A deed of trust refers to a type of

legal instrument Legal instrument is a law, legal term of art that is used for any formally executed written document that can be formally attributed to its author, records and formally expresses a legally enforceable act, process, or contractual duty, obligation ...

which is used to create a

security interest In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the '' collateral'') which enables the creditor to have recourse to the property if the debtor defaults in m ...

real property In English common law, real property, real estate, immovable property or, solely in the US and Canada, realty, refers to parcels of land and any associated structures which are the property of a person. For a structure (also called an Land i ...

and real estate. In a deed of trust, a person who wishes to borrow money conveys ''legal'' title in

to a

trustee Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, refers to anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility for the ...

, who holds the property as security for a loan (

debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

) from the lender to the borrower. The ''equitable'' title remains with the borrower. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary.

Overview

Transactions involving deeds of trust are normally structured, at least in theory, so that the lender/beneficiary gives the borrower/trustor the money to buy the property; the borrower/trustor tenders the money to the seller; the seller executes a grant deed giving the property to the borrower/trustor; and the borrower/trustor immediately executes a deed of trust giving the property to the trustee to be held in trust for the lender/beneficiary. In reality, an

escrow An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transact ...

holder is always used so that the transaction does not close until the escrow holder has the funds, grant deed, and deed of trust in their possession. This ensures the transaction can be easily rescinded if one party is unable to complete its part of the deal. Deeds of trust differ from

mortgages A mortgage loan or simply mortgage (), in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pur ...

in that deeds of trust always involve at least three parties, where the third party holds the legal title, while in the context of mortgages, the mortgagor gives legal title directly to the mortgagee. In either case, equitable title always remains with the borrower. Both mortgages and deeds of trust are essentially security instruments in the form of conveyances; that is, they appear to provide on their face for absolute conveyances of legal title, but it is implicitly understood that the borrower is retaining equitable title and the conveyance is intended to merely create a security interest. This confusing situation is a legacy of the archaic (and now-obsolete) common law requirement of livery of seisin, under which English common law courts had refused to enforce shifting fees or springing freehold interests (that is, a gage for years that was supposed to automatically expand to fee simple title if the underlying debt was not repaid). A deed of trust is normally recorded with the recorder or county clerk for the

county A county () is a geographic region of a country used for administrative or other purposesL. Brookes (ed.) '' Chambers Dictionary''. Edinburgh: Chambers Harrap Publishers Ltd, 2005. in some nations. The term is derived from the Old French denoti ...

where the property is located as evidence of and security for the debt. The act of recording provides constructive notice to the world that the property has been encumbered. When the debt is fully paid, the beneficiary is required by law to promptly direct the trustee to transfer legal title to the property back to the trustor by reconveyance, thereby releasing the security for the debt. Deeds of trust are the most common instrument used in the financing of real estate purchases in

Alaska Alaska ( ) is a non-contiguous U.S. state on the northwest extremity of North America. Part of the Western United States region, it is one of the two non-contiguous U.S. states, alongside Hawaii. Alaska is also considered to be the north ...

Arizona Arizona is a U.S. state, state in the Southwestern United States, Southwestern region of the United States, sharing the Four Corners region of the western United States with Colorado, New Mexico, and Utah. It also borders Nevada to the nort ...

California California () is a U.S. state, state in the Western United States that lies on the West Coast of the United States, Pacific Coast. It borders Oregon to the north, Nevada and Arizona to the east, and shares Mexico–United States border, an ...

Colorado Colorado is a U.S. state, state in the Western United States. It is one of the Mountain states, sharing the Four Corners region with Arizona, New Mexico, and Utah. It is also bordered by Wyoming to the north, Nebraska to the northeast, Kansas ...

, the

District of Columbia Washington, D.C., formally the District of Columbia and commonly known as Washington or D.C., is the capital city and Federal district of the United States, federal district of the United States. The city is on the Potomac River, across from ...

Idaho Idaho ( ) is a landlocked U.S. state, state in the Pacific Northwest and Mountain states, Mountain West subregions of the Western United States. It borders Montana and Wyoming to the east, Nevada and Utah to the south, and Washington (state), ...

Maryland Maryland ( ) is a U.S. state, state in the Mid-Atlantic (United States), Mid-Atlantic region of the United States. It borders the states of Virginia to its south, West Virginia to its west, Pennsylvania to its north, and Delaware to its east ...

Mississippi Mississippi ( ) is a U.S. state, state in the Southeastern United States, Southeastern and Deep South regions of the United States. It borders Tennessee to the north, Alabama to the east, the Gulf of Mexico to the south, Louisiana to the s ...

Missouri Missouri (''see #Etymology and pronunciation, pronunciation'') is a U.S. state, state in the Midwestern United States, Midwestern region of the United States. Ranking List of U.S. states and territories by area, 21st in land area, it border ...

Montana Montana ( ) is a landlocked U.S. state, state in the Mountain states, Mountain West subregion of the Western United States. It is bordered by Idaho to the west, North Dakota to the east, South Dakota to the southeast, Wyoming to the south, an ...

Nebraska Nebraska ( ) is a landlocked U.S. state, state in the Midwestern United States, Midwestern region of the United States. It borders South Dakota to the north; Iowa to the east and Missouri to the southeast, both across the Missouri River; Ka ...

Nevada Nevada ( ; ) is a landlocked state in the Western United States. It borders Oregon to the northwest, Idaho to the northeast, California to the west, Arizona to the southeast, and Utah to the east. Nevada is the seventh-most extensive, th ...

North Carolina North Carolina ( ) is a U.S. state, state in the Southeastern United States, Southeastern region of the United States. It is bordered by Virginia to the north, the Atlantic Ocean to the east, South Carolina to the south, Georgia (U.S. stat ...

Oregon Oregon ( , ) is a U.S. state, state in the Pacific Northwest region of the United States. It is a part of the Western U.S., with the Columbia River delineating much of Oregon's northern boundary with Washington (state), Washington, while t ...

Tennessee Tennessee (, ), officially the State of Tennessee, is a landlocked U.S. state, state in the Southeastern United States, Southeastern region of the United States. It borders Kentucky to the north, Virginia to the northeast, North Carolina t ...

Texas Texas ( , ; or ) is the most populous U.S. state, state in the South Central United States, South Central region of the United States. It borders Louisiana to the east, Arkansas to the northeast, Oklahoma to the north, New Mexico to the we ...

Utah Utah is a landlocked state in the Mountain states, Mountain West subregion of the Western United States. It is one of the Four Corners states, sharing a border with Arizona, Colorado, and New Mexico. It also borders Wyoming to the northea ...

Virginia Virginia, officially the Commonwealth of Virginia, is a U.S. state, state in the Southeastern United States, Southeastern and Mid-Atlantic (United States), Mid-Atlantic regions of the United States between the East Coast of the United States ...

, Washington, and

West Virginia West Virginia is a mountainous U.S. state, state in the Southern United States, Southern and Mid-Atlantic (United States), Mid-Atlantic regions of the United States.The United States Census Bureau, Census Bureau and the Association of American ...

, whereas most other states use

. Besides purchases, deeds of trust can also be used for loans made for other kinds of purposes where real estate is merely offered as collateral, and are also used to secure performance of contracts other than loans.

Power of sale and trustee's sale

A deed of trust has a crucial advantage over a mortgage from the lender's point of view. If the borrower defaults on the loan, the trustee has the power to foreclose on the property on behalf of the beneficiary. In most U.S. states, a deed of trust (but not a mortgage) can contain a special "power of sale" clause that permits the trustee to exercise these powers. An example is the standard conveyance clause from a

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.''Apao v. Bank of New York''
324 F.3d 1091 (9th Cir. 2003)
''Bryant v. Jefferson Federal Sav. & Loan Ass'n''
509 F.2d 511 (D.C. Cir. 1974). That is, unlike a mortgage, the lender need not sue the borrower in a state court; instead, the lender/beneficiary merely directs the trustee to mail, post, serve, publish, and/or record certain notices required by law, culminating in a "trustee's sale" at which the trustee auctions the property to the highest bidder. The borrower's equitable title normally terminates ''automatically'' by operation of law (under applicable statutes or case law) at the trustee's sale. The trustee then issues a deed conveying the legal and equitable title to the property in fee simple to the highest bidder. In turn, the successful bidder records the deed and becomes the owner of record. Thus, the advantage of deeds of trust is that the lender can recover the value of the collateral for the loan much more quickly, and without the expense and uncertainty of suing the borrower, which is why lenders overwhelmingly prefer such deeds to mortgages. The time periods for the "trustee's sale" or "power of sale" foreclosure process vary dramatically between jurisdictions. Some states have very short timelines. For example, in

, it can be as short as two weeks. In California, a nonjudicial foreclosure takes a minimum of approximately 112 days from start to finish. The process starts only when the lender or trustee records a "notice of default" no matter how long the loan payments have been unpaid. For certain home loans made between 2003 and 2007, because of current economic conditions, California law was amended to add a temporary additional 60 days to the process.

Terminology

Historically, some of these documents were titled "deeds of trust" and others were titled "trust deeds," and U.S. case law prior to about 1990 tends to reflect both usages. Due to the rise of real estate securitization in the 1990s and the shift from "lend to hold" to "lend to securitize," the majority of residential real estate transactions are now completed with uniform security instruments which are consistently described as "deeds of trust" so as to avoid confusion with true trusts or true deeds (i.e., true conveyances rather than security interests in the form of conveyances). Thus, the more precise term of art "deed of trust" has become predominant in the case law since then. Though a mortgage is technically an entirely different legal instrument (as noted above), deeds of trust are frequently called mortgages in the real estate loan business due to the functional similarity between deeds of trust and mortgages. Although a deed of trust usually states that the borrower is making an "irrevocable" transfer to the trustee, it is common in many jurisdictions for borrowers to obtain second and third mortgages or trust deeds that make similar transfers to additional trustees (that is, of a property they already conveyed to the trustee on their first deed of trust). As with mortgages, deeds of trust are subject to the rule "first in time, first in right," meaning that the beneficiary of the first recorded deed of trust may foreclose and wipe out all junior deeds of trust recorded later in time. If this happens, the junior debt still exists, but may become unsecured. If the debtor has sufficient senior secured claims upon his assets, lacks equity, or is otherwise insolvent, the junior liens may be wiped out completely in bankruptcy.

References

{{DEFAULTSORT:Trust Deed (Real Estate) Mortgage industry of the United States

Overview

Power of sale and trustee's sale

Terminology

See also

References