The concept of credit creation was derived from the traditional ways of money lending. As time passed, banks evolved and money lenders lost their importance. Banks, thus, became the new money lenders and started their operations in a very well-defined manner. The basic components of any credit creation facility are the amount, the interest and the mortgage. A mortgage is nothing but the collateral or security that is pledged by the applicant to the bank for a finance. Further, if the person fails to repay the debt, the bank has the right to seize the real estate property that is pledged against the default.
Off late, financial institutions and banks that are located in the western hemisphere, have termed the real estate collateral as a mortgage. Unlike in the 19th century, banks today easily provide credit to many people on the basis of their credit history. When we want to purchase expensive real estate, we can easily avail a loan, and the real estate thus purchased, becomes a collateral and is pledged with the lender.
How it Works
Most jurisdictions, legal systems, and courts follow different systems and laws while seizing a property. Most legal systems use two basic processes:
In the first type of process, the lender sends the borrower a notice indicating the default. At times, lenders multiply the amount of interest, and also give an additional time period to provide an opportunity for repayment. After that time period is over, the lender files a case or a suit in the legal system. The legal authority, that is usually the court itself, sends a notice of evacuation, demanding immediate payment. If the borrower is still unable to pay, and the court does not receive the pending amount in the specified amount of time (usually 30 days), then a notice of foreclosure and evacuation is sent. Then, it is expected of the borrower to vacate the property within the given time limit. At the end of that time period, the court auctions the house and forwards the generated amount to the lender. The remaining or surplus amount after the repayment of the debt is forwarded to the borrower.
This process is followed by some banks that have a different approach to the default of loans. In this case, the house is evacuated by the borrower and it goes into the possession of the bank. The bank does not immediately sell off the property. It is rented out or leased. During this time, the property can be repossessed by the borrower if he is able to repay the total due amount along with an additional fine. By the end of a decided time period, if the borrower is still unable to pay back the amount to the bank, then the property is auctioned off.
The process of foreclosure can be very painful and depressing. If the appropriate measures and remedies are taken, then one can overcome this financial difficulty.