When a homeowner defaults on mortgage payments, the lender (mortgagee) must take action. The lender becomes a "mortgagee in possession" when it takes over or assumes management of a mortgaged property to protect itself from damages, according to the website foreclosurelistings.com.). According to the Columbia Law Review, the lender has rights and duties when faced with actual or threatened default, and may realise on its security by court action or an arrangement with the homeowner (mortgagor).
Assignment of Rents
In the case of commercial property that produces rental income for the mortgagor, the mortgagee in possession may assume the duty of collecting and keeping tenants' rent payments. The clause in a commercial mortgage that allows for this enforcement is called an "assignment of rents." Most commercial lenders will assume this duty as a form of additional collateral and will exercise it as a step short of foreclosure, according to The Complete Real Estate Encyclopedia. According to Much Shelist, a commercial law firm in Chicago, some states, such as Illinois, mandate that a party that obtains the benefit of a property's rent must also accept the burdens and responsibilities that come with possession of the property. In many cases, a mortgagee must take actual possession of a property through foreclosure, deed-in-lieu of foreclosure, or judicial sale of the property before it may collect rent on it. A lender may contact the tenants and advise them to pay the mortgagee directly, rather than the landlord borrower.
The mortgagee in possession may have to appoint a rent receiver in order to collect the rents on commercial property. The independent rent receiver will collect the rent and report to the court during the often lengthy foreclosure process.
In the case of residential property, the mortgagee in possession may either manage the property or appoint a third party, depending on the property's jurisdiction. Having taken management rights away from the landlord borrower, a mortgagee assumes the responsibilities of management, such as collection of rents, handling tenant requests for service, complaints, etc. The mortgagee in possession becomes liable to be called to account in respect of its management. A rent receiver shields the mortgagee in possession from most liabilities.
A mortgagee in possession assumes duties and liabilities that come with maintaining a property. It becomes liable for environmental, insurance, health and safety issues relating to the property and makes necessary repairs or modifications to property as necessary to keep it in good standing. These include third party claims of injury that occur on the premises, municipal zoning and ordinance violations, the physical or financial deterioration of the property due to action or inaction of the mortgagee, misapplication of rents, and environmental cleanup claims by local, state or federal agencies. It is also the duty of the mortgagee in possession to handle deficiency judgments against the property, such as tax and mechanic's liens.