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A mortgage is a legal instrument that is not as straight forward as most people think.
Different states can adopt different concepts of mortgage law in lending.
While a mortgage basically refers to the borrowing of funds to finance a property, the different mortgage theories which a state practice can have material implications from a legal standpoint.
When the concept of a mortgage was first introduced in the financial industry, pledging a house as security to secure a debt was essentially an assignment of the collateral (house) to the lender funding the deal.
Even though the mortgagor was paying for the home loan, the mortgagee retained control of the land and was entitled of all or a portion of the rent collected from tenants on the land.
This means that the title was actually under the possession of the lender.
Lenders then started to abuse their rights by being the sharks that they are. Some of which include the taking over of valuable land from borrowers for issues as simple as delinquency.
As more problems arose, it led to more concise wording in mortgage instruments from a legal standpoint.
Lien theory is the most common of the mortgage theories adopted by the most states.
This approach involved creating a loan security in the form of a lien.
Legally, a lender would be holding a lien on a property rather than the title.
Because the property is a security for the home loan, a liens gives a lender the right to foreclose it in order to repay the debt.
This can occur when there is a default on the promissory note, and the title eventually gets conveyed to the lender.
This lien placed on the property remains there until the debt is satisfied. This is even when there is a change of ownership for the property.
Title theory is somewhat similar to the early concepts of mortgages in that the title is actually conveyed to the lender.
But from past lessons, there are a lot of guidelines that lenders have to adhere to so that they do not abuse their rights.
This is why a different name is given to this “title” and it’s called a mortgage deed.
There is still a constant war between borrowers and lenders on the legal rights of both parties.
Which is why title theory states are constantly refining the perimeters of mortgage deeds.
When a borrower fully satisfies the debt, will he get the title back.
Deed of trust
The deed of trust concept brings a third party into the picture.
Also known as a trust deed, this works like an escrow service holding onto the property while the two parties do their dealings with each other.
In this case, a third party holds the land in trust for the holder of the note. When the debt is repaid, the trustee will convey title to the homeowner.
The main advantage of this approach is that is can be a more efficient and less messy affair when there is a need to foreclose the property.
Since the trustee already controls the title, things can happen very quickly.
There would be less intentional sabotaging and delaying from parties who feel victimized.