Can a Property Owned by an Irrevocable Trust Be Foreclosed?

Property owned by an irrevocable trust can be sold in a foreclosure.

Foreclosure is the way mortgage lender's recover mortgage loans when the borrower does not repay the money as required, and foreclosure can happen on any property subject to the mortgage lien. The question is not who, or what entity, owns the property, but instead whether the mortgage lien attaches to that property.

Mortgage Liens

A mortgage lien is a security interest granted voluntarily from the property owner to a mortgage lender. Once a mortgage lien attaches to a specific piece of property, the lien remains attached to that property unless the mortgage lender agrees to release the property from the lien or the lien is paid off. The lien remains attached to the property even if ownership of the property changes hands.

Time Frame

Mortgage liens can attach to property before or after that property becomes a part of an irrevocable trust. This distinction in time, however, is generally irrelevant because transfer of property to an irrevocable trust does not eliminate a mortgage lien. If the mortgage lien was attached to the property before the property was transferred to the trust, then the lien will remain attached to the property after the property becomes a part of the trust.

Default

When a mortgage borrower defaults on a mortgage loan, this triggers the lender's right to foreclose on the property subject to the lien. It does not matter whether the borrower who defaults is also the owner of the property subject to the lien. If property held in a trust is used as collateral for a mortgage loan, then any default on the loan allows the lender to foreclose on the collateral.

Due on Sale

Interestingly, transferring mortgaged property to an irrevocable trust can trigger a lender's right to foreclose even if the borrower remains current on all mortgage payments. Most mortgage loans include a standard "due on sale" provision. The due on sale provision authorizes the lender to require immediate payment of the full outstanding mortgage loan balance upon conveyance of the mortgaged property without the lender's advance permission. Transfer of mortgaged property to an irrevocable trust can trigger the due on sale clause, which means if the borrower can't pay off the full mortgage loan, then the lender can foreclose on the property.

References

• "Real Estate Finance Law"; Grant S. Nelson and Dale A. Whitman; 2008