By Ron Chernek, Esq.

Reimer Law Co.*

USFN Member (KY, OH, WV)

Looking back at the historical evolution of the foreclosure process and the legal systems of the Roman civil law and the Common Law of England, we can trace how these ancient beginnings have shaped the concept of foreclosure over the centuries, and just how little has changed over 1,500 years.

When we review the historical aspects of the foreclosure process, it is imperative that we first understand the meaning of the term “mortgage.” In the legal publication known as Ohio Jurisprudence 2d, a mortgage is defined as “the conveyance of property to secure performance of some obligation, conditioned to become void on the due performance thereof.” In other words, property is given as security for some type of obligation that will cease when the person/entity obligated completes whatever he or she (or “it” in the case of a business entity) has promised to do. It is thought that the word “mortgage” has been derived from the Latin “mortuum vadium.” The literal translation of this term is a “dominant pledge.” This meaning appears to reflect the view that, if the obligation was not performed within the stated time, the security (property pledged) of the debtor or person/entity who made the promise would become dead or dormant.

Each state has various statutes that govern mortgages. In all states, the real estate mortgage is security for a related obligation, like a note or loan, with that obligation being the primary document and the mortgage being used to collateralize the document. In other words, the mortgage follows the note.

There are two requirements to any mortgage – the right to redeem in the mortgagor (the borrower) and the right to foreclose in the mortgagee (the lender). These concepts are basic to modern real estate practices. The borrower can repay his or her obligation and have the security interest satisfied as a result, whereas the lender retains the right to enforce its lien on the collateral if there is a default. The right of enforcement is what is known as foreclosure.

The legal purpose/reason for foreclosure involves cutting off the “equity of redemption,” or the right to retain property of the mortgagor in his or her security. In Roman civil law, often thought to be the predecessor of modern foreclosure laws, a pledge of fixtures, or land, was termed a “hypotheca.” Failure of payment as required by the pledge resulted in a procedure with notice to all interested parties whereby a hearing was held in open court on the default, and the sale of the property was publicized. The goal was to minimize damages to both parties.

Although the present system does not appear to vary in theory from that practiced by the Romans, the mortgage pledge was not recognized by feudal law in England. Not until the 16^th century did Common Law, the source of much of the law in the United States, come to accept the principle of “mortuum vadium.”

            English loans in the 11^th to 16^th centuries were unpredictable. Lenders could demand repayment at any time. If the borrower defaulted, a lender could seek a court order and the land would be forfeited to the lender by the borrower. A borrower then had the option of petitioning the king, who could then refer the matter to a lord chancellor, who had ultimate authority to rule as he saw fit. From 1618 to 1621, the lord chancellor was Sir Francis Bacon, who established the Equitable Right of Redemption, which allowed borrowers to pay off debts, even after default. The official end of the period to redeem the property was called “foreclosure,” derived from an old French word that means “to shut out.”

            In Common Law, the “mortuum vadium” was an absolute mortgage, a failure of which resulted in a forfeiture of title without any recourse to the debtor. This severe remedy was eased over a period of years by the various courts of England, known as courts of equity and chancery. As time progressed, the laws primarily stated that a mortgagee could not obtain clear title without actively demonstrating that it had a great enough interest in the property to cut off the mortgagor’s right to redeem the property, also known as the “equity of redemption.” The matters were routinely heard in a court proceeding where the parties were able to plead their respective cases.

            In the 1700s, the phrase “equity of redemption” came into common usage. In the case of Duchess of Hamilton v. Countess of Dirlton (1Ch.R. 165), the right of redemption was subject to two conditions:

1.     The mortgagor must pay the principal and interest within a reasonable time after the property was taken by the mortgagee, and

2.     The mortgagee had a right to petition the court to grant a decree ordering the debtor to pay by a fixed date or be forever barred from being able to redeem the property.

Upon obtaining a decree that cut off the equity of redemption, the mortgage obligation was satisfied by what was known as strict foreclosure. This was where the pledged property entirely became the property of the mortgagee when the right of redemption was terminated by the court’s decision. This greatly favored the mortgagee. Today, foreclosure is completed by public sale where fair conduct and bidding at the sale come into play, and surplus funds after satisfying expenses and mortgage claims and liens are generally turned back to the mortgagor.

During the Great Depression, beginning in the early 1930s, masses of homeowners were unable to make their mortgage payments. Between 1929 and 1933, personal income in the U.S. declined by 44 percent, the unemployment rate climbed to 25 percent, and housing values plummeted. The resulting defaults led to record numbers of foreclosures by mortgagees, largely banks. By 1933, a staggering 40 to 50 percent of all mortgages in the United States were in default, leading nearly 275,000 people into foreclosure as compared to 68,000 in 1926! This slide toward total collapse was one of the primary contributors to the banking crisis of the early 1930s. Twenty-seven states instituted moratoria to reduce the number of foreclosures at that time.

To combat these housing problems, the U.S. Federal Government instituted the Home Loan Bank Act of 1932. This was followed by the Home Owners’ Refinancing Act of 1933, which eventually led to the Federal Housing Authority (FHA), which was actually part of Franklin Roosevelt’s New Deal. This created federally funded long-term low-interest mortgages to refinance unstable mortgages. In 1938, the government created the Federal National Mortgage Association (Fannie Mae), which backed banks by purchasing mortgages, and thus freed up more of the banks’ money for additional mortgage and construction loans. This eventually led to the post-World War II housing boom.

In the 1950s and 1960s, the mortgage industry was fraught with discriminatory practices. Unbridled lending discrimination culminated in massive foreclosures for a disproportionate number of minority homeowners. Lenders disparately foreclosed upon upper-class, middle-class, and lower-class minority homeowners. This served to deepen racial segregation and prolonged the stagnancy in the real estate market in post-war America. This led to the Fair Housing Act of 1968, which really did very little to curb the discriminatory procedures of lending to and foreclosing on minorities.

One of the latest foreclosure crises occurred late in the first decade of the 2000s.  The financial industry was tanking, and Congress attempted to right the economy with a $700 billion bailout of the financial industry. The collapse of the housing market was largely responsible for the downturn and, as a result, the bailout did little to improve the economic situation in the U.S. In mid-2010, there was a 14 percent increase in the number of homeowners receiving default notices, and a staggering one in every 45 homes were foreclosed upon during that time period. In August 2014, the foreclosure rate was 33.7 percent, most densely in New York, New Jersey, and Florida. The problem became more widespread due to vast unemployment, and banks became more aggressive in their foreclosure efforts. 

Recently, the foreclosure industry has been greatly affected by the COVID-19 pandemic. The inception of moratoria and forbearance plans largely brought the foreclosure process to a halt. In addition, the government assisted Americans with stimulus funds in an attempt to curb the economic hardships resulting from the pandemic. Toward the end of 2021, and into 2022 and beyond, foreclosures increased dramatically as the moratoria gradually came to an end, as did the economic assistance.

In looking back at history and the evolving landscape of foreclosures, it is interesting to note that, after 1,500 years of changes in laws and rules, even with all the latest challenges to the way foreclosure is handled in our country, we have a system similar to that of the Romans. In most states, the primary instruments that have a mortgage effect are the mortgage deed and the deed of trust. To a degree, we have come full circle in adopting a foreclosure process that has recognizable similarities to the process used by our ancient ancestors.

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