Mortgage Trust Definition

Mortgage trusts are legal constructs are used for many purposes. The two primary uses associated with mortgage are as a form of investment and a form of loan security. The investment form of a mortgage trust helps investors not directly associated with the loan make money, while the security form of a mortgage trustee makes it easier for a borrower to purchase a home. Both have different advantages and dangers, but the investment is primarily an investor choice, while the security version tends to be required by state laws.

A mortgage trust can function as an investment account. In this case, investors put funds in the trust account, and the trustee of the account invests these funds by directly buying mortgage securities, or investment instruments that pool mortgages together and provide a rate of return. These securities in turn provide a total rate of return for the trust account. This provides investors with a way to indirectly channel funds to the real estate market.

While a mortgage trust account places distance between the investor and the home loans themselves, it comes with dangers. The investment option is based on the success of the real estate market, since the securities succeed only if the borrowers are paying off their mortgages. In the housing crash that reached its peak in 2008, many investors lost money on real estate investment, as many borrowers defaulted on the loans and the securities lost money.

The second form of a mortgage trust is a deed of trust, created when a buyer takes out a mortgage to purchase a home. The deed of trust is simply the document that shows the trust has been created. The trustee is typically the escrow company involved in the sale, which holds the title to the property as long as the mortgage continues. When the mortgage is paid off, the trustee gives the title to the borrower and the lender relinquishes any claim to the property. Different states require a deed of trust as part of the mortgage process.

A deed of trust takes the title away from the borrower but does not give it directly to the lender. As long as the trustee holds the title, it has certain powers granted to it legally. For instance, if the borrower does not make mortgage payments, the trustee may have the ability to conduct a power of sale, or directly sell the house and pay the lender without going through the foreclosure process.