MORTGAGE

MORTGAGE
- is a contract whereby the debtor secures to the creditor the fulfillment
of a principal obligation, immediately making immovable property or
real rights answerable to the principal obligation in case it is not
complied with at the time stipulated.

- Mortgage contract
 Real estate mortgage contract – still governed by Civil Code
 Chattel Mortgage – now governed by RA 11057 Personal
Property Security Act
Art. 2124. Only the following property may be the object of a contract of
mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon
immovables.
Nevertheless, movables may be the object of a chattel mortgage.

Art. 2125. In addition to the requisites stated in Article 2085, it is

indispensable, in order that a mortgage may be validly constituted, that the
document in which it appears be recorded in the Registry of Property. If
the instrument is not recorded, the mortgage is nevertheless binding
between the parties.
The persons in whose favor the law establishes a mortgage have no other
right than to demand the execution and the recording of the document in
which the mortgage is formalized.

Art. 2126. The mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be, to the fulfilment
of the obligation for whose security it was constituted.

Art. 2127. The mortgage extends to the natural accessions, to the

improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the
estate remains in the possession of the mortgagor, or it passes into the
hands of a third person.

Art. 2128. The mortgage credit may be alienated or assigned to a third

person, in whole or in part, with the formalities required by law.

Art. 2129. The creditor may claim from a third person in possession of the
mortgaged property, the payment of the part of the credit secured by the
property which said third person possesses, in the terms and with the
formalities which the law establishes.

Art. 2130. A stipulation forbidding the owner from alienating the

immovable mortgaged shall be void.

Art. 2131. The form, extent and consequences of a mortgage, both as to its
constitution, modification and extinguishment, and as to other matters not
included in this Chapter, shall be governed by the provisions of the
Mortgage Law and of the Land Registration Law.

Real Estate Mortgage

- is a contract whereby the DR secures to the CR the fulfilment of
a principal obligation, specially subjecting to such security,
immovable property or real rights over immovable property in
case the principal obligation is not paid or complied with at the
time stipulated
- mortgage – foreclosed property sold to answer for the mortgage
credit

- Parties
●mortgagor – one who conveys the real property by way of
mortgage to secure an obligation
●mortgagee – creditor – person whose credit is secured by the
mortgage

Real Estate Mortgage Sale with Right to Repurchase

Accessory contract Principal & independent contract
No transfer of title & possession There is transfer of title &
of property possession though conditional
CR has no rights to the fruits of Vendee a retro entitled to the
thing mortgaged fruits even during period of
redemption
If DR fails to pay debt, Cr can’t As soon as there has been a
appropriate thing mortgaged nor consolidation of title in name of
disposed of it vendee a retro, he may dispose of
it as an absolute owner

Object:
a. immovable property (real)
Article 415. The following are immovable property:
1. Land, buildings, roads and constructions of all kinds
adhered to the soil;
2. Trees, plants, and growing fruits, while they are attached to
the land or form an integral part of an immovable;
3. Everything attached to an immovable in a fixed manner, in
such a way that it cannot be separated therefrom without
breaking the material or deterioration of the object;
4. Statues, reliefs, paintings or other objects for use or
ornamentation, placed in buildings or on lands by the owner
of the immovable in such a manner that it reveals the
intention to attach them permanently to the tenements;
5. Machinery, receptacles, instruments or implements intended
by the owner of the tenement for an industry or works which
may be carried on in a building or on a piece of land, and
which tend directly to meet the needs of the said industry or
works;
6. Animal houses, pigeon-houses, beehives, fish ponds or
breeding places of similar nature, in case their owner has
placed them or preserves them with the intention to have
them permanently attached to the land, and forming a
permanent part of it; the animals in these places are
included;
7. Fertilizer actually used on a piece of land;
 8. Mines, quarries, and slag dumps, while the matter thereof
forms part of the bed, and waters either running or
stagnant;
9. Docks and structures which, though floating, are intended
by their nature and object to remain at a fixed place on a
river, lake, or coast;
b. alienable real rights imposed upon immovable in accordance
with the law
Art. 415
10.Contracts for public works, and servitudes and other
real rights over immovable property.

Chattel Mortgage
- personal property

Kinds:
1.Conventional – constituted voluntarily by the parties
2.Legal
law itself establishes the mortgage in favor of 3 rd persons.
3.Equitable mortgage
parties intention was to make an immovable property merely
as a security for the obligation BUT the formalities of a real
mortgage contract are not complied with.

Characteristics:
1.Accessory
2.Indivisible
3.Unilateral – only the mortgagor’s signature is necessary to
constitute it
4.Inseparable
5.Subsidiary
6.Real right
7.Comprehensive

Essential requisites:
1.Constituted to secure fulfilment of principal obligation
- Cause/consideration – validity of the principal contract
2.Mortgagor be the absolute owner of the property mortgaged
3.Mortgagor has free disposal of the property
4.Can’t exist without a valid obligation
5.When principal obligation becomes due, thing mortgaged may be
alienated for payment to the CR
6.Appears in a public document & recorded in the Registry of
Property

Future property can’t be the object

 Exception – however, a stipulation subjecting to the mortgage
improvements which the mortgagor may subsequently acquire, install
or use in connection with real property already mortgaged belonging
to the mortgagor is VALID.

Future obligations
 may be covered if the same is EXPRESSLY STIPULATED – deed
of real estate mortgage
 default rule – limited only to that amount expressly stipulated
in the mortgage

Mortgagor retains possession of the property; can deliver said

property to the mortgagee without altering the nature of the
contract of mortgage

Once the mortgage contract has been signed - Mortgagee

entitled to registration of mortgage as a matter of right
 by executing the mortgage contract – mortgagor is
understood to have given – CONSENT – to its registration
 can’t revoke it unilaterally
Incidents of registration
1.Proceedings for registration do not determine validity of
mortgage or its effect
2.Registration is without prejudice to better rights of 3 rd parties
3.Mortgage deed once duly registered forms part of the records
for the registration of property mortgaged
4.Mortgage by surviving spouse of his/her undivided share in the
conjugal properties can be registered

 If not recorded contract is still binding between the parties

 The mere fact that a mortgaged was registered does not stop any
interested party from questioning it.
 Registration can’t be invoked as a shield or protect fraud
 Mortgagee is entitled to the registration of the mortgage as a
matter of right
 By executing the contract of mortgage, the mortgagor is
understood to have given his consent to its registration and can’t
revoke it unilaterally
 Registration is necessary to protect interest of mortgagee
because his rights can easily be defeated by a transfer or
conveyance of the property mortgaged to a PV
 Registration is necessary to bind 3 rd person BUT NOT for the
validity of the contract
 Registration – ministerial act – deed, contract or instrument is
sought to be inscribed in the records of the Office of Register
Deeds – annotation – back of the certificate of title
 Registration or entry of memorial of a mortgage – NOT
DECLARATION by the State that such an instrument is a valid
and subsisting interest on the land – MERELY DECLARATION –
record of title is burdened with an encumbrance
 Registration can be made even if the mortgagor is questioning
the mortgage – lack of consideration – as long as there is no final
judgment annulling the mortgage – burden is thus on part of
mortgagor to prove his cause – mortgage contract – INVALID –
ordinary civil action – avoidance of the deed and cancellation of
the registration

Junior Mortgage
 Existence of a mortgage contract DOES NOT deprive owner to
constitute another mortgage on same property (Sec. 4, Rule 68)
 Such can likewise be registered – HOWEVER – 1 st registered
mortgagee – PREFERENTIAL RIGHTS – 2nd registered mortgagee

Effects of mortgage
1. Creates right in rem or real rights – a lien inseperable from
the property mortgaged, enforceable against the whole world as
long as it is registered. IF NOT REGISTERED, 3 rd party must
know of the mortgage
 it follows the property whoever is in possession thereof
  extinguish when the principal obligation has been fully
settled
 encumbrance – on real property – right of the mortgagee –
right in rem – registered mortgage follows the property even
if there is a change of ownership
2. Creates merely an encumbrance – the law considers void any
stipulation forbidding the owner from alienating the immovable
property.
- Mortgagors default does not operate to vest in the mortgagee
ownership of the encumbered property
- Mortgagor’s failure to redeem the property does not
automatically vest ownership of the property to mortgagee
- only a security interest is created – right to possession and
jus dispodendi – EXCLUDED – unless otherwise stipulated

Nature:
- akin to a contract of adhesion
- mortgagor NOT PERSONALLY LIABLE TO PAY OBLIGATION
– right of mortgagee is only limited – lien – mortgaged property
If the mortgage contract VOID – principal obligation is still
VALID
 probative value of the deed – evidence of indebtedness of DR
to CR
Mortgagee’s cause of action in case of non-payment
1. Real action -Foreclose the mortgage
2. Personal action - Sue DR – civil case
 mortgagee may pursue either BUT not both

Extent of mortgage
- A real estate mortgage constituted on immovable property is
not limited to the property itself, extends to the following
unless there is an express stipulation to the contrary:
1. Accessions
2. Improvements
3. Growing fruits
4. Rents or income
5. Proceeds of insurance should the property be destroyed
 6. Expropriation value of the property should it be expropriated

Mortgage lien – subsist on the date of the registration of the

mortgage
Mortgage to secure future advancements (Blanket/dragnet
Clause)
Blanket/dragnet clause
- one which is specifically phrased to subsume all debts of past
or future origin
- such clauses are carefully scrutinized and strictly construed
- mortgage contract is contract of adhesion

Gen. Rule: there must be a stipulation for the inclusion of future

advancements
- Mortgage with a dragnet clause enable the parties to provide
continuous dealings, the nature or extent of which may not be
known or anticipated at the time, and they avoid the expense
and inconvenience of executing a new security on each new
transaction.
Amount stated in the contract does not limit the amount for
which the mortgage stands as a security, if from the wordings of
the instrument it is the intent of the parties that it likewise would
secure future and other indebtedness.
- A mortgage given to secure future advancement is a
continuing security and is not discharged by the repayment
of the amount named in the mortgage, until the full amount of
the advancements is paid.
Stipulation forbidding mortgagor from alienating the
mortgaged property – VOID
Mortgage credit may be alienated/assigned in whole or in part
to 3rd persons with the formalities required by law (Art. 2128)
 Mortgagor remains owner of the property
 Alienate OR assign - property
  Assignment should be in a public document or that it be
recorded in the Registry of Property if it involves real property
to bind 3rd persons (Art. 1625 NCC)
 If not registered – BINDING – only between the parties
Person in possession of the mortgage property – liable to the
mortgagee to the extent of the debt - secured by the property
under its custody/possession (Art. 2129)
Laws governing Mortgage
1. Civil Code
2. Mortgage Law
3. PD 1529 – Property Registration Decree
4. Revised Administrative Code
5. RA 4882 – as regards aliens becoming mortgagee

Foreclosure of Mortgage
- remedy granted to the mortgagee by which he subjects the
mortgaged property to the satisfaction of the obligation for which
the mortgage was given.
 DR must have been in default before mortgagee can foreclose
 Property is seized and sold with a view of applying the proceeds
to the payment of the principal obligation
 Retroacts to the date of registration of the mortgage and that a
person who takes a mortgage in good faith and for valuable
consideration, the records showing clear title to the mortgagor,
will be protected against equitable claims on the title in favor of
3rd persons of which he had no actual or constructive notice.
 Mere inadequacy of the price obtained at the sheriff’s sale will
not be sufficient to set aside the sale – shocking to the
conscience of the court
 Action for foreclosure survives death of the mortgagor – not
purely money claims but an action to enforce a mortgage lien
 Action to recover deficiency after foreclosure prescribes in 10
yrs. from the time right of action accrues
 Foreclosure sale MUST be held on date set – otherwise – VOID
 DOES NOT outright terminate the obligation IF PROCEEDS
NOT enough to satisfy principal obligation
  Failure of mortgagor to exercise option granted to it after the
foreclosure sale – consolidation of title in buyer’s name

Common types of forced sales – failure to pay mortgage

1. Extrajudicial foreclosure (Act. 3135)
2. Judicial foreclosure (Rule 68)
3. Ordinary execution sale (Rule 39)

Judicial Foreclosure (Governed by Rule 68 – Rules of Court)

1. Judicial action
 Action quasi in rem
 Based on a personal claim against a specific property of
defendant – have the property seized sold by the court to
the end that the proceeds be applied in payment of
plaintiff’s claim
 Foreclosure is only the result or incident of the failure to
pay debt
 Survives death of mortgagor
 Options or remedies of Mortgagee in case of DR’s Death
Waive the mortgage and claim the entire debt from the
settlement of the estate of the mortgagor
Foreclose the mortgage judicially and prove any
deficiency as an ordinary claim
Rely on the mortgaged exclusively before barred by
prescription – without right to claim - deficiency
2. Upon filing of complaint and after trial, Court – issue order
to mortgagor to pay mortgage debt with interest and other
charges within a period of not less than 90 days nor more
than 120 days from entry of judgment
3. If mortgagor fail to pay within time directed – Court upon
motion – order sale to highest bidder at public auction (Rule
39)

When confirmed by the Court upon motion - operates to

divest the rights of all parties in the action and to vest their
rights to the purchaser, subject to right of redemption as
may be allowed by law.
 4. Application of proceeds of sale to:
a. Cost of sale
b. Amount due to mortgagee
c. Claims of junior encumbrancers or persons holding
subsequent mortgages in the order of their priority
d. Balance if any to be given to mortgagor

5. If after sale there remain a balance/deficiency – Court upon

motion shall render judgment against the defendant DR – to
settle the same
6. Registration – copy of final order of the court confirming the
sale is registered in the registry of deeds
 No right of Redemption
 CoT in name of mortgagor – cancelled; new CoT in the
name of purchaser/buyer will be issued
 With right of Redemption
 CoT in mortgagor’s will not be cancelled
 Certificate of Sale and order confirming the sale shall
be registered
 RD to make proper annotation – memorandum – CoT
 If redeemed – deed of redemption – registered with
RD; registrar to make annotation – CoT
 If not redeemed – the final deed of sale executed by
the sheriff in favor of buyer – foreclosure sale –
registered with RD
 CoT in mortgagor’s name – cancelled; new CoT – in
name of buyer – issued

Judicial foreclosure deemed completed

 Sheriff’s certificate executed, acknowledged and recorded

Confirmation of Judicial Sale

 Confirmation cuts off all the rights and interest of the
mortgagor and mortgagee and person holding under him, and
with the equity of redemption in the property and vest them to
the purchaser
 VALID – necessary for the Court to conduct hearing to enable
all interested parties the chance – show cause why
confirmation – denied
  Hearing necessary – inform parties – expiration of period of
right of redemption
 It is a final order, not interlocutory
 There can be no redemption of the property. Confirmation
retroactive to date of auction sale; previous owner lose any
right would have over the property which would be vested to
purchaser

Extra-judicial Foreclosure (governed by Act 3135 as amended)

 May only be effected if in the mortgage contract – clause –
giving mortgagee the power, upon default of DR, to foreclose
the mortgage by - extrajudicial sale of the mortgage property.
 Authority may in a separate document BUT annexed to the
mortgage contract
Initiated by filing petition with the office of the sheriff OR
through a Notary Public commissioned in the place where
property is located
Express authority to sell is given to the mortgagee
Authority is not extinguished by death of mortgagor or
mortgagee
Public sale should be made after proper notice –
PUBLICATION newspaper of general circulation (once a
week for 3 consecutive weeks) EXCEPT value of property –
less than P 500K; POSTING – 3 public places where
property is located; posting on mortgaged property NOT
necessary
Personal notice to the mortgagor or successor-in-interest
NOT necessary – EXCEPT – when otherwise stipulated
Winning bidder to pay in CASH – bid price EXCEPT when
winning bidder - MORTGAGEE
Surplus proceeds belongs to mortgagor or his assigns
DR has right to redeem property sold within 1 yr. from DATE
OF REGISTRATION of the certificate of sale
Remedy of party aggrieved by foreclosure is a petition to set
aside sale and cancellation of writ of possession
 Publication is necessary for the validity of a postponed
foreclosure sale (parties have no right to waive the publication
requirement)
 It is discretionary on the part of the mortgagee – whether or
not to foreclose the mortgage
 
Rule of Procedure on Extra-judicial Foreclosure
1. Filing of application before the EJ through the CoC
2. CoC will examine whether the requirements has been complied
with, that is, whether the notice of the sale has been posted for
not less than 20 days in at least 3 public places of the
municipality or city where the property is situated and if the
same is worth more than P400,000, that such notice has been
published more than a week for at least 3 consecutive weeks in a
newspaper of general circulation in the city or municipality
3. The certificate of sale must be approved by the Executive Judge.
4. In extrajudicial foreclosure of real mortgages in different location
covering one indebtedness only one filing fee corresponding to
such debt shall be collected.
5. The CoC shall issue certificate of payment indicating the amount
of indebtedness, filing fees collected, the mortgages sought to be
foreclosed, the description of the real estates and their
prospective location
6. Notice of sale shall publish in a newspaper of general circulation.
7. Application shall be raffled among all sheriffs
8. After redemption had expired, CoC shall archived the records
9. No auction sale shall be held unless there are at least 2 bidders
participating otherwise the sale shall be postponed to another
date. If on the new date, there shall not be at least 2 bidders, the
sale shall then proceed. The names of the bidders shall be
reported by the Sheriff or the Notary Public who conducted the
sale to the CoC before the issuance of the certificate of sale.

Right of the mortgagee to recover deficiency

 Inherent in – JUDICIAL Foreclosure; EXTRAJUDICIAL – allowed if
there is stipulation
 MORTGAGOR – 3rd person NOT DR – not liable in the absence of a
contrary stipulation
 If the deficiency is embodied in the judgment, it is referred to as
deficiency judgment
 Action to recover prescribes in 10 yrs. – from time of action
accrues
Nature of power of foreclosure by extrajudicial sale
1. Conferred for mortgagee’s protection
2. An ancillary stipulation supported by the same cause or
consideration for the mortgage
3. A prerogative of the mortgagee

Stipulation Fixing Upset Price or “tipo”

- A stipulation of minimum price at which the property shall be
sold to become operative in the event of a foreclosure sale at
public auction is NULL and VOID.
- Parties can’t by agreement CONTRAVENE the law

Effect of inadequacy of price in foreclosure sale

1. Where there is right to redeem
Gen. Rule: inadequacy of price is immaterial because the
judgment debtor may redeem the property
Exception: the price is inadequate as to shock the conscience of
the court taking into consideration the peculiar circumstances

2. Property may be sold for less than its fair market value upon the
theory that the lesser the price the easier for the owner to redeem

3. The value of the mortgaged property has no bearing on the bid

price at the public auction, provided that the public auction was
regularly and honestly conducted

Waiver of security by CR
1. Mortgagee may waived right to foreclose his mortgage and
maintain a personal action for recovery of the indebtedness
2. Remedies are alternative, not cumulative
3. Options in case the DR dies
a. To waive mortgage and claim entire debt from the mortgagor’s
estate as an ordinary claim
b.To judicially foreclose mortgage and prove any deficiency
c. To rely on the mortgage exclusively without filing a claim for
deficiency
NOTE: foreclosure retroacts to the date of the registration of
mortgage
REDEMPTION
- Transaction by which the mortgagor reacquires or buys back
the property which may have passed under the mortgage or
divests the property of the lien which the mortgage may have
created
- Mere statutory privilege – must be exercised in accordance -
law
Kinds of Redemption

Equity of Redemption Right of Redemption

- Right of the mortgagor to
redeem the mortgaged property
after his default in the
performance of the conditions of
the mortgage but before the
confirmation of sale
a. Applies to judicial foreclosure
b. 2nd mortgagee acquires only
the equity of redemption
vested in the mortgagor, and
his rights are strictly
subordinate to the superior
lien of the 1st mortgagee
NOTE: redemption of banking
institutions is allowed within 1
yr. from confirmation of sale
- Right of the mortgagor to
redeem the property within a
certain period after it was sold
for the satisfaction of the debt.
a. Applies only to extrajudicial
foreclosure of real mortgage
NOTE: the right of redemption as
long as within the period
prescribed, may be exercised
irrespective of whether or not the
mortgagee has subsequently
conveyed the property to some
other party.
A sale by the mortgagor to a 3rd
party of the mortgaged property
during the period of redemption
transfers only the right to
redeem the property and the
right to possess, use, and enjoy
the same during period.

Judgment DR remains in
possession of the property
foreclosed and sold during the
period of redemption, but he
can’t make a conveyance of the
 ownership of the property, since
it belongs to the purchaser at the
foreclosure sale

Period of Redemption:
1. Extra-judicial (Act. No. 3135)
a. Natural person
 1 yr. from registration of the certificate of sale with Registry
of Deeds
 Property – acquired – Public Land Act – foreclosed – Rural
Bank – 2 yrs. from registration and if owner failed to
redeem – heirs/successors-in-interest – 5 yrs. from
expiration of 2 yr. period
b. Juridical person – same as above
c. Juridical person (mortgagee is bank) – 3 months after
foreclosure or before registration of certificate of foreclosure
whichever is earlier (Sec. 117 – Gen. Banking Law)

2. Judicial – before confirmation of sale by court

Period of Judicial Foreclosure Extrajudicial

Redemption Foreclosure
Mortgage Banks Non- Banks Non-Banks
Banks’
Individual 1 yr. from X 1 yr. from - Do -
DRs/Mortgagors registration registration
of sale of sale
Juridical persons - Do - X Until 1 yr. from
as registration registration
DRs/Mortgagors of of sale
certificate
of sale OR
3 months
from sale
whichever
is earlier

NOTE: allowing redemption after the lapse of the statutory period

when the buyer at the foreclosure sale does not object but even
 consents to the redemption, will uphold the policy of the law
which is to aid rather that defeat the right of redemption.

Amount of Redemption Price:

1. Mortgagee is not bank (Act 3135 in relation to Rule 39, Rules of
Court)
a. Purchase price of the property
b. 1% interest per month on the purchase price
c. Taxes paid and amount of purchaser’s prior lien, if any, with
the same rate of interest computed from the date of
registration of sale, up to the time of redemption

2. Mortgagee is bank
a. Amount due under the mortgage deed
b. Interest
c. Cost and expenses

NOTE: redemption price in this case is reduced by the income

received from the property

Period of redemption is not a prescriptive period BUT a

condition precedent provided by law to restrict the rights of the
person exercising redemption.

When right of redemption has been seasonably exercised

 it would just result – cancellation of the lien created by the
levy or attachment of the property
 no transfer of property – such is still in name of mortgagor
Mortgagor FAILS to redeem – loses right over the property;
buyer at auction sale – title consolidated in his name – issuance
of CoT in his name