4.20 Deeds Of Trust

4.20.1

In General

In Texas, a deed of trust, also known as a trust deed, is the commonly used instrument for the purpose of creating mortgage liens on real estate.

A mortgage is an executed contract in which the legal or equitable owner of the real property pledges the title thereto as security for performance of an obligation. This obligation is ordinarily a debt and is evidenced most often by a promissory note. A deed of trust is the most commonly used mortgage instrument in Texas for both residential and commercial transactions.

A mortgage has also been described as a grant of fee on condition of the payment of a debt.

The term "mortgagor" refers to one who owns an interest in real estate and who executes a mortgage on that interest as security for a loan or for advance of credit; that is, the borrower or debtor in the transaction.

The term "mortgagee" refers to the lender, or the party being secured in the transaction.

The term "trustee" refers to the grantee or second party in a deed of trust, which party is theoretically the party holding title to the land of the mortgagor for the benefit of the mortgagee beneficiary.

In Texas, any agreement (whether a deed of trust or trust deed) creating a security interest in real property as an incident of a debt constitutes a mortgage.

The existence of both a mortgagor and a mortgagee is essential to a mortgage.

The owner of property cannot execute a mortgage to oneself either directly or in some representative capacity.

The distinction between a mortgage and a deed of trust is that a mortgage is a grant from a mortgagor to a mortgagee, while the deed of trust involves a third party, the trustee, who takes the mortgage grant and holds it in trust for the mortgagee (the beneficiary).

Unless the loan goes into default, the trustee is not involved with the property.

Deeds of trust contain a power of sale in the trustee to be exercised after a default at the request of the lender-noteholder.

A deed of trust is a comprehensive and complicated instrument which usually describe among other things:

  • The duties and responsibilities of the trustee;
  • The transfer of the title to the mortgaged property to the trustee, subject to a defeasance clause;
  • The details of the mortgaged property;
  • The covenants of the mortgagor to pay the principal and interest on the bonds and to maintain the mortgaged property in good condition;
  • The procedure in the case of default; and
  • The procedure to appoint a successor trustee.

A promissory note is a negotiable instrument evidencing the borrower's promise to pay the underlying debt. The deed of trust creates a lien against realty being pledged as collateral to help ensure the repayment of the debt.

Under Texas homestead laws, care must be taken to determine that deeds between family members are truly conveyances and not prohibited mortgages in contravention of the Texas Constitution (Art: 16, Section 50a).  Sales between family members, other than owelty of partition should be approved by a Texas underwriter.

 

See also Texas Bulletin TX2012003.

4.20.2

The Trustee

Capacity

The trustee must have the legal capacity to take hold and transfer property.

If the trustee is a corporation, it must have the power to act as a trustee in Texas.

Nature of the Title Acquired by the Trustee

The title acquired by the trustee is dependent upon the lien theory of mortgage law which provides that the mortgagee's interest is a security and that the mortgagee does not hold any title to the property until a valid foreclosure occurs.

Duties

The trustee in a deed of trust owes duties both to the borrower (mortgagor) and the holder of the debt. The duties of the trustee are determined and measured by the terms of the deed of trust in conjunction with Chapter 51, Texas Property Code.

The main function of a trustee in a deed of trust is to sell the property at public auction:

  • If default on the payments has occurred, and

  • If instructed by the mortgagee, beneficiary, or noteholder to foreclose.

 

 

It is the policy of the Company that neither Stewart Title Guaranty Company nor Stewart Title Company be named as a trustee in a deed of trust.  See Bulletin Tx2009006. 

4.20.3

Satisfaction Of A Deed Of Trust

A deed of trust can be satisfied by the proper execution and recording of a release.

The release is an instrument executed by the original mortgagee, assignee, beneficiary, or actual holder of the note, after the outstanding debt has been paid in full, releasing the property from the lien of the deed of trust.

When a deed of trust lien is refinanced, the doctrine of equitable subrogation provides that a release or assignment works equally well.

4.20.4

Payoff Statements

For a number of years, obtaining reliable pay off statements from some lenders was quite difficult because of the lender refusing to honor such statements and demanding additional principal or interest even though the title company had in good faith paid and relied on such payoff statements.  Accordingly, the 2011 Texas legislature enacted Section 343.106, Finance Code providing that such statements are final unless the lender makes corrections prior to the closing.

The law now  provides that the Texas Finance Commission shall promulgate a standard payoff request and statement to be used on all home loans secured by Texas real property.  It provides that once the lender or the mortgage servicer has been given 7 days to provide the payoff information, the payoff is final unless the lender makes a correction before the second day before the proposed closing date.   It is expected that this form will be available in the first quarter of 2012.

Sec. 343.106, Finance Code provides

PAYOFF STATEMENTS  

(d)    The standard payoff statement form prescribed by the finance commission under Subsection (b) must require that a completed form: 

(1)    state the proposed closing date for the sale and conveyance of the real property securing the home loan or for any other transaction that would involve the payoff of the home loan, as specified by the title insurance company's request; and 

(2)    provide a payoff amount that is valid through that date. 

The law further provides if the lender or servicer provides a payoff and does not correct the payoff within 2 days prior to the closing date, the lender must provide a release of lien and look to the borrower for the difference. 

(g)     If a mortgage servicer submits an incorrect payoff statement to a title insurance company that results in the mortgage servicer requesting an amount that is less than the correct payoff amount, the mortgage servicer or mortgagee does not deliver a corrected payoff statement in accordance with Subsection (f), and the mortgage servicer receives payment in the amount specified in the payoff statement, the difference between the amount included in the payoff statement and the correct payoff amount: 

(1)    remains a liability of the former mortgagor owed to the mortgagee; and 

(2)    if the payoff statement is in connection with: 

(A)     the sale of the real property: 

(i)                  the deed of trust or other contract lien securing an interest in the property is released; 

(ii)                within a reasonable time after receipt of payment by the mortgagee or mortgage servicer, the mortgagee or mortgage servicer, as applicable, shall deliver to the title company a release of the deed of trust or other contract lien securing an interest in the property; and 

(iii)               any proceeds disbursed at closing to or for the benefit of the mortgagor, excluding closing costs related to the transaction, are subject to a constructive trust for the benefit of the mortgagee to the extent of the underpayment; or 

(B)     a refinance by the mortgagor of the existing home loan: 

(i)      the lien securing the existing home loan becomes subordinate to the lien securing the new home loan; and any proceeds disbursed at closing to or for the benefit of the mortgagor, excluding closing costs related to the transaction, are subject to a constructive trust for the benefit of the mortgagee to the extent of the underpayment