When people borrow money to buy a home, the mortgage can seem confusing because the borrower has to sign two documents for the mortgage loan: the promissory note and the deed of trust, or, simply, trust deed. The promissory note is your promise to pay the borrower. The trust deed represents the lender's financial interest in the title to the property. If you don't pay the note, the lender can take the property under the terms of the trust deed.
A trust deed has three parties to it. The first is you, the borrower. You become the trustor. The second is the lender, who becomes the beneficiary. The third party is the trustee, who holds a claim of title, sometimes called "bare title," on the property.
While the note itself is your promise to pay, the trust deed identifies the terms. Trust deeds are not perfectly uniform, and vary slightly by state and lender. In general, they give a legal description of the property, and define the loan amount and the parties involved. The legal procedures in the event of nonperformance of the loan will also be clearly set out. If the note is paid as agreed, the trustee's job is to reconvey title of the property to the borrower. If the borrower does not pay, the trustee holds the power of sale.
Trustee's Importance in a Slow Housing Market
In times of economic downturn, some people become unable to pay their mortgages and the lender decides to foreclose. It's the trustee's duty to carry out this procedure under terms of the deed of trust.
The trustee usually changes during a foreclosure proceeding. The initial trustee is often a title company. But when foreclosure begins, the original trustee can turn it over to a firm specializing in this process. When this happens, it's called a substitution of trustee.
The trustee sends out the notice of default to the trustor (the borrower), describing the past-due amounts, the fees and the beneficiary's intent to sell the property at public auction. If the trustor is able to pay the past-due amount, or if the beneficiary decides to delay the procedure, the trustee receives the funds or stays the foreclosure, and handles the paperwork and filings.
What Trustees Do Not Do
A trustee is a disinterested third party and does not favor one side or the other. The trustee's purpose is to administer the note terms. If the borrower has other issues, such as a second mortgage, deficiency, etc., the trustee will likely not be involved.
While a trustee is often thought of as accompanying foreclosures, their existence has been positive for home buyers. Prior to the Note and Trust Deed form of mortgage loan, lenders would have to foreclose on a note in a process called a judicial foreclosure. In this scenario, a suit to claim property on a defaulted loan has to go before a judge, who rules on the case. Court dates are often far into the future, leaving the defaulting borrower in the property and the lender unpaid for months. Most states have a right of redemption, meaning the defaulting borrower can buy back the property long after he or she has lost the court ruling. In Oregon, for example, the right of redemption is 180 days after judgment.
A foreclosure under a note and deed of trust is called a nonjudicial foreclosure because it doesn't go to court. When the borrower defaults on the promissory note, the trustee is able to take title to the property and have it auctioned off to pay back the lender. No judge is involved, the lender is satisfied and there is no right of redemption for the defaulting borrower.