There is a common metaphor among people who mortgage their debts that they never truly own their property until the debt is cleared. For example, if a bank holds your mortgage and you don’t make your mortgage payments, the bank can foreclose on your home. According to this metaphor, the “pay to stay” nature of the loan means that the bank actually owns the home, not the person who purchased the home with the mortgage. Although this metaphor is very common, it is incorrect. It fundamentally misunderstands the legal nature of ownership.
Owning property comes with certain rights. Owners have the right to exclude and can legitimately prevent others from using their property without permission. Owners have the right to use (or not use) their property. They may enjoy (or not enjoy) the property as they see fit. The owner has the right to dispose of the property and is free to sell, transfer, or otherwise relinquish ownership of the property. Additionally, the owner is free to enjoy the fruits of the property (including disposal). In short, the owner will be in charge of the property.
However, that control is not absolute. With ownership comes responsibility. Do not use your property to interfere with the legal rights of others. You may not use your vehicle to damage someone else’s home. Owners are responsible for the safety of individuals on their premises. And they are responsible for maintaining their property.
There is a set of laws relating to these rights and responsibilities. A broad overview of property law is beyond the scope of this article. Rather, we will focus on these unique characteristics of ownership.
With that out of the way, let’s get back to the question of this post. Does the secured loan owner actually own the property used as collateral?
You can explore this question using the mortgage example, but the logic here applies to any secured loan. Does the bank own the homes it mortgages?The unique characteristics of real estate ownership make it clear that the answer to these questions is a resounding “no.” It turns out that the rights and responsibilities of ownership do not apply to banks.
First, the bank does not have the right to exclude anyone from the property. If you decide to invite a friend over, the bank has no say. Banks also cannot impose restrictions like landlords can. If the occupier has a feud and forbids access to private property, the bank cannot override it. In fact, banks are not consulted on any exclusion/inclusion issues. They just don’t have that right. Therefore, you can remove the “right to exclude” from the list.
Second, the bank has no right to use the property. A banker can’t call an owner and say, “I need your house for a party this weekend, and I own your mortgage, so I’m using your house.” Nor can non-use be enforced in any other way. The bank may not be able to prevent the owner from having a party on the weekend. Just because a bank holds a mortgage does not give them the right to use the property.
The third right discussed above, disposition, is where the confusion begins. Banks have limited disposal rights. If you don’t pay your mortgage, the bank may repossess and sell your home to collect the debt. However, the important point here is that the right of disposal is limited and the claim is linked to the contract rather than the property. The bank can only foreclose and dispose of the house if the owner defaults on the end of the contract (i.e., mortgage payments). In other words, the right is limited to the owner’s default. The bank may one day wake up and decide not to sell the house. They just don’t have that right. Also, if the house is sold, the bank is not entitled to any profits. They can only get what is owed to them. Banks provided mortgage customers with money, not the use of a home. That was never something a bank would give you.
Also note that the limited right of disposal is tied to the contract. In order to induce the bank to lend, the (future) owner must provide the bank with one of his rights, the right of disposal. However, the (future) owner retains absolute disposal rights. And disposing of the house does not relieve the owner of his obligations to the bank. Transfer of ownership to and from real property. They invest in real estate, not individuals.
Also, the bank is not responsible for ownership. Banks are not required to maintain it. If your roof is damaged in a storm, the bank won’t pay for it. Banks face no threat if their assets cause harm to someone. The owner faces those legal obligations.
The bank does not own the house. They do not have any rights or responsibilities of the owner. The bank owns the mortgage loan (contract). This agreement gives certain rights and responsibilities to the bank, as well as to the other party signing it (the homeowner). However, the mortgage does not own the home itself.
The logic of property ownership here can be extended to areas beyond secured loans.
Another common metaphor is that you will never truly own your home because you have to pay property taxes and if you don’t, your property can be foreclosed on. However, using the same logic I outlined in this post, we can see that this metaphor is wrong as well. Again, the government has no rights or responsibilities regarding ownership. However, the government has some unique powers and limited rights. The government can compel certain uses (such as easements) or non-uses (nuisances), enter property without permission (warrant searches), and seize property (prominent lands), but these rights are still limited. These are limited by law (such as constitutional limits on government power) and due process, and often require government compensation.
In the case of taxation, similar to a mortgage, the government can only seize the property in the event of a default on an obligation (in this case, payment of property taxes). It’s a limited right. And, like with mortgages, the government cannot profit from foreclosures (see Tyler v. Hennepin County; Chief Justice Roberts’ observation that this principle goes back to Magna Carta is also instructive).
You can separate out certain aspects of ownership to get a better deal. But cutting out one aspect of it doesn’t mean the whole bundle of rights disappears.
