ADVANTAGES AND DRAWBACKS OF LEGAL MORTGAGE TO A BANKER AND CUSTOMER IN MORTGAGE TRANSACTION

Before the bank to advance loan to the borrower, bank, the bank will often need security for the loan it offers. The most preferred form of security is the mortgage. There are two kinds of mortgage i.e. legal mortgage and equitable mortgage. However, the focus here will be on discussing relative advantages and drawbacks of legal mortgage to a banker and customer when it comes in mortgage transaction.

Read Also: Procedures to Register Mortgage

Legal Mortgage

Legal mortgage is created by execution of a deed known as a Mortgage Deed. The Customer binds himself to repay the mortgage money on a certain date and transfers his interests in mortgage property absolutely to the banker on terms that the mortgagee will transfer it to him on repayment of the mortgage money.

The customer has the right to redeem his property not only in the absence of default of payment but also on the default of payment provided that he can pay up the amount due before his right is debarred.

Relationship of Banker and Customer in Mortgage Transaction

In mortgage transaction the banker becomes mortgagee who is a creditor having a lien or charge on land for his dept, with or without the right of possession and the customer becomes a mortgagor who transfers an interest in specific immovable property by creating a mortgage.

Therefore, the relationship between a banker as mortgagee and his customer as mortgagor is established when the later executes a mortgage deed in respect of his immovable property in favor of the bank or deposits the title deeds of his property with the bank to create an a mortgage as security for the load advance.

Relative Advantages of Legal Mortgage to a Banker and Customer

Under a legal mortgage, the banker has a special interest in the property, therefore, the banker has a right to sell or to enter into possession of the mortgaged property in case of a customer’s default.

Under legal mortgage a banker enjoys a right to tack, thus a banker can use this right to get priority over other mortgages. For example where a customer obtain money on the first banker while there are second and third bankers, then the first banker can tack his first mortgage and get priority during the payment, over second and third bankers.

A legal mortgage confers interests in the asset to the banker so it cannot be disposed to a third party unless the mortgage being released and the customer regain ownership free of encumbrances. Alternatively, the purchaser can agree to acquire the property subject to the existing mortgage.

Under legal mortgage, a customer may create a third party mortgage. This arrangement ensures that the customer can get the credit facility he needs from the banker basing on the property belong to the third party through Deed of Guarantee.

Drawbacks of Legal Mortgage to a Banker

Failure of a banker to register a legal mortgage of registered land will render such a mortgage ineffectual to create, transfer, vary or extinguish any estate or interest in any registered land. In Guaranty Discount Co v Credit Finance Ltd [1963] EA 345 was held that failure to register a legal mortgage render it void.

Under legal mortgage a banker can lose all remedies available to him in case of default by the customer, if the banker fails to follow proper procedure in the creation of the mortgage. if the banker will make an improper evaluation of a mortgaged property this will create problems, of obtaining the reasonable price when the customer's default and bankers choose to sell the mortgaged property.

Also, contradictions may arise when a banker will not carry physical verification of the property as a matter of experience so as to verify whether a customer has a spouse and whether the land to be mortgaged is a matrimonial home or not. As it was in the case of Zakaria Barie Bura v Theresa Maria John Mubiru [1995] TLR 211 was a case involving a house jointly owned by the spouses. In an action by the wife for a declaration that the sale of the house by the husband without her consent was void, the court held that the husband had no power to sell the mortgaged house because it was jointly owned by the two spouses.

Why Legal Mortgage is the Best?

Despite the above drawbacks, the legal mortgage is still the best form of the mortgage due to the following reasons.

First, a legal mortgage gives the customer the right to redeem his property not only in the absence of default but also on default provided he can pay up the amount due before his right is debarred. This right is known as the equity of redemption also known as the right of redemption.  It exists as soon as a mortgage is created. Therefore banker keeps the mortgaged land with the customer's right of redemption upon payment.

Second, a legal mortgage allows a customer to mortgage an immovable property to more than one banker, it should be noted that the mortgage is not of the land but his interest in the land. With such power, customers can create more than one mortgages with different bankers. Example, if  a customer own a landed property worth a hundred million dollars, he can use the same property to create a mortgage with different banks, and this will depend on the amount of loan I seek.

Third, a legal mortgage is more formal. The law offers protection to the customers in case he defaults. Example the banker cannot exercise the right to sell without complying with the procedure prescribed by the law and in case the sale was proper conducted the banker have to refund the amount which is exceeded after taking the owed money.

Lastly, a legal mortgage allows the customer to create a third part mortgage in case a customer needs a loan but he does don’t own an immovable property to secure it. Through the third part mortgage, a customer will be able to use the property of another with his consent to get a loan from a bank.