When you buy real estate you'll either sign a mortgage document or deed of trust (also called a trust). Although there are very real differences between the two documents, they probably won't matter to you at all – unless you run into problems and face a foreclosure. Then the differences between them become important.
What Is a Promissory Note?
When you go to a real estate closing and sign the many different documents your state's real estate laws require, you may think of the mortgage document or deed of trust as the most important document you're signing because it's the contract you're making with your lender promising to repay the amount you've borrowed.
That's actually not quite the case. In reality, the promissory note you're also signing at the closing is the one where you agreed to repay what you've borrowed. The mortgage or trust deed document is the document that identifies the house you're buying as the security on your loan. It's whichever of these two documents you sign that gives your lender the right to foreclose if you breach the terms of the promissory note.
The Difference Between a Mortgage and a Trust Deed
In normal circumstances when you make timely payments and eventually pay off your real estate loan, the technical difference between a mortgage and a trust deed won't affect you. If you have financial or legal problems that result in your falling so far behind in your payments that your lender initiates foreclosure proceedings, the difference becomes critical.
A mortgage document involves two parties: you, the borrower, and your lender. Since this is a private party contract and a real estate mortgage involves a private party with limited resources and a lender with abundant financial resources and legal expertise, in states where borrowers pledge real estate as security using a mortgage contract, it's usual to require that this contract be judicially reviewed before the foreclosure can proceed.
A deed of trust, on the other hand, adds a third party to the contract, a trustee, an independent third party, whose independence guarantees (in theory) that a disinterested party is involved in the foreclosure process, making unnecessary the usual judicial intervention that's required in states using mortgage contracts.
A further important difference between these two contracts is that when there's a trust deed governing the agreement, neither you (often called the "trustor" in these documents) nor the lender (referred to as "the beneficiary") actually holds title to the property. It's in the hands of the trustee, who is already authorized in the trust deed document to put the house up for auction in a foreclosure proceeding when, in his sole judgment, foreclosure is appropriate.
Problems Associated With Trustees in Foreclosure Proceedings
The details of judicial foreclosures are wide in scope, and if you are facing this type of proceeding, it is advisable to seek legal advice for your particular situation.
However, an important point to understand regarding judicial foreclosures is that they really slow down the foreclosure process and help level the field in a contest between a powerful lender and an individual borrower. In a judicial proceeding, both parties have to appear in court and argue the merits for or against the foreclosure before the judge. If the mortgagee appears to be bullying the borrower or hastening through the foreclosure process in violation of the borrower's rights, judges can get testy in a hurry. Just knowing this tends to slow mortgagees down.
In a foreclosure proceeding overseen by a trustee, there's no impartial judicial party to the proceedings. In theory, the trustee is that impartial party, but in reality, lenders invariably choose trustees. It's a problem similar to the inclusion in employment and other contracts that legal problems be resolved through arbitration. In most cities, a limited number of professional arbitrators handle these proceedings. Arbitrators who are truly impartial tend not to be selected. In both these instances – arbitrator and real estate trustee selections – where the supposedly impartial party depends primarily upon the corporate party for repeat business, the deck can be loaded against the individual.
How to Protect Your House in a Trust Deed Foreclosure
While the trust deed foreclosure process limits your rights, there are things you can do to slow down the proceeding and, in many cases, prevent the foreclosure.
One course of action to take early on is to call the lender and explain that you want to participate in the Home Affordable Modification Program (HAMP). Under certain circumstances, this requires your lender to modify the agreements to lower monthly payments, lowering payments on average by more than $500 per month. Depending on the lender, this may or may not work. If not, you still have ways available to protect your home. Unless you're experienced with court proceedings, it's best to work with a reputable real estate lawyer with a reputation for effectiveness in court who can review your paperwork and inform you of unconscionable terms and/or improper foreclosure proceedings:
Unconscionable Terms. Your lawyer's review of the terms of the deed of trust and/or promissory note may reveal illegal or obviously unethical terms in the agreement, sometimes added without your knowledge. This can stop a foreclosure proceeding dead in its tracks and make the lender more worried about being sued than foreclosing. The presence of unconscionable and illegal terms became surprisingly common in the battle over residential foreclosures that accompanied the collapse of the real estate market in 2008 and 2009.
Improper Foreclosures. As the real estate market collapsed, it also became apparent that many foreclosure proceedings had no underlying deed of trust supporting the lender's position. This happened in several ways, often simply by carelessness on the part of the lender and at other times because the trust deed and promissory note had been sold off to successive mortgage conglomerates – financial entities bundling hundreds or even thousands of individual mortgages together to create a tradable financial document – that the actual documents themselves had disappeared somewhere along the line. One of the first things your lawyer can do is demand production of the documents; he'll next require verification of all required foreclosures notices to you. Sometimes these notices aren't given with proper notice, and there's no record of notice at all or the notice has been "verified" by a clerk with no firsthand knowledge of what really happened. If there's no verified record of foreclosure notice, the proceeding stops and the process begins again from the beginning, giving you months more to refinance or sell the property yourself. In foreclosure proceedings, even where there's substantial equity involved, the various expenses and penalties accompanying foreclosure often leave the former property owner empty-handed.