A deed of trust is an agreement that is made between a lender and a borrower, to allow a neutral third party to act as a trustee over a piece of property. The trustee holds legal title to the property until the borrower can pay off his debt. As he repays the debt, the borrower keeps the actual title to (and possession of) the property, and maintains full responsibility over the premises, unless the deed of trust says otherwise. The legal title to the property, however, is held by the trustee. To explore this concept, consider the following deed of trust definition.
Definition of Deed of Trust
- A document that secures a debt, in which a debtor places legal ownership of real property with a trustee, to be held in trust until the debt is repaid.
What is a Dead of Trust
A deed of trust is a legal document that a borrower and a lender agree to make, which permits a neutral third party to enter the fold as a trustee over a piece of real property. For example, the deed of trust permits the trustee to hold onto the property while the borrower repays his debt. During this time, the borrower keeps the actual title to the property, and remains fully responsible for the property. The trustee, on the other hand, holds on to the legal title.
Deeds of trust have become less popular as more people have opted for mortgages. One of the main differences between a deed of trust and a mortgage is that, with a mortgage, everyone involved in the transaction has a vested interest in the outcome of the arrangement. With a deed of trust, an impartial third party serves as trustee. For example, a deed of trust can only be sold by the trustee, who is not permitted to change the selling price to benefit either the borrower or lender.
Once the sale of a property under a deed of trust is finalized, the trustee distributes the proceeds to the lender, with the remainder to the borrower. The lender receives the amount necessary to fully satisfy the debt, and the borrower receives whatever is left over.
The term “trustee” refers to any person who is in a position of trust, responsibility, or authority for the benefit of another person. A trustee is “trusted” with another person’s property. Trustees may be responsible for carrying out certain tasks, but without the benefit of earning an income for their efforts. When it comes to real property, a trustee is a holder of the property, typically on behalf of a beneficiary. This means that the trustee holds the property for the beneficiary until the beneficiary is ready to take the property over.
Difference Between Deed of Trust and Mortgage
In order to better understand the difference between a deed of trust and a mortgage, it is important to first define promissory notes. A promissory note does as its name suggests: it contains a “promise” on the part of the borrower to repay the amount he is borrowing. A promissory note is essentially an IOU. Both mortgages and deeds of trust are considered promissory notes, and both use real property to secure the loan. This means that, if the borrower fails to make his monthly payments, the lender is permitted to foreclose on the property, based on the promise in the mortgage or deed of trust having been broken.
Many people believe that a mortgage is the loan that they take out on their property, but this is not actually true. The mortgage is the document that the borrower gives to the lender to allow the lender to place a lien on his property. If a property owner is unsure as to whether he has a mortgage or a deed of trust, the borrower can review the documents he received when the property was initially sold to him. The only time the difference between a deed of trust and a mortgage becomes an issue is if the property goes into foreclosure. This is because the foreclosure process is different for a property under deed of trust.
Another difference between a deed of trust and a mortgage is the foreclosure process. A foreclosure is the sale of a piece of property by a lender when a borrower has failed to make his loan payments as agreed. The lender then sells the property to recoup what is owed so that the loan can be fully satisfied.
When a piece of property under a deed of trust goes into foreclosure, the foreclosure sale does not have to adhere to the same procedures that a foreclosure on a mortgaged property must heed. With a foreclosure on a mortgaged property, the rules are stricter, and the parties involved are held to a higher level of accountability. A foreclosure sale under a deed of trust, however, does not require court intervention in most states.
Power of Sale
A power of sale is a clause found in most deeds of trust that allow a trustee to sell the property if the borrower defaults on his loan, and the property goes into foreclosure. The courts have consistently held that a deed of trust with a power of sale clause effectively serves as the property owner’s permission for a trustee to conduct a nonjudicial foreclosure in the event that the borrower defaults on his payments. What this means is that the lender does not need to sue the borrower in state court. Instead, the lender instructs the trustee to mail or serve the required notices that the property will be auctioned off at a “trustee’s sale.”
Once the property is sold at the trustee’s sale, the borrower’s title is automatically terminated. The trustee then issues a deed transferring the legal title to the property to the highest bidder. The bidder then records that deed and becomes the new owner of record. This is why lenders prefer deeds of trust over mortgages. They can sell the property much more quickly, recovering the collateral of the loan without needing to incur the expenses that would be involved with suing the borrower.
The length of time that it takes to complete a trustee’s sale – or power of sale foreclosure – varies wildly, depending on the jurisdiction. Some states, like Virginia, have incredibly short time lines, Virginia’s being only two weeks. The process begins only when the lender or trustee records a notice of default, no matter how long the borrower has been in default on his payments. Poor economic conditions have also influenced states to extend the time in which to sell the property, understanding that it may take longer than usual to do so in a struggling economy.
Deed of Trust Form
For borrowers who wish to conduct their own real estate transactions, they can use a free deed of trust form, which can be found on the internet. They must file the completed and signed deed of trust form with the county clerk within the jurisdiction of their property. Filing the deed of trust form with the county clerk is crucial because the filing itself acts as a sort of notice to any interested parties that the property is being purchased under a deed of trust.
Assignment of Deed of Trust
An assignment of deed of trust transfers the interest that the original borrower had under the deed of trust to a new bank. Typically, the deed of trust is recorded shortly after the lender signs it. If further assignments of deed of trust are to follow, each must be recorded with the county clerk.
Lenders buy and sell loans all the time, with usually little to no effect on the borrower. The assignment of deed of trust simply serves as permission for one lender to sell the loan to another lender. Once the loan is re-assigned, the new lender takes over the same lien on the same piece of property, essentially stepping into the shoes of the prior lender. The borrower can be provided with a copy of the assignment of deed of trust upon repaying his debt in full.
Deed of Trust Example Concerning an Assignment of Deed of Trust
An example of a deed of trust action can be found in the case of Maria Mendoza v JPMorgan Chase Bank. In November of 2007, Maria and Juan Mendoza took out a loan in the amount of $540,600 from JPMorgan Chase Bank. The loan was secured by a deed of trust. In the loan, the Mendozas were listed as the borrowers, Chase as the lender and beneficiary, and North American Title Company as the trustee. Unfortunately, by March of 2011, the Mendozas had fallen behind on their payments – to the tune of nearly $55,000.
On March 4, 2011, Chase reassigned the deed of trust to Chase Home Finance, LLC. California Reconveyance Company then replaced North American Title Company as the trustee on the loan. California Reconveyance Company issued a notice to the Mendozas indicating their default on the loan and the trustee’s intention to sell the property. Maria Mendoza filed a lawsuit challenging the assignment of the deed of trust, as well as the substitution of California Reconveyance Company as trustee.
Mendoza’s argument was that Colleen Irby, who had signed the assignment as an officer of Chase, was actually an employee of California Reconveyance Company. Mendoza had gleaned this information from Irby’s LinkedIn.com page, where she identified herself as an employee of the latter. Mendoza therefore alleged that Irby acted fraudulently in performing the assignment. Mendoza accused Irby of being a “robo-signer,” which is someone who simply signs documents, with no legal authority whatsoever. Mendoza argued that the substitution of the trustee was equally fraudulent.
The defendants filed a motion to dismiss, which was ultimately granted by the trial court. Mendoza then appealed to California’s Court of Appeals for the Third District. The Court of Appeals ultimately affirmed the dismissal primarily because Mendoza failed to provide enough factual evidence in her complaint, and in her appeal. The court explained its decision, stating:
“We uphold the trial court’s ruling because plaintiff lacks standing to challenge the assignment of her loan and deed of trust. Plaintiff makes the rote assertion that if afforded the opportunity, she would provide more facts to coincide with the emerging jurisprudence. That promise does not meet her burden of disclosing in her briefing what new facts she can now state to revive her wrongful foreclosure claim. As a result, the trial court did not abuse its discretion by foreclosing additional amendments.”
The Court concluded by saying that:
“[Mendoza] offers no new factual allegations to merit an opportunity to further amend her complaint or to demonstrate that the trial court abused its discretion. She has had three opportunities to state a viable claim against these defendants and has fallen far short of the mark.”
Related Legal Terms and Issues
- Collateral – Something of value pledged as security for repayment of a loan.
- Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or charged with, a crime or offense.
- Lien – An encumbrance placed on a person’s property to secure a debt the property owner owes to another person or entity.
- Promissory – Containing, implying, or having the nature of a promise.