Mortgages are complex financial documents, not only because of the multiple types of mortgages and different terms that lenders offer, but also because of the many regulations that affect mortgages. Laws on how a mortgage can be created and held tend to differ from state to state and can create confusion on how the process works. Some states, for instance, allow for a deed held in trust, a common procedure that streamlines the use of the home as collateral in the loan. Where there is a trust there is a trustee, and this trustee is typically the escrow company.
Escrow companies are organizations that manage the transfer of the title in a property transaction by providing required services as dictated by state laws. Because they work with moving and examining the title to the home, escrow companies are typically combined with title companies into one business. When a mortgage is created, the escrow company agrees to hold the deed in trust, or manage a trust in which ownership to the house is preserved.
A deed in trust is a useful way for both lenders and borrowers to reach an agreement. A borrower may not like the title of a home in the hands of a lender, even when the borrower has "bought" the house using the lender's funds. The lender may not like the title being held by the borrower when the lender has a claim to it as long as the mortgage exists. But by putting it in a trust, the escrow company holds onto it as a neutral third party. When the loan is completely paid off, the escrow company will close the account and transfer the deed to the borrower.
If a borrower stops making payments on a mortgage, the lender has the ability to foreclose the home, taking possession of the house and selling it to make a profit. There are two types of foreclosure, judicial and nonjudicial foreclosures. Escrow companies holding the title allow for a nonjudicial foreclosure: as trustees, they can sell houses themselves and give the proceeds to the lender. This is often a quicker process than pursuing a foreclosure through the court system.
There are many different types of trusts, and other trusts may also become involved in mortgages. For instance, some mortgages may be used in mortgage-backed securities, an investment option that may be held in a trust and managed by a trustee. Large trusts can also take out and use mortgages themselves as a means to invest in property. In the case of a bankruptcy, the court creates a bankruptcy estate and appoints a trustee to manage payment of key loans, which can include mortgages.