American courts have traditionally recognized one of three theories of mortgage law. Under the title theory, legal “title to the mortgaged real estate remains in the mortgagee until the mortgage is satisfied or foreclosed; in lien theory jurisdictions, the mortgage is regarded as owning a security interest only and both legal and equitable title remain in the mortgage until foreclosure. Under the intermediate theory , legal and equitable title remain in the mortgagor until a default, at which time legal title passes to the mortgagor until a default, at which time legal title passes to the mortgagee.
The title theory, English legal history is crucial to understanding the title theory. When the mortgage transaction became the conveyance of a fee on condition subsequent, with defeasance based on performance by the mortgagor on law day, the mortgagee obtained legal title to the land, and with it, acquired that right to possession and to collect rents and profits. Thus, actual possession became the norm. Under English law at this time, any collection of interest was deemed usurious. Consequently, possession and its access to rents and profits proved to be an economic substitute for interest. Indeed, until the middle of the 17th century the usual practice was for the mortgagee to take possession upon execution of the mortgage; only thereafter did it become common for the mortgagor to be left in possession.
In all probability, the development of mortgagor possession coincided with the creation by equity of the mortgagor’s equity of redemption.
This was a logical development because with the acceptance of the mortgagor as the equitable owner of the real estate, there was an implicit recognition that, notwithstanding the mortgagee’s legal title, its major interest in the real estate was that of security. With the acceptance of this view, the mortgagee who actually exercised the right to possession was held to strict standards of accountability. Consequently, the exercise of the possessory right became relatively infrequent. Nevertheless, while seldom used, the right to possession was, as it still is in a few states today, a fundamental element of the mortgagee’s legal title.
As a result, the mortgagee could maintain ejectment against the mortgagor until the mortgagee was satisfied.
The American state initially adopted the title theory in substantially the same from it had developed in England. Usually, however, there was an express agreement permitting the mortgagor to stay on mortgaged real estate. Even without such express agreements, courts often found from the other terms and conditions of the mortgage documents an implicit right in the mortgagor to remain in possession.
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