There are at least a couple of main reasons why Oklahoma law treats contracts for deeds and similar arrangements as mortgages, regardless of the title of the documents and wording to the contrary: protecting a borrower’s equity and protecting a borrower’s right of redemption.
Consider an example where a borrower borrows $100,000 (at 0% interest to make it simple) from a lender under some type of “agreement” on a house. The borrower begins to live in the house, and over many years, even decades, the borrower pays lender $99,000. However, then the borrower misses one payment.
Under a traditional “agreement,” borrower would have signed a promissory note promising to pay lender $100,000 and a mortgage giving lender the right to take back the property if borrower did not pay the note. If borrower fails to pay, lender would have to foreclose the mortgage in a proper Court procedure for the $1,000 still owed. As part of that procedure, the house would be sold. If the house brought $125,000.00 at sale, the lender would receive the amount due plus fees and costs of the action. This treats lender fairly, as they would receive the full agreed purchase price. This treats borrower fairly, as the remaining surplus, or equity, (sale price minus amount owned minus fees and costs) would go to borrower, for their years of payment and contribution to value.
Under many “agreements” such as contracts for deed and similar arrangements, there is language that the lender can remove the borrower from the premise upon failure to pay. The removal language is generally automatic or perhaps with a streamlined process similar to a rental arrangement but definitely short of foreclosure. Under this agreement, Lender would be able to keep payments equaling virtually the entire value of the property and also keep the property. This does not protect the borrower’s equity, and therefore, the law does not favor this arrangement.
Of course if the agreement were a pure rental, a renter could pay the landlord rent equaling the entire value of the property, or more, over years and decades. The value of the payments is not the issue. In a rental situation, there is clearly no expectation of future ownership. Where there is an expectation of future ownership (a deed at the end of all payments, etc.), Oklahoma law will tend to treat such an agreement as a mortgage.
Under a traditional “agreement,” in addition to the right of receiving back the surplus of a sale or equity, the borrower also would have the right to purchase the property back at any point in the foreclosure process until Court confirmation of the sale. This right of redemption allows a borrower the right to keep the property if they really want it, even after default, if they can come up with an alternate source of funds.
Under many “agreements” such as contracts for deed and similar arrangements, there is no foreclosure process. The borrower’s right of redemption during foreclosure is not protected, and therefore, the law does not favor this arrangement.
Where there is a purchase agreement with an expectation of future ownership, Oklahoma law will tend to treat such an agreement as a mortgage, regardless of the title of the documents involved or wording to the contrary. Two important reasons for this policy are protection of a borrower’s equity and protection of a borrower’s right of redemption.
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This blog contains general information and the opinions of the author – not legal advice; you should seek the advice of competent counsel (attorney/lawyer) when considering any legal issues.