DEEDS OF TRUST & MORTGAGES (SECURED AND UNSECURED NOTES)
Secured and unsecured notes are used to extend credit from one or more individuals or entities to another individual or individual’s entity. There are two types of notes:
- Secured notes are backed by collateral, providing the lender increased assurance of return of the loan amount and interest, such as mortgages and deeds of trust.
- Unsecured notes are not backed by collateral. You might consider an unsecured note for perhaps a friend or a non-disqualified relative, but it is a higher risk—and sometimes reward—than a secured note.
To clear up confusion a trust deed, deeds of trust, and mortgage notes are largely the same investment, depending on the state that you reside in. A Self-Directed IRA may invest in trust deeds, mortgage notes, and deeds of trust and other interest-bearing notes. These notes may be either in first or subordinate positions and may be purchased from brokers or private parties. Usually, the documentation is recorded at county recorder’s offices, and title to the property is insured as instructed. You may also purchase or sell portions of mortgages. In such cases, your Self-Directed IRA can hold an undivided interest in that portion of the note and receive the proportionate amount of income due under its terms. You may also purchase discounted notes as well as real estate purchase options.
When title and/or escrow companies are involved, proper instructions are provided to them for all documents for your account. In the event that a local title or escrow company has additional requirements other than those provided additional costs may result.
In real estate in the United States, a trust deed or deed of trust is a deed wherein legal title in real property is transferred to a trustee, which holds it as security for a loan (debt) between a borrower and lender. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary of the trust deed.
Transactions involving trust deeds are normally structured so that the lender gives the borrower/trustor the money to buy the property, the seller executes a grant deed giving the property to the trustor, and the borrower/trustor immediately executes a trust deed giving the property to the trustee to be held in trust for the lender/beneficiary. Trust deeds differ from mortgages in that trust deeds 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 remains with the borrower.
A trust deed is normally recorded with the recorder or county clerk for the county 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 the property back to the trustor by re-conveyance, thus releasing the security for the debt.
A trust deed has a crucial advantage over a mortgage. If the borrower defaults on the loan, the trustee has the power to foreclose on the property on behalf of the beneficiary. In most U.S. states, a trust deed (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 “uniform instrument”:
In the states that enforce “power of sale” clauses, the courts have uniformly held that by executing a deed of trust with a “power of sale” clause, the borrower has authorized the trustee to conduct a non-judicial foreclosure in the event of default. 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 (or serve, publish, 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 trust deeds 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.
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 Virginia, it can be as short as two weeks. In California, a non-judicial 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.
Trust deeds are the most common instrument used in the financing of real estate purchases in Alaska, Arizona, California, Colorado, the District of Columbia, Idaho, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, Oregon, Tennessee, Texas, Utah, Virginia, Washington, and West Virginia, whereas most other states use mortgages. 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.
Though a mortgage is technically an entirely different legal instrument, trust deeds are frequently called mortgages in the real estate loan business due to the functional similarity between trust deeds 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 becomes unsecured. If the debtor has sufficient senior secured claims upon his assets, the junior liens may be wiped out completely in bankruptcy.
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
In many jurisdictions, though not all, it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed.
The word mortgage is a French Law term meaning “dead pledge,” apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.