6. What is a “deed of trust” or “security deed”?
A “deed of trust”, or “security deed”, as it is known is some jurisdictions, is a form of mortgage. A borrower of money signs a promissory note demonstrating the debt owed to the lender. The promissory note will generally recite the purpose of the loan and indicate that it is secured by real property. The borrower then takes possession of the land and records her ownership. The borrower signs a deed of trust, which transfers the land to the lend. The deed cannot be recorded except upon default. This effectively grants the lender a security interest in the real property as security for the loan. The difference between a deed of trust and a standard mortgage arises in how the security interest is recorded. A traditional mortgage simply records the security interest in the public records (registrar of deeds office) where the property is located. The deed of trust takes a different tact. A third party serves as trustee and holds the deed transferring legal ownership of the land during the pendency of the mortgage. In some jurisdictions, the secured party will hold the deed, as apposed to employing the services of a third-party trustee. Once the mortgage is repaid, the trustee will surrender the deed to the purchaser. If the loan is not repaid, the lender will request that trustee turn over the deed. The lender will then record the deed in the public records to assume ownership of the property. The process of foreclosing on a deed of trust is commonly referred to as an “administrative foreclosure”. After recording the deed, the lender must then sell the property to recuperate the lent money.
• Note: If the sale produces more funds than those owed along with foreclosure fees, the excess funds are returned to the borrower. The notable aspect of this arrangement is that the lender may not seek a deficiency judgment if the funds from the sale of the land are insufficient to pay off the loan.
• Discussion: How do you feel about the traditional mortgage scenario versus a deed of trust scenario? In what way is an administrative foreclosure by way of a security deed or a deed in trust advantageous to the mortgage holder? How do the benefits to the borrower compare to the benefits to the lender?
• Practice Question: Kara lost her job and has fallen on difficult financial times. She has been unable to make her mortgage payments and is afraid that her mortgage holder is going to foreclose on her home. Kara’s mortgage is pursuant to a deed of trust arrangement. If the lender does foreclose, what is the legal process that Kara will face?