Why a mortgage and a deed of trust are different

Why a mortgage and a deed of trust are different is the topic of this blog post.  Some people are under the impression that the only difference is in the name.  The confusion likely stems from the fact that loans securing real property are often referred to as mortgages by many people, but in reality only loans backed by mortgage notes are truly mortgage loans. Home loans backed by a deed of trust are trusts.

California is one of more than 12 states, in addition to the District of Columbia in which most, if not all, home loans are secured with a deed of trust also known as a trust deed.  California law allows the use of either a trust deed or a mortgage, but because lenders have more power under a trust deed as compared to a mortgage virtually all lenders use a trust deed in California, rather than a mortgage.

When a borrower takes out a home loan, they must sign a promissory note which is a document pledging to repay the loan. Depending on the particular state the transaction takes place in will determine whether the document is a mortgage note or a deed of trust. The main difference between them is in who holds the title to the house while the borrower is paying off the loan.

In a real estate transaction involving a mortgage note, the note serves as a lien on the property. This means the borrower cannot sell the house until the debt is repaid and the lien is satisfied. With a mortgage note, either the lender or the borrower can hold the actual title to the house, depending on which state the house is located in. In states known as "title theory" states the lender keeps the title and owns the house until the borrower pays off the loan.  In other states known as “lien theory" states the borrower holds the title and owns the house, but the mortgage note gives the lender the right to seize and sell the house for non-payment.

For home loans backed by a deed of trust, neither the borrower nor the lender holds the title to the property. The deed of trust brings in a third party to hold the title. This party is the trustee. The trustee might be a bank, a lawyer or some other entity, but the law requires that it must be a neutral party. When the borrower has repaid the loan, the lender will instruct the trustee to release the title to the borrower, who now owns the house free and clear.

The difference between a mortgage and a deed of trust will become crystal clear if the borrower defaults on the loan and the lender then forecloses on the house. With a mortgage, regardless of who is holding the title, the lender usually has to get a court order allowing it to seize the home and sell it. This is called "judicial foreclosure." With a deed of trust, the trustee already has the power to sell the home. All the lender has to do is furnish proof to the trustee that the borrower has defaulted. This is called "non-judicial foreclosure," and because it doesn't need to go through the court system, it's usually quicker and easier for the lender. California is a non-judicial foreclosure state which means that in most cases no court order is required.

Attorneys or parties in California who would like to view a portion of a 22 page sample complaint to stop a trustee foreclosure sale that includes a verified complaint, ex-parte application for temporary restraining order with points and authorities, sample declarations, and a proposed order sold by the author can see below.

http://www.scribd.com/doc/146074976/Sample-California-Complaint-to-Stop-Foreclosure-Sale-by-Trustee

The author of this blog post, Stan Burman, is a freelance paralegal who has worked in California and Federal litigation since 1995 and has created over 225 sample legal documents for California and Federal litigation.

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Copyright 2013 Stan Burman. All rights reserved.

DISCLAIMER:

Please note that the author of this blog post, Stan Burman is NOT an attorney and as such is unable to provide any specific legal advice. The author is NOT engaged in providing any legal, financial, or other professional services, and any information contained in this blog post is NOT intended to constitute legal advice.

These materials and information contained in this blog post have been prepared by Stan Burman for informational purposes only and are not legal advice. Transmission of the information contained in this blog post is not intended to create, and receipt does not constitute, any business relationship between the author and any readers. Readers should not act upon this information without seeking professional counsel.