Underwriting Manual: Deeds Of Trust

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Underwriting Manual Subtopic

In General

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In many states, a deed of trust, also known as a trust deed, represents the used instrument for the purpose of creating mortgage liens on real estate.

The most notable distinction between a mortgage and a deed of trust is that the former is a bilateral grant from a mortgagor to a mortgagee, while the latter involves the intermediation of a third party, the trustee, who takes the mortgage grant and holds it in trust for the mortgagee.

Deeds of trust contain a power of sale in the trustee to be exercised after a default at the request of the lender-noteholder. Such a deed of trust is essentially similar to a mortgage with a power of sale. Indeed, in many states, the same statutes regulating foreclosure of power of sale mortgages are also applicable to deeds of trust.

A deed of trust is a comprehensive and complicated instrument which describes:

  • the duties, responsibilities, and compensation 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 and to maintain the mortgaged property in good condition;
  • the procedure in the case of default; and,
  • the procedure to appoint a successor trustee.

Deeds of trust usually reference promissory notes. 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.

See also Mortgages. (12.28)

Underwriting Manual Subtopic

The Trustee In A Deed Of Trust

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Local legislation must be considered before a trustee is selected. Some states have legislation directed against:

  • Individual trustees who do not reside in the state.
  • Corporate trustees that lack trust corporate powers.
  • Foreign corporate trustees.

Nature of the Title Acquired by the Trustee

The nature of the title acquired by the trustee is dependent upon the theory of mortgage law adopted by the specific jurisdiction.

Three theories of mortgage law exist in the United States:

  • The title theory. This theory recognizes that the mortgagee acquires legal title to the land until the mortgage has been satisfied.

  • The lien theory. This theory recognizes that the mortgagee's interest is security and that the mortgagee does not hold any title to the property until a valid foreclosure occurs.

  • The intermediate theory. This theory is a compromise between the title and the lien theories: the lien theory is applied until default and the title theory thereafter.

It is not possible to draw any final and conclusive list of states that adhere to one theory or the other, since vestiges of the title theory will be found in lien theory states, and many title theory states have adopted rules developed by lien theory courts. Even in title states, the title vested in the mortgagee tends to be rather dubious for most purposes.

Underwriting Manual Subtopic
4.20.2 1/2


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Underwriting Manual Subtopic

Duties Of Trustee In A Deed Of Trust

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It is well settled that the trustee in a deed of trust owes duties both to the 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 the pertinent legal provisions of the specific jurisdiction.

The two main functions of a trustee in a deed of trust or trust deed are:

  • To sell the property at public auction if:

    • Default on the payments has occurred.
    • Requested by the mortgagee, beneficiary, or noteholder.
    • The instrument contains a valid and exercisable power of sale.

In some jurisdictions, to execute a deed of reconveyances upon the payment of the debt.

Underwriting Manual Subtopic

Satisfaction Of A Deed Of Trust

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Depending on the jurisdiction, a deed of trust can be satisfied by the proper execution and recording of either:

  • A deed of reconveyance; or,
  • A release deed (or release of lien).

The deed of reconveyance is an instrument that transfers legal title, after the outstanding debt has been paid in full, from the trustee under a deed of trust to the borrower or owner of the land upon which the deed of trust or trust deed was a lien.

The release deed is an instrument executed by the original mortgagee, assignee, 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.

Underwriting Manual Subtopic

Security Trusts

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The deed of trust is also employed in corporate borrowing, with the trustee acting for the benefit of a large number of individuals who have lent money to the enterprise and to whom bonds or other evidence of indebtedness have been issued in return for their investments. The deed of trust, or trust indenture as it is more commonly termed in corporate bond transactions, is a mortgage, although it is frequently complicated by highly detailed provisions in the documents, prescribing the rights and duties of the three parties. In addition, statutory safeguards promote a maximum opportunity for real estate sales and ownership as well as optimum protection for each of the participants.