Disguised Mortgages

CYA Disclaimer: The following is intended for reference only and not as legal advice.

When determining whether or not a particular arrangement is a "mortgage" (and thus subject to the legal protections that most states grant to mortgagors), a court is not gonna be all that concerned with what it's called in the legal document that created it (a loan agreement, for example). Instead, the court will look at the structure of the transcation and see if it actually works like a mortgage or not. This is designed to prevent smooth bank lawyers from skirting around consumer legal protections.

Here is an example (no, it didn't really happen!):

In a drunken barroom transaction, Darryl gives Bubba $100,000. In return, Bubba hands Darryl the deed to his houseboat. Darryl writes on a napkin "I hereby grant Bubba McPherson the right to repurchase his houseboat two years later for $110,000." Two years go by and Bubba still hasn't repaid the money. A couple of weeks after that,Darryl beats Bubba to a bloody pulp in an argument over some chic, Bubba sues Darryl for personal injuries, and Darryl, recently rich due to his moonshining business, immediately settles for $110,000, afraid that if he doesn't then Bubba will tell the Sherriff about his business.

Now Bubba, flush with cash, wants his houseboat back, but Darryl refuses to sell it to him, pointing out that his purchase option has already expired. Bubba, under the influence of some city slicker lawyer, files a complaint with the court stating that the original transaction was actually a disguised mortgage and that he wishes to exercise his statutory right to redeem the property by paying off the mortgage (even though he has defaulted on his "mortgage" by failing to pay back the money in time). Darryl claims that the transaction was just an ordinary loan at 10% interest.

Believe it or not, this one could go either way. If the court decides that the transaction really was a mortgage in diguise, the state's statory right of redemption will kick in, and Bubba will be able to force Darryl to sell him back the houseboat for $110,00. If the court decides it really was a loan transaction, then Bubba could end up having to pay back the loan at $110,000 plus back interest.