Mortgage will be the prime security to advance home loan or loan against other properties. By R.P. Deshpande
The ‘Transfer of Property Act 1882’ says “A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability”.
To advance home loans and loan against properties, banks and HFCs (Housing Finance Companies) seek security in the form of mortgage of property to be funded. In case of default of loan repayment, lenders will have the legal right to enforce the security to order to recover outstanding debt along with interest and other charges.
As there are only two types are mortgages in practice, viz., mortgage by deposit of title deeds, and registration of memorandum of deposit of title deeds, let us analyse the pros and cons of both. The first is commercially known as ‘equitable mortgage’. Thanks to the simple, easy and less expensive procedure involved in creating ‘equitable mortgage’, today a majority of home loans are backed by equitable mortgage.
How it is created
The mortgage is created by mere deposit of title deeds (original ownership documents, like sale deed/gift deed/partition deed etc., and link documents) and executing a memorandum of deposit of title deeds.
In Karnataka, stamp duty is applicable for executing memorandum of deposit of title deeds, even though it is not registered. Although stamp duty is paid, there will be no entry of the mortgage charge in the books of registering authorities. Hence the mortgage entry will not be there in the Encumbrance Certificate issued by the Sub-Registrar’s office.
As creation of equitable mortgage is known to only the borrower and lender, there is a possibility of misuse of the same by the borrower. The borrower can conceal the mortgage, and sell the property to any third party, by giving a wrong statement that he/she has lost title deeds. In such a case, even the sale deed gets registered in the name of the new buyer and khata gets transferred in the name of the new buyer. Although the buyer gets the title, it comes with mortgage liability, not known until the bank/HFC, which has given the loan and has original title deeds, reaches out to the new buyer and claims the mortgage liability. There are many instances of such wrong doings by criminal minded borrowers.
Many builders who could be termed as ‘fly-by-night operators’ have cheated banks/HFCs as well as purchasers by first seeking finance for construction of an apartment complex by depositing title deeds of the entire property and without informing the mortgage liability, have sold apartments to individuals, who have further taken individual home loans from other banks/HFCs.
Thus there has been multiple funding on one property, making it difficult for lenders to recover debts. This multiple funding by two or more banks/HFCs is one of the reasons for alarming increase in NPAs (Non-Performing Assets) in recent times. Of late, banks and HFCs are slowly exercising the option of getting registered the memorandum of deposit of title deeds in the jurisdictional Sub-Registrar’s office.
Once memorandum of deposit of title deeds is registered, both stamp duty and registration charges are applicable, as per the stamp duty table indicated above. Not only the higher cost, the procedure becomes lengthy and inconvenient as borrowers will have to approach the jurisdictional Sub-Registrar to register the memorandum, where corrupt practices are the order of the day.
Procedure of banks
As banks and HFCs are exempted from appearing before registering authorities, the authorised signatories of banks/HFCs will execute the memorandum at their offices and ask borrowers to go to the Sub-Registrar’s office and get the registration of memorandum of deposit of title deeds and get back the registered document and fresh EC (Encumbrance Certificate) showing the entry of registration of deposit of title deeds. Only after collecting all original title deeds, registered memorandum and EC, will banks/HFCs release the sanctioned loan.
And after closing the loan, the bank/HFC will execute memorandum of release of mortgage. Again the borrower has to approach the Sub-Registrar, pay stamp duty and registration fees and get the mortgage released.
Some leading banks that have sanctioned home loans, created deposit of title deeds and released part disbursements, are insisting on registration of memorandum of deposit of title deeds, before releasing the final disbursement of loan amount. This move is unjustified. Such aggrieved borrowers are suggested to seek justice by approaching the Ombudsman of regulatory bodies.
(The author is founder Director, Institute of Home Finance, Bengaluru, and can be contacted at [email protected])