Mortgage similar to pawning?

A couple obtained multiple mortgages. How long did the fiddle continue?

Everyone needs money. But there are ways—good and bad ways—to earn it. This time, we travel with people who take the unbeaten path. 

A couple had property. They needed cash. If they had gold, or jewellery, or shares in a company, these would have been hocked and a loan taken against the valuables. However, when you have land, or buildings or bungalows, something you cannot leave with the bank or moneylender, you mortgage it. That the couple did.

A mortgage works like a pawned article. One goes to the bank, or financial institution, and collects money—hard cash—by putting up the property as a security. Since the plot of land cannot be left behind, documents relating to the property are deposited. This is called a mortgage. The owner is the mortgager and the lending party is called the mortgagee.

Our couple took a loan against their home. They regularly paid the instalments. The other side was happy. The deal was running smoothly. Since such a transaction is registered and the registrar records the mortgage, no one would be able to deal in that property, not even the couple. Yet, the couple was able to get a second loan on the same property from another party. In effect, two loans for the pledge of one security.

Not content, the couple, now on a high, managed yet another loan. On the same property! How did they do it? They managed to alter the records. So, when the second mortgagee conducted a search, it found that the property was unencumbered. Did the first mortgagee not find out? No, it did not. Simply because the couple was smart enough to continue paying the instalments. 

Good times never last. As all things, this too came to an end. But, before that, the couple had approached a third party, informing them of only the second mortgage. So mortgagee No.3 offered terms to mortgagee No.2 and released the latter. Still way to go. The couple next tapped mortgagee No.4 for a ‘second’ mortgage which would run along with mortgagee No.3. So now, Nos.4 and 3 knew of each other and neither knew of No.1. 

For two years, the fiddle went on. Payments to No.1 were on time. That is, until one day, the instalments stopped. Next, the instalments to Nos.3 and 4 also stopped. And all hell broke loose. 

The icing on the cake, or, if you wish the poison pill, came when the couple filed for bankruptcy and vacated the property and allowed No.3, who supposedly had the first right, to put the property on the block. This awoke No.1.

Nos.1, 3 and 4 agreed to sell the property but could not get enough to satisfy all of them. Nos.1 and 3 claimed first right. Not to be left out, No.4 claimed second right, after the first two’s demand had been fulfilled, if at all.

The original mortgagee soon found out that the problem arose from the fraudulent change of records. It sought relief on the basis of the fraud, claiming first right. The others demanded their pound of flesh first, arguing that their mortgage was on the basis of ‘clean’ property, based on official records. The couple was out of the loop and the mortgagees wound up in court.

Now you be the judge. 

Which mortgagee company had ‘FIRST’ right? Was it No.1? Or No.3? Or was it No.4? The court decided it was No.1. It reasoned that No.1 was the victim of a fraud and, therefore, had the first right to the proceeds. Whilst the judgement dwelled on many points of Canadian law, it asked for common sense to be used, especially by later mortgagees. They should have asked themselves that most elementary question: “If the couple was so strapped for cash, how did it manage to pay off No.1?” The records may say one thing but it is the buyer’s, or the mortgagee’s, responsibilty to pay maximum attention.

We end this tale on a rather sad note. The couple has Indian names.

Courtesy: Moneylife

Bapoo Malcolm is a practising lawyer in Mumbai. Please email your comments to mail@moneylife.in