When someone borrows money and uses land as security, the lender usually takes a mortgage or trust deed to show the lien. The law doesn’t restrict the use of mortgages and trust deeds to commercial lenders. A noncommercial lender can get the same rights in land by taking a mortgage or trust deed using the same basic forms. Sometimes, however, the parties to a private loan decide to exchange a deed to the property, usually because they think this can make the transaction easier to resolve. Unfortunately, this isn’t always the case. Because there are laws regulating foreclosure, a lender who takes a deed may instead be buying a lawsuit to have the deed recognized as an “equitable” mortgage.
The idea behind the concept of an equitable mortgage is that if the parties intend to use a deed as a means of securing payment, then the use of the deed doesn’t override their intent. The borrower claiming that the deed was an equitable mortgage, however, has a difficult case to prove.
In Oregon, if the parties use a deed, the borrower has to prove that it was highly probable that both parties intended an equitable mortgage. The judge reviewing the case looks at the whole set of circumstances, including the situation and business and social relationship of the parties, whether the price is inadequate given the value of the property, whether the buyer gets immediate possession of the land, who pays the taxes, whether either party pays rent to the other or receives it from a tenant, whether the seller has to pay interest, the seller’s financial circumstances, and how the parties act before and after the transfer. As a practical matter, if it looks and smells like a loan, it will be treated as a loan, but it’s going to have to reek fairly strongly. Washington appears to have similar rules, but the published opinions suggested that the courts are more willing to focus their inquiry on the terms of the deal than on the overall circumstances.
Equitable mortgage arguments are unpredictable. In general, a person who wants to make the argument or who has to oppose one should be ready to talk to a lawyer about what happened and provide as much documentation as can be found in order to get advice whether the argument should be pressed or dropped, or opposed or conceded.