You're absolutely right. If I buy a house with a mortgage, I don't really own the house, I just own the equity. The deed is in my name but it's encumbered with a mortgage, which is a cloud on the title. I can't sell the house without paying off the mortgage, otherwise the buyer won't get clear title. In theory I could pretend to sell it if the buyer didn't do a title search, but it wouldn't be a good sale.
It's not really different than a pawn, pledge or hypothecation. If I tranfer collateral to someone in return for a loan, and default on the loan, then the lender has the right to force the sale of the property in order to collect the principle and interest due. Pawns are the most naked forms of this - if I pawn a gold ring, the pawn shop won't pay me anything close to the value, and will charge a very high rate of interest. If I default on the loan, then the ring belongs to the pawnshop and can sell it. I don't even have a right to the difference between the loan price and the sale price, less expenses. In foreclosures of residential property, I do, but that's because laws have been passed to protect me from the realities of the market.
I would call these transactions conditional sales - the property is mine IF I pay off the loan, otherwise it belongs to the lender. The term conditional sale has a different meaning in common law, which I can't help, but I did start off in civil law (Roman law) which actually makes more sense for this type of transaction. In civil law, installment sales are called conditional sales. One more example of the problems of how you define things.
But it's easy to analyze, really. I buy a house for $300K. I make a down payment of $100K. I own $100K of equity, the bank owns $200K. If I default, the bank can sell the house, and is due its $200K plus expenses, because that's in the loan contract. I get whatever's left over, whether it's $100K, $200K, or $10K. So what do I own? I own whatever the bank doesn't own. Further, if there is a deficiency, I owe that to the bank.
So far we continue to be in agreement. |
