the mortgage is closely associated with the promissory note, the foreclosing party may be allowed to enforce the promissory note even if it cannot produce a valid assignment of the mortgage. You should seek legal guidance in your state to determine whether this defense may be viable.

Homeowners who believe that they may have a defense based on an invalid assignment may wish to consult with a knowledgeable foreclosure lawyer, since this defense can become complicated. Justia offers a lawyer directory to simplify researching, comparing, and contacting attorneys who fit your legal needs.

The Relationship Between Mortgages and Promissory Notes

The mortgage and the promissory note are the two key documents attached to a loan for buying a home. Some purchases involve a deed of trust rather than a mortgage, but they are functionally equivalent in this context. While the promissory note is your guarantee to repay the loan, the mortgage gives the lender the right to foreclose if you do not repay the loan as arranged. The mortgage also identifies the property that will serve as security for the loan. Thus, the two documents work together in establishing the lender’s rights.

The Role of Mortgage Assignments in Loan Transfers

A bank or other lender often will sell a mortgage to another party, which will collect payments and pursue the homeowner if they fail to keep up with the mortgage. To transfer the loan, the original lender will endorse the promissory note to the new owner of the mortgage. This is because collection efforts hinge on owning the promissory note. If the foreclosing party cannot produce the promissory note, the homeowner will have a defense to the foreclosure.

Meanwhile, the new owner will record the assignment of the mortgage. This includes transferring the right to foreclose, as provided by the mortgage, to the new owner. The assignment will provide the amount of the mortgage and the names of the homeowner, the original lender, and the new owner of the mortgage. It also will contain a description of the property attached to the mortgage and the date when the mortgage took effect.

An invalid assignment defense may only be a temporary solution until the new owner records an assignment in their name.

The mortgage industry uses a tool known as the Mortgage Electronic Registration System (MERS) to keep track of assignments. MERS may be a nominee for the lender, or it may receive the mortgage as an assignment. If MERS is the current assignee, it cannot pursue a foreclosure because it does not have an interest in the promissory note. MERS simply serves as an agent for the current owner of the mortgage and assists in creating a record for transfers of the mortgage. This allows banks to more easily transfer loans among them without creating a new assignment each time. You may have a defense against a foreclosure action if MERS is listed as the owner of the mortgage. However, this likely will be only a temporary solution until the new owner records an assignment in their name.

Last reviewed October 2023

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• Timeshare Foreclosures & the Legal Process
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• Manufactured Home Foreclosures & Relevant Legal Concerns
• The Right of Redemption Before and After a Foreclosure Sale Under the Law
• Reinstatement and Payoff to Prevent Foreclosure & Your Legal Rights
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What Is a Transfer of Mortgage?

How a transfer of mortgage works, special considerations for transfer of mortgage, the bottom line.

• Personal Finance

Transfer of Mortgage: What it Is and How it Works

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.

Transfer of mortgage is a transaction where either the borrower or lender assigns an existing mortgage (a loan to purchase a property—usually a residential one—using the property as collateral) from the current holder to another person or entity.

Homeowners who are unable to keep current on their mortgage payments may seek a transfer so that they do not default and go into foreclosure. However, not every mortgage is transferable . Here's how a transfer of mortgage works, and how to tell if your mortgage allows this strategy.

key takeaways

• A transfer of mortgage is the reassignment of an existing mortgage from the current holder to another person or entity.
• Not all mortgages can be transferred to another person.
• If a mortgage can be transferred, the lender has the right to approve the person assuming the loan.
• Many mortgage lenders often include a due-on-sale clause in their loans that prohibits a home seller transferring a mortgage to a buyer.

A transfer of mortgage lets a buyer take over the current homeowner's mortgage, assuming the same terms and conditions as they take over responsibility for payments. If your mortgage allows it, this strategy can help you avoid foreclosure, but it can have advantages for the new mortgage owner as well.

For one, the new mortgage owner may want to take on an older mortgage because such a transfer could let them take advantage of previous interest rates if they are lower than the current market rates. Although the new mortgage owner may have to undergo a credit check by the lender.

A transfer of the mortgage, if completed successfully without challenge or stipulations, would not change the terms or length of the loan. The new mortgage owner would only be responsible for the remaining outstanding balance. Through a transfer of the mortgage, a buyer might also avoid having to pay closing costs associated with a new mortgage.

Many mortgages are not eligible for transfer . Mortgages that are eligible are considered "assumable." In order to transfer a mortgage, the mortgage lender will typically need to verify that the person or entity that will assume the loan has adequate income and credit history to be able to make payments in a timely manner.

If you are not allowed to transfer a mortgage due to the loan's underwriting, you may need to explore other options to avoid foreclosure . For example, you could work with your lender to see if they will agree to other payment arrangements, such as a temporary suspension of your payment obligation.

Another option to avoid foreclosure is to sell the home and have a potential buyer, colleague, family member, or another entity agree to make up any difference between the home's sale price and the unpaid loan balance.

Lenders who want to deter a transfer of mortgage might include a clause in the mortgage that requires the remaining balance of the loan to be due on the sale of the property.

This due on sale clause ensures that when homeowners sell their houses, they cannot transfer the mortgage to the buyer (which could play a key part in a homebuyer's making an offer, especially if the mortgage interest was lower than the current market rates). These clauses in effect require the seller to repay the full outstanding balance on the loan, perhaps with the sale proceeds, and likewise compel the buyer to take out a new mortgage to make the purchase.

Under the 1982 Garn-St. Germain Act , lenders cannot enforce the due-on-sale clause in certain situations even if ownership has changed.

You can potentially avoid triggering a due-on-sale clause by transferring the mortgage to an immediate family member, or to a spouse from whom one is legally separated or divorced.

Further, the transfer may be a result of an inheritance following the death of the borrower, and the family member is moving into the home. In such an instance, the lender might not have grounds to prevent the transfer of the mortgage. If the property is transferred to a living trust and the borrower is the trust’s beneficiary , the mortgage usually can also be transferred as well.

Can You Add a Co-Borrower to Your Mortgage?

Once you have a mortgage on your own, you cannot add a co-borrower without refinancing the loan. Many mortgage lenders allow co-borrowers, but some may not. The requirements for a home loan will vary by lender.

What Types of Mortgages are Assumable Mortgages?

Assumable mortgages that can be transferred to another person or entity may include Federal Housing Authority (FHA) loans, U.S. Department of Agriculture (USDA) loans, and Veterans Affairs (VA) loans. Conventional mortgages backed by Freddie Mac or Fannie Mae are generally not assumable.

What Is an Unofficial Transfer?

An unofficial transfer is not a legal arrangement. In this case, the original homeowner continues to make payments to their mortgage lender, but they receive payments from another party to help them make the payments.

Whether you can transfer a mortgage to another party will depend on what type of mortgage you have and the lender's standards. Most conventional mortgages backed by Fannie Mae and Freddie Mac are not eligible for mortgage transfers. Before you go forward with this strategy of avoiding foreclosure, consider alternatives such as working with your lender or requesting forbearance.

U.S. Department of Housing and Urban Development. " Assumptions ."

Congress.gov. " H.R.6267 - Garn-St. Germain Depository Institutions Act of 1982 ."

United States Department of Agriculture. " Chapter 2 - Overview of Section 502 ."

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What Is Assignment of Mortgage: What You Need to Know

We will explore the idea of mortgage assignment in this thorough guide, going over its definition, steps involved, potential consequences, and more. So read on to learn more about this important facet of the real estate market, whether you’re a homeowner, a prospective buyer, or just inquisitive about mortgages.

What is Assignment of Mortgage?

The assignment of mortgage, often simply referred to as mortgage assignment , is a legal process that involves the transfer of a mortgage loan from one party to another. This transfer typically occurs between mortgage lenders or financial institutions and is a common practice within the mortgage industry.

The Key Parties Involved

• Assignor: The person transferring the mortgage is known as the assignor. The initial lender or financial organization that gave the borrower the mortgage loan is often the assignor.
• Assignee: The assignee is the party receiving the mortgage assignment. This could be another lender or financial institution that is buying the mortgage, often as part of a financial transaction.
• Borrower: The borrower is the individual or entity that initially took out the mortgage loan to finance the purchase of a property.

Why is Assignment of Mortgage Necessary?

Assignment of mortgage occurs for various reasons, and it serves specific purposes for all parties involved.

1. Loan Portfolio Management

Mortgage assignment is a common practice used by lenders to better manage their loan portfolios. Lenders might raise funds to offer more loans or issue new mortgages by selling or transferring mortgage loans to other financial organizations. This procedure aids in keeping their portfolios risk-balanced and liquid.

2. Risk Mitigation

Lenders may also assign mortgages to mitigate risk. When they transfer a mortgage to another entity, they are essentially transferring the associated risk as well. This can be a strategic move to reduce their exposure to potential defaults or financial instability.

3. Secondary Mortgage Market

The secondary mortgage market plays a significant role in the assignment of mortgages. Many mortgages are bundled together into mortgage-backed securities (MBS) and sold to investors. Assignment of mortgages allows lenders to participate in this market, which provides additional funding for new mortgage loans.

The Assignment of Mortgage Process

The process of assigning a mortgage, or deciding to sell your mortgage , involves several steps and legal requirements. Here’s a breakdown of the typical process:

1. Agreement between Parties

The assignor (original lender) and assignee (new lender or investor) must enter into a formal agreement outlining the terms and conditions of the new mortgage assignment. This agreement includes details such as the transfer price, terms of the loan, and any specific warranties or representations.

2. Notice to the Borrower

Once the agreement is in place, the borrower is typically notified of the assignment. This notice informs them that the servicing of their mortgage, including collecting monthly mortgage payments, will now be handled by the assignee. The borrower is advised to send future payments to the assignee.

3. Recordation

In many jurisdictions, mortgage assignments must be recorded with the appropriate government office, such as the county recorder’s office. This recordation provides public notice of the transfer and ensures that the assignee has a legal claim on the property.

4. Continuation of Monthly Mortgage Payments

For the borrower, the most noticeable change is the address where monthly payments are sent. Instead of sending payment to the original lender, the borrower will send them to the assignee. It is crucial for borrowers to keep records of these changes to avoid any confusion or missed payments.

Implications of Mortgage Assignment for Borrowers

While the assignment of mortgage primarily involves lenders and investors, it can have implications for borrowers as well. Here are some important considerations for borrowers:

1. No Change in Loan Terms

Borrowers should be aware that the assignment of mortgage does not change the terms of their loan. The interest rate, monthly payments, and other loan terms remain the same. The only change is the entity to which payments are made.

2. Proper Record-Keeping

Borrowers must maintain accurate records of their mortgage payments and correspondence related to the assignment. This helps ensure that payments are correctly credited and can be vital in case of any disputes or issues.

3. Communication with the New Lender

If borrowers have questions or concerns about their mortgage after the assignment, they should reach out to the new lender or servicer. Open and clear communication can help address any issues that may arise during the transition.

4. Property Taxes and Insurance

Borrowers are still responsible for property taxes and homeowner’s insurance, even after the assignment of mortgage. These payments are typically not affected by the transfer of the loan.

The Role of Mortgage Servicers

Mortgage servicers play a crucial role in the assignment of mortgage process. This section will explore the responsibilities of mortgage servicers, their relationship with borrowers, and how they manage mortgage loans on behalf of investors or lenders.

Legal Requirements and Regulations

Assignment is subject to various legal mortgage requirements and regulations that vary by jurisdiction. Discussing these legal aspects will help readers understand the legal framework governing the assignment of mortgages in their region and how it impacts the process.

Impact on Credit and Credit Reporting

The assignment of mortgage can have implications for borrowers’ credit reports and scores. Explore how mortgage assignment can affect credit histories, reporting by credit bureaus, and what borrowers can do to protect their credit during and after the assignment.

Assignment of Mortgage vs. Assumption of Mortgage

Differentiating between assignment of mortgage and assumption of mortgage is important. This section will explain the key differences, where one party takes over the mortgage and liability, while the other party merely transfers the loan to a new lender.

Impact on Property Taxes and Insurance

Taxes and insurance are essential components of homeownership. Explain how the assignment of mortgage may affect property tax payments and the homeowner’s insurance policy, as these are often escrowed into the monthly mortgage payment.

Potential Challenges and Disputes

Discuss common challenges or disputes that can arise during or after the assignment of mortgage, such as miscommunication, incorrect payment processing, or disputes over ownership rights. Offer advice on how to handle and resolve these issues.

Foreclosure and Default Scenarios

In the unfortunate event of mortgage default, understanding how the assignment of mortgage affects foreclosure proceedings is crucial. Explain how the assignee handles foreclosures and what options are available to borrowers facing financial difficulties.

Future Trends and Innovations

Explore emerging trends and innovations in the mortgage industry related to the assignment of mortgages. This could include the use of blockchain technology, digital mortgages, or other advancements that may impact the process.

In the complex world of real estate and mortgage financing , the assignment of mortgage plays a pivotal role in the movement of funds and management of risk. It allows lenders to efficiently manage their portfolios, mitigate risk, and participate in the secondary mortgage market. For borrowers, understanding the process and implications of mortgage assignment is essential to ensure the smooth continuation of their monthly mortgage payments.

As you navigate the world of homeownership or consider entering it, remember that the assignment of mortgage is a routine occurrence designed to benefit all parties involved. By staying informed and maintaining open communication with your lender or servicer, you can ensure that your mortgage loan remains a manageable and secure financial commitment.

In summary, purchase of mortgage is a vital mechanism within the mortgage industry that facilitates the transfer of mortgage loans from one party to another. This process helps lenders manage their portfolios, mitigate risk, and participate in the secondary mortgage market.

For borrowers, it means a change in the entity collecting their monthly mortgage payments but typically does not alter the terms of the original loan. Keeping accurate records and staying informed about the transition are crucial steps to ensure a smooth experience for homeowners. So, whether you’re a homeowner, lender, or investor, understanding assignment of mortgage is key to navigating the real estate landscape effectively.

This article is for informational purposes only and does not constitute legal, tax, or accounting advice.

Written by Alan Noblitt

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Daniel Moore

Demystifying mortgage assignment: what it means for borrowers and lenders, demystifying mortgage assignment: what it means for borrowers and lenders. explore the process, benefits, and risks in our comprehensive guide..

A mortgage assignment is a financial process in which an existing mortgage is transferred from the current holder to another party. It can occur for various reasons, such as a lender selling the mortgage to another bank or financial institution.

Understanding mortgage assignment is essential for both borrowers and lenders, as it impacts the terms and the handling of the loan.

This brief introduction lays the groundwork for a deeper understanding of what mortgage assignment entails and its significance in the mortgage industry.

Understanding Mortgage Assignment

Mortgage assignment is when the original lender transfers the mortgage to another lender or financial institution. This can occur for various reasons, including the original lender wanting to liquidate assets or reduce risk exposure.

Steps in the Mortgage Assignment Process

Discover the critical steps in the mortgage assignment process, from initiation to completion, ensuring a smooth transfer between lenders and maintaining clarity for borrowers.

The process begins when the original lender assigns the mortgage to another party. This decision can be driven by a strategic need to manage financial resources more effectively.

The original and the new lender agree on the terms of the assignment. This agreement includes details about the transfer of rights and the responsibilities each party will hold.

Notification

The borrower is informed about the mortgage assignment. Borrowers must receive clear and concise information about what this change means for their mortgage terms.

Legal Documentation

The transfer of a mortgage is formalized through legal documents. These documents are critical as they protect the rights of all parties involved, ensuring the assignment adheres to financial regulations.

The mortgage assignment is complete once all parties have signed the legal documents and all conditions are met. The new lender now holds the rights and duties originally held by the original lender.

Critical Points for Borrowers and Lenders

Borrowers should pay attention to any changes in the terms of their mortgage, and both lenders need to handle the legal aspects carefully to prevent future disputes. Proper communication between all parties can smooth the transition and maintain trust.

Mortgage assignment doesn't have to be a complicated affair. Clear communication and adherence to legal procedures can be a straightforward process beneficial to all involved.

Advantages of Mortgage Assignment for Lenders and Borrowers

Mortgage assignment offers significant benefits for both lenders and borrowers, each finding unique advantages in the process. Understanding these benefits can help parties make informed decisions about their mortgage management strategies.

For Lenders

Mortgage assignment allows lenders to free up capital and reduce risk by transferring the mortgage to another party, optimizing their financial assets efficiently.

Freeing Up Capital

One of the primary advantages for lenders in the process of mortgage assignment is the ability to free up capital.

By transferring the rights of a mortgage to another financial institution or entity, the original lender can redeploy resources into new lending opportunities or other investments. This can improve the lender's liquidity and enhance its financial flexibility.

Reducing Risk

Mortgage assignment also allows lenders to reduce their risk exposure. When a mortgage is transferred, the associated risks, such as the possibility of default, are also transferred to the acquiring party.

This shift can help the original lender manage its risk portfolio more effectively, allowing for a more stable financial position.

For Borrowers

For borrowers, mortgage assignment can lead to better loan terms and ensure the continuity of their mortgage agreement with a new lender.

Potential for Better Terms

For borrowers, one of the critical advantages of mortgage assignment is the potential to secure better terms from a new lender. This new lender may offer lower interest rates, better repayment conditions, or more favorable terms to attract and maintain clients.

As a result, borrowers can enjoy cost savings and a loan structure more aligned with their current financial situation.

Continuity of Agreement

Despite the change in the lender, mortgage assignment ensures that the continuity of the mortgage agreement is maintained. This means that borrowers do not have to renegotiate the fundamental terms of their mortgage.

Their payment schedule, interest rate, and loan duration remain the same, providing them stability and predictability in their financial planning.

Potential Risks and Disadvantages of Mortgage Assignment

Mortgage assignment can be a valuable tool for managing financial portfolios for borrowers and lenders.

However, it comes with certain risks and disadvantages that must be considered. This section outlines some challenges, helping both parties make informed decisions.

In the mortgage assignment process, lenders face significant challenges, including legal complexities and managing borrower expectations, which require careful navigation to avoid disputes and dissatisfaction.

Legal Complexities and Potential Disputes

One of the primary concerns for lenders in the process of mortgage assignment is the array of legal complexities that can arise.

Transferring a mortgage from one lender to another involves meticulous documentation and strict adherence to legal standards, which, if not properly managed, can lead to disputes with borrowers. These disputes may revolve around misunderstandings about the mortgage terms or the new lender's responsibilities.

Challenges in Managing Borrower Expectations

Lenders may also face challenges in managing borrower expectations during a mortgage assignment. Borrowers might not fully understand the implications of their mortgage being assigned to another lender, which can lead to dissatisfaction or conflict.

Lenders must clearly and effectively communicate what a mortgage assignment means and how it will affect the borrower's loan terms and conditions.

This section examines borrowers' challenges during mortgage assignments, focusing on potential changes regarding the risks of engaging with a new lending institution.

Possible Changes in Mortgage Terms

For borrowers, one of the significant risks associated with mortgage assignment is the potential for changes in the terms of their mortgage.

When a new lender takes over a mortgage, they might adjust the interest rates, payment schedules, or other terms to align with their lending policies. Such changes can sometimes be unfavorable to borrowers, increasing their financial burden.

Risks of Dealing with a New Lending Institution

Additionally, borrowers face risks related to the reputation and stability of the new lending institution. If the new lender has less favorable customer service or a weaker financial position, it could impact the borrower's experience and mortgage security.

Borrowers must thoroughly research the new lender and ensure they are comfortable with their practices and stability.

Considering Mortgage Assignment? Fetch Your Rate Today

As we conclude our discussion on mortgage assignment, it's clear that borrowers and lenders can benefit from this process when managed effectively.

Whether you're a lender looking to reorganize your portfolio or a borrower facing a change in the lender, understanding the terms and conditions of mortgage assignment is critical.

If you're contemplating a mortgage assignment, now is the time to contact Fetch arate and see how this option might work.

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Assignments of life policies and taxation

Chris o'neill looks at the tax consequences of assignments of life policies and the tax planning opportunities the rules offer.

An assignment is a transfer of legal ownership from one party to another. Common types of assignment include assignments by way of gift, assignments by way of mortgage and assignments into (or out of) trust. Here we look at the tax consequences of assignments of life policies and the tax planning opportunities that the rules offer. Full assignments For non-qualifying policies, such as investment bonds, a full assignment is only a chargeable event for income tax purposes if it is for money or money's worth. Furthermore, assignments by way of mortgage and assignments between spouses livin...

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Home Resources Real Estate Assignment vs. Sublease

Assignment vs. Sublease: What Are the Key Differences?

Updated September 26, 2024 | Written by Sara Hostelley Reviewed by Brooke Davis

When leasing property, you might encounter situations where you need to transfer your lease or share your rented space. Assigning a lease and subletting are potential solutions, but you should first understand their implications.

In this article, we explore the differences between a lease assignment and sublease, explain how these arrangements work, and discuss the rights and responsibilities they entail.

What Is a Lease Assignment?

A lease assignment is when the tenant transfers all their rights and obligations under a lease agreement to another party. The new tenant (the “assignee”) accepts all of the responsibilities and benefits of the leased property.

The assignment of a lease helps you when you need to get out of a lease before it expires. For example, suppose you’ve signed a 12-month lease for a commercial space. If your business relocates after six months and needs to get out of the commercial lease early, you can assign the lease to another entity to relieve your company from the lease responsibility.

What Is a Sublease?

A sublease agreement lets a tenant rent out all or part of their rented property to another person (the “subtenant” or “sublessee”). This arrangement is beneficial when you (as the direct tenant) need to temporarily vacate your rental unit or share the space with someone else. Subletting offers flexibility for short-term housing needs and can help you avoid breaking your lease .

When you enter a sublease, you’ll still be responsible for fulfilling the terms of your original lease, including paying rent and maintaining your unit. Additionally, you’ll assume landlord-like duties toward your subtenant, such as addressing maintenance issues and collecting rent.

Assignment vs. Sublease: Key Differences

Here are the key differences between a lease assignment and a sublease:

• Assignment: Three main parties—the landlord, the original tenant (the assignor), and the new tenant (the assignee).
• Sublease: Two main parties—the original tenant (the “sublessor”) and the subtenant (the “sublessee”). The landlord isn’t a direct party in a sublease.
• Assignment: The original tenant transfers all their rights under the rental agreement to the new tenant. The assignee takes over the lease for the rest of the term.
• Sublease: The original tenant keeps their lease rights but grants the subtenant rights to use an entire rental unit (or part of it) for a certain period. The subtenant’s rights are secondary to the original tenant’s.
• Assignment: The new tenant assumes liability for the lease, but the original tenant may remain secondarily answerable to the landlord if the assignee defaults.
• Sublease: The original tenant remains fully liable to the landlord for the lease’s obligations. The subtenant is only responsible to the original tenant.
• Assignment: The assignee pays rent to the landlord.
• Sublease: The subtenant pays rent to the sublessor; they have no financial obligation to the landlord. The sublessor must make full rent payments to the landlord.
• Assignment: The assignee can use the leased premises in the manner outlined in the original lease. Any conditions or restrictions that applied to the original tenant now apply to the assignee.
• Sublease: The subtenant uses the property as described in the sublease, which may or may not be consistent with the original lease’s terms. The original tenant must ensure that the sublease’s terms don’t violate the original lease.
• Assignment: The original lease agreement stays in effect, but all responsibilities transfer to the assignee. Any changes to the lease may require the landlord’s consent.
• Sublease: The original lease governs the sublessor’s obligations, while the sublease dictates the sublessor-subtenant relationship. The sublease cannot override the original lease’s terms.
• Assignment: The landlord must typically issue approval before the original tenant can assign the lease to a new tenant. Most leases have clauses that allow the landlord to approve or reject an assignment based on reasonable grounds.
• Sublease: A sublease also typically requires the landlord’s consent . Some leases may allow subletting without further consent from the landlord, as landlords have fewer concerns because the original tenant keeps their promises in the lease.
• Assignment: The landlord and the new tenant (the assignee) enter a relationship.
• Sublease: The landlord has no direct involvement with the subtenant. The subtenant answers to the tenant, while the tenant answers to the landlord.

How to Choose Between Assigning a Lease and Subletting

Here are some factors that may influence your choice between assigning a lease and subletting:

• Duration of Need: Consider how long you plan to vacate the property. If you want the option to return, choose subletting. If you plan not to return, choose assigning the lease.
• Liability: Think about how much responsibility you want to have. Assigning a lease minimizes your liability, while subletting keeps you liable if the subtenant defaults.
• Lease Terms: Check your lease for an assignment or sublease clause. If your lease favors subletting and restricts assignments, you may opt for a sublease.
• Landlord’s Approval: If your landlord is willing to let you assign the lease to someone else, you may choose this option because it provides a cleaner break. However, it might be easier to get approval for a sublease than for an assignment.
• Control Over the Property: Subletting may be right for you if you wish to retain some control over the property. However, if you no longer have an interest in using or benefiting from the property, you may pursue a lease assignment.
• Market Conditions: In a renter’s market, you may be able to sublease to another individual and charge payments that cover your monthly rent and let you profit. If the rental market is weak in your area, you may opt to assign the lease instead.

Privity of Contract and Privity of Estate in Lease Assignments and Subleases

You can further distinguish between lease assignments and subleases by determining the presence or absence of the privity of contract and privity of estate between the involved parties:

• Privity of contract: A relationship between two parties that lets them enforce the terms of their contract against each other.
• Privity of estate: A relationship between two parties with an interest in the same property.

This table summarizes whether privity of contract and privity of estate exists between the parties in an assignment:

This table summarizes whether privity of contract and privity of estate exists between the parties in a sublease:

Example of Privity of Contract and Estate in an Assignment

Sophia owns Riverside Apartments. She leases Riverside Apartments to Mark for a term of 4 years. In the third year of the lease, Mark decides to assign his interest in Riverside Apartments to Jordan.

Here’s whether privity of contract and privity of estate exist between the parties:

• Sophia and Mark: Sophia and Mark retain privity of contract but not privity of estate because the original lease is still valid, but the interest in the property goes to Jordan.
• Sophia and Jordan: Sophia and Jordan maintain privity of estate because Jordan now holds the present interest in the property. Sophia doesn’t have privity of contract with Jordan, as the original lease agreement remains between Sophia and Mark.
• Mark and Jordan: Mark and Jordan share privity of contract because of their agreement regarding the lease assignment. However, they don’t have privity of estate because Mark no longer has a possessory interest in Riverside Apartments; he has fully transferred his rights to Jordan.

Example of Privity of Contract and Estate in a Sublease

David owns Greenfield Plaza. He leases Greenfield Plaza to Brittany for a five-year term. In the fourth year of the lease, Brittany decides to sublease her rights to Emily for the remaining year.

• David and Brittany: David keeps privity of contract with Brittany because their original lease is still in effect. David also has privity of estate with Brittany, as she keeps a legal interest in the property.
• David and Emily: David and Emily don’t have privity of contract because the sublease is a separate agreement between Brittany and Emily. As a result, David has no direct legal obligations or rights concerning Emily. Furthermore, David and Emily have no privity of estate.
• Brittany and Emily: Brittany and Emily have privity of contract and privity of estate because of the sublease they entered into together.

Understanding the Differences Between Assignments and Subleases

Understanding the nuances between assignments and subleases can significantly impact tenants navigating their rental agreements. This knowledge helps them make informed decisions when circumstances require them to transfer or share their leased space.

Review your original lease, talk to your landlord, and talk to a lawyer to protect your interests and create flexibility in your living or business arrangements.

Sara Hostelley

Legal Content Editor

Sara Hostelley is a legal and SEO content editor with a bachelor's degree in English from the University of South Florida. She has ample experience writing informative content pieces within various...

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