The Bank Doesn’t Own Your House (Neither Does the Government)

There’s a common trope among people who have collateralized debt that, until the debt is cleared, they never truly own their property. For example, the bank holds the mortgage, and if mortgage payments aren’t made, the bank can seize the house. The trope says that  the “pay to stay” nature of the loan means the bank truly owns the house, not the person who purchased it using their mortgage. Despite how common this trope is, it is incorrect. It fundamentally misunderstands the legal nature of ownership.

Ownership of property comes with certain rights. The owner has the right to exclude: they can rightfully prevent others from using their property without their permission. The owner has the right to use (or not use) their property; they may enjoy (or not enjoy) the property as they see fit. The owner has the right to dispose of the property: they may sell it, transfer it, or in some other way relinquish ownership of the property at their pleasure. Furthermore, the owner may enjoy the fruits of the property (including the disposal) at their pleasure. In short, the owner exercises control over the property.

That control, however, is not absolute. Ownership also comes with responsibilities. One may not use their property to interfere with the legal rights of another person; I cannot use my car to damage another person’s house. The owner is responsible for the safety of individuals within their property. And they are responsible for the upkeep of their property.

There is a whole body of law related to these rights and responsibilities. A broad overview of property law is beyond the scope of this piece. Rather, we will focus on these unique characteristics of ownership.

With the preliminaries out of the way, let us return to the question of this post: does the holder of a collateralized loan actually own the property used as collateral?

We can explore this question with the example of a mortgage, but the logic here applies to any collateralized loan. Does the bank own the home for which it holds the mortgage? With the unique characteristics of property ownership, we can see pretty clearly the answer to these questions is “no.” We can see that none of the rights or responsibilities of ownership apply to the bank.

First, the bank does not have the right to exclude anyone from the property. If one decides to have friends over, the bank has no say. Nor can the bank impose limitations the way a landlord can. If the occupant has a feud and bans an individual from their property, the bank cannot override them. Indeed, the bank never has to be consulted on any matters related to exclusion/inclusion; they simply do not have that right. So, we can cross “right to exclude” off the list.

Second, the bank has no right to use the property; The banker cannot call the owner and say “I need a house for a party this weekend. I am using yours since I own your mortgage.” Nor may they compel non-use in other ways; the bank may not prevent the owner from having weekend parties. The bank has no right to use the property whatsoever just because they hold the mortgage.

The third right discussed above, disposal, is where the confusion sets in. The bank does have a limited right of disposal. If one does not pay one’s mortgage, then the bank may seize the house and sell it to collect the debt. But the key aspects here are that the right of disposal is limited and the claim is tied to the contract, not the property. The bank can only seize the house and dispose of it if the owner fails to fulfil their end of the contract (that is, paying the mortgage). In other words, that right is limited to the non-performance of the owner. The bank may not wake up some day and decide to sell the house; they simply do not have that right. Nor, if the house is sold, is the bank entitled to any profit. They can only get what is owed to them.  What the bank has extended to the mortgage customer is money, not the use of the home; that was never the bank’s to give away.

Note as well that the limited right to disposal is tied to the contract. In order to induce the bank to give the loan, the (future) owner has to offer them one of his rights, that right of disposal. But the (future) owner maintains the absolute right of disposal. And, disposing of the house does not absolve the owner of their obligation to the bank. Property rights transfer with the property. They are invested in the property, not the individuals.

Nor does the bank face any responsibilities of ownership. The bank is not obligated for upkeep; if a roof is damaged in a storm, the bank doesn’t pay for it. If the property harms someone, the bank faces no threats; the owner faces those legal obligations.

The bank does not own the house. They do not have any of the rights or responsibilities of the owner. What the bank does own is the mortgage (the contract). That contract entitles the bank to certain rights and responsibilities, as it does the other party (the homeowner) who signed it. But that mortgage is not ownership in the house itself.

We can extend the logic of property ownership here to areas beyond collateralized loans.

Another common trope is that since one must pay property taxes and the property can be seized if one does not, that one never truly owns one’s house. But using the same logic outlined in this post, we can see this trope is similarly incorrect. Again, the government possesses none of the rights or responsibilities of ownership. Governments do have some unique powers and limited rights, however. Governments can compel certain usages (e.g., easements) or non-usage (nuisance), enter property without permission (warrant searches), and even seize property (eminent domain) but again those rights are limited. They are limited by law (for instance by constitutional limitations on government powers), due process, and often require compensation by the government.

In the case of taxation, like with a mortgage, the government can only seize property following non-performance of an obligation (in this case, paying property taxes). It is a limited right. And, like a mortgage, the government cannot profit off the seizure (see Tyler v. Hennepin County. Chief Justice Roberts’s point in his opinion that this principle goes back to the Magna Carta is also instructional).

We can unbundle certain aspects of ownership in order to make better deals. But just because we unbundle one aspect of it doesn’t mean the whole bundle of rights disappears.