real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

in the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...

, a deed of trust or trust deed is a

legal instrument Legal instrument is a legal term of art that is used for any formally executed written document that can be formally attributed to its author, records and formally expresses a legally enforceable act, process, or contractual duty, obligation, or ...

which is used to create a

security interest In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''collateral'') which enables the creditor to have recourse to the property if the debtor defaults in makin ...

in real property wherein ''legal'' title in real property is transferred to a

trustee Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to ...

, which holds it as security for a loan (

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

) between a borrower and lender. The ''equitable'' title remains with the borrower. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary.

Overview

Transactions involving deeds of trust are normally structured, at least in theory, so that the lender/beneficiary gives the borrower/trustor the money to buy the property; the borrower/trustor tenders the money to the seller; the seller executes a grant deed giving the property to the borrower/trustor; and the borrower/trustor immediately executes a deed of trust giving the property to the trustee to be held in trust for the lender/beneficiary. In reality, an

escrow An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacti ...

holder is always used so that the transaction does not close until the escrow holder has the funds, grant deed, and deed of trust in their possession. This ensures the transaction can be easily rescinded if one party is unable to complete its part of the deal. Deeds of trust differ from

mortgages A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

in that deeds of trust always involve at least three parties, where the third party holds the legal title, while in the context of mortgages, the mortgagor gives legal title directly to the mortgagee. In either case, equitable title always remains with the borrower. Both mortgages and deeds of trust are essentially security instruments in the form of conveyances; that is, they appear to provide on their face for absolute conveyances of legal title, but it is implicitly understood that the borrower is retaining equitable title and the conveyance is intended to merely create a security interest. This confusing situation is a legacy of the archaic (and now-obsolete) common law requirement of livery of seisin, under which English common law courts had refused to enforce shifting fees or springing freehold interests (that is, a

gage Gage may refer to: Measurement * Gage is a variant spelling of the word ''gauge'' *Stream gauge, aka Stream gage, a site along a stream where flow measurements are made People * Gage (surname) *Gage Golightly (born 1993), American actress Plac ...

for years that was supposed to automatically expand to fee simple title if the underlying debt was not repaid). A deed of trust is normally recorded with the recorder or county clerk for the

county A county is a geographic region of a country used for administrative or other purposes Chambers Dictionary, L. Brookes (ed.), 2005, Chambers Harrap Publishers Ltd, Edinburgh in certain modern nations. The term is derived from the Old French ...

where the property is located as evidence of and security for the debt. The act of recording provides constructive notice to the world that the property has been encumbered. When the debt is fully paid, the beneficiary is required by law to promptly direct the trustee to transfer legal title to the property back to the trustor by reconveyance, thereby releasing the security for the debt. Deeds of trust are the most common instrument used in the financing of real estate purchases in

Alaska Alaska ( ; russian: Аляска, Alyaska; ale, Alax̂sxax̂; ; ems, Alas'kaaq; Yup'ik: ''Alaskaq''; tli, Anáaski) is a state located in the Western United States on the northwest extremity of North America. A semi-exclave of the U.S. ...

Arizona Arizona ( ; nv, Hoozdo Hahoodzo ; ood, Alĭ ṣonak ) is a state in the Southwestern United States. It is the 6th largest and the 14th most populous of the 50 states. Its capital and largest city is Phoenix. Arizona is part of the Fou ...

California California is a state in the Western United States, located along the Pacific Coast. With nearly 39.2million residents across a total area of approximately , it is the most populous U.S. state and the 3rd largest by area. It is also the m ...

Colorado Colorado (, other variants) is a state in the Mountain states, Mountain West subregion of the Western United States. It encompasses most of the Southern Rocky Mountains, as well as the northeastern portion of the Colorado Plateau and the wes ...

, the

District of Columbia ) , image_skyline = , image_caption = Clockwise from top left: the Washington Monument and Lincoln Memorial on the National Mall, United States Capitol, Logan Circle, Jefferson Memorial, White House, Adams Morgan, ...

Idaho Idaho ( ) is a state in the Pacific Northwest region of the Western United States. To the north, it shares a small portion of the Canada–United States border with the province of British Columbia. It borders the states of Montana and Wyomi ...

Maryland Maryland ( ) is a state in the Mid-Atlantic region of the United States. It shares borders with Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; and Delaware and the Atlantic Ocean to ...

Mississippi Mississippi () is a state in the Southeastern region of the United States, bordered to the north by Tennessee; to the east by Alabama; to the south by the Gulf of Mexico; to the southwest by Louisiana; and to the northwest by Arkansas. Miss ...

Missouri Missouri is a state in the Midwestern region of the United States. Ranking 21st in land area, it is bordered by eight states (tied for the most with Tennessee): Iowa to the north, Illinois, Kentucky and Tennessee to the east, Arkansas t ...

Montana Montana () is a state in the Mountain West division of the Western United States. It is bordered by Idaho to the west, North Dakota and South Dakota to the east, Wyoming to the south, and the Canadian provinces of Alberta, British Columb ...

Nebraska Nebraska () is a state in the Midwestern region of the United States. It is bordered by South Dakota to the north; Iowa to the east and Missouri to the southeast, both across the Missouri River; Kansas to the south; Colorado to the sout ...

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North Carolina North Carolina () is a state in the Southeastern region of the United States. The state is the 28th largest and 9th-most populous of the United States. It is bordered by Virginia to the north, the Atlantic Ocean to the east, Georgia and ...

Oregon Oregon () is a state in the Pacific Northwest region of the Western United States. The Columbia River delineates much of Oregon's northern boundary with Washington, while the Snake River delineates much of its eastern boundary with Idaho. T ...

Tennessee Tennessee ( , ), officially the State of Tennessee, is a landlocked state in the Southeastern region of the United States. Tennessee is the 36th-largest by area and the 15th-most populous of the 50 states. It is bordered by Kentucky to th ...

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Utah Utah ( , ) is a state in the Mountain West subregion of the Western United States. Utah is a landlocked U.S. state bordered to its east by Colorado, to its northeast by Wyoming, to its north by Idaho, to its south by Arizona, and to it ...

Virginia Virginia, officially the Commonwealth of Virginia, is a state in the Mid-Atlantic and Southeastern regions of the United States, between the Atlantic Coast and the Appalachian Mountains. The geography and climate of the Commonwealth ar ...

Washington Washington commonly refers to: * Washington (state), United States * Washington, D.C., the capital of the United States ** A metonym for the federal government of the United States ** Washington metropolitan area, the metropolitan area centered o ...

, and

West Virginia West Virginia is a state in the Appalachian, Mid-Atlantic and Southeastern regions of the United States.The Census Bureau and the Association of American Geographers classify West Virginia as part of the Southern United States while the B ...

, whereas most other states use

. Besides purchases, deeds of trust can also be used for loans made for other kinds of purposes where real estate is merely offered as collateral, and are also used to secure performance of contracts other than loans.

Power of sale and trustee's sale

A deed of trust has a crucial advantage over a mortgage from the lender's point of view. If the borrower defaults on the loan, the trustee has the power to

foreclose Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mort ...

on the property on behalf of the beneficiary. In most U.S. states, a deed of trust (but not a mortgage) can contain a special "power of sale" clause that permits the trustee to exercise these powers. Here is the standard conveyance clause from a

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.''Apao v. Bank of New York''
324 F.3d 1091 (9th Cir. 2003)
''Bryant v. Jefferson Federal Sav. & Loan Ass'n''
509 F.2d 511 (D.C. Cir. 1974). That is, unlike a mortgage, the lender need not sue the borrower in a state court; instead, the lender/beneficiary merely directs the trustee to mail, post, serve, publish, and/or record certain notices required by law, culminating in a "trustee's sale" at which the trustee auctions the property to the highest bidder. The borrower's equitable title normally terminates ''automatically'' by operation of law (under applicable statutes or case law) at the trustee's sale. The trustee then issues a deed conveying the legal and equitable title to the property in fee simple to the highest bidder. In turn, the successful bidder records the deed and becomes the owner of record. Thus, the advantage of deeds of trust is that the lender can recover the value of the collateral for the loan much more quickly, and without the expense and uncertainty of suing the borrower, which is why lenders overwhelmingly prefer such deeds to mortgages. While true mortgages (limited to judicial foreclosure) remain available in every state that enforces "power of sale" clauses, they are quite rare. Any prospective borrower who specifically asks for a true mortgage from a commercial lender in such a state necessarily brings his or her creditworthiness into question (since if they were confident in their own ability to repay the loan, they would not need to make such a request), and any rational lender willing to extend credit to less creditworthy borrowers will insist on harsher terms, including the use of a deed of trust with a "power of sale" clause. The time periods for the "trustee's sale" or "power of sale" foreclosure process vary dramatically between jurisdictions. Some states have very short timelines. For example, in

, it can be as short as two weeks. In California, a nonjudicial foreclosure takes a minimum of approximately 112 days from start to finish. The process starts only when the lender or trustee records a "notice of default" no matter how long the loan payments have been unpaid. For certain home loans made between 2003 and 2007, because of current economic conditions, California law was amended to add a temporary additional 60 days to the process.

Terminology

Historically, some of these documents were titled "deeds of trust" and others were titled "trust deeds," and U.S. case law prior to about 1990 tends to reflect both usages. Due to the rise of real estate securitization in the 1990s and the shift from "lend to hold" to "lend to securitize," the majority of residential real estate transactions are now completed with uniform security instruments which are consistently described as "deeds of trust" so as to avoid confusion with true trusts or true deeds (i.e., true conveyances rather than security interests in the form of conveyances). Thus, the more precise term of art "deed of trust" has become predominant in the case law since then. Though a mortgage is technically an entirely different legal instrument (as noted above), deeds of trust are frequently called mortgages in the real estate loan business due to the functional similarity between deeds of trust and mortgages. Although a deed of trust usually states that the borrower is making an "irrevocable" transfer to the trustee, it is common in many jurisdictions for borrowers to obtain second and third mortgages or trust deeds that make similar transfers to additional trustees (that is, of a property they already conveyed to the trustee on their first deed of trust). As with mortgages, deeds of trust are subject to the rule "first in time, first in right," meaning that the beneficiary of the first recorded deed of trust may foreclose and wipe out all junior deeds of trust recorded later in time. If this happens, the junior debt still exists, but may become unsecured. If the debtor has sufficient senior secured claims upon his assets, lacks equity, or is otherwise insolvent, the junior liens may be wiped out completely in bankruptcy.

References

{{DEFAULTSORT:Trust Deed (Real Estate) Mortgage industry of the United States

Overview

Power of sale and trustee's sale

Terminology

See also

References