Ownership of mortgaged property does not pass to the creditor

The provision of Article 2088 of the New Civil Code, which states that:

"Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void."

Based on the above-stated law, a creditor is prohibited from appropriating or disposing of the thing pledged or mortgaged to him or her. Any stipulation to the contrary on this matter is considered as null and void because this arrangement is in the nature of a pactum commissorium, which is prohibited by our law.

Further, in the case of Annaliza Singson vs. Spouses Nar Christian and Cecilia Carpio (GR 238714, Aug. 30, 2023), the Supreme Court, through Chief Justice Alexander Gesmundo, held that "Art. 2088 of the New Civil Code provides that a creditor cannot appropriate or consolidate ownership over a mortgaged property merely upon failure of the mortgagor to pay a debt obligation. The essence of pactum commissorium is that ownership of the security will pass to the creditor by the mere default of the debtor.

Incidentally, the only right of a mortgagee, in case of nonpayment of debt secured by mortgage, would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness. The mortgagor's default does not operate to automatically vest in the mortgagee the ownership of the encumbered property, for any such effect is against public policy."

To conclude a creditor is prohibited from appropriating the things given to him/her by way of mortgage, or from disposing of the same even if the mortgagor-owner defaults in payment of the debt owed to the creditor.

As the ownership of a mortgaged property is not transferred to the creditor upon the default of payment of the debt, the creditor may not sell the same.