The United States is a group of fifty states, each with their own laws. While the original thirteen states based their laws on the laws of merry old England, many of the western states based their laws on their Spanish influence, and then there is Louisiana, whose laws are founded in the old Napoleonic Code. That’s why there are differences in how property is handled in the various states. For example, the states of the American Southwest have community property laws that govern how assets acquired during marriage are handled upon divorce or death. These laws are based on Spanish law in effect at the time they became states. New England inheritance laws recognize rights of dower and curtesy, both of which are archaic and totally incomprehensible to this southwest-trained lawyer.
Another difference between states is how real estate is treated as collateral for a loan. While the term “mortgage” is used generically, in many states there are no mortgages, but “deeds of trust” instead. In Georgia, they use “deeds to secure debt”. And while it might be easy to say that mortgages are used in states with a British legal history and deeds of trust are used in the former Spanish colonies, things have gotten so muddled throughout the last two hundred years, that you have to be very careful what type of security instrument you use in your state to make sure you’ve done it right.
“What’s the difference?” you might ask. Well, that’s a good question. For the most part, both mortgages and deeds of trust do the same thing: they provide security to a lender for a debt of the borrower, who agrees to give the security in order to get the loan. Both need to be recorded in order to provide constructive notice to third parties that the lender has a security interest in the property. And they both can be foreclosed. But when you come to foreclosure, that’s where difference between the two types of security instruments really becomes important.
Generally speaking, and this is very general, the difference between a mortgage and a deed of trust is that if you have a mortgage, the lender has to go to court to foreclose on their security, while if you have a deed of trust, you can do a non-judicial foreclosure. The concept of a deed of trust is that, at the time of the loan, the borrower executing the deed of trust agrees to “convey” the real estate in trust to a trustee, who holds it for the benefit of the lender. The terms and obligations of the deed of trust basically give the trustee the right to sell the property at a foreclosure sale should the borrower go into default and fail to cure. A sale under a deed of trust will require the trustee to give notice to the borrower that he is in default, and that if not cured, the property encumbered by the deed of trust will be sold. Once this notice is given, and no cure is made, then the trustee will post the property for sale, give notice of the sale to the borrower and the public, and will hold a sale or auction of the property at a specific date, and generally at the steps of the county courthouse. Once the sale or auction has been held, and the trustee has accepted a bid for the property, the borrower has no more rights in the property, and must vacate or face eviction. For loans secured with a deed of trust, the process of foreclosure can be relatively short, and is usually no more than 6-8 months from default to sale.
On the other hand, mortgages are an agreement directly between the borrower and the lender, with no third party trustee involved. While a mortgage will create a lien on the real estate, it does not have the same concept of conveyance in trust that a deed of trust has, and because of that difference, mortgages generally require the lender to enforce its lien through a judicial procedure. In order to foreclose on a defaulting borrower, the mortgage lender must follow state statutory law by filing a lawsuit in the local courts, giving notice to the borrower, and going through all the usual evidentiary and procedural processes that slows down every lawsuit. Many states have very strict laws on how judicial foreclosures must be handled, and give the borrower many opportunities to postpone the eventual foreclosure. The borrower also has the right to appeal the judgment of foreclosure, and this will delay the process even more. In addition, many mortgage states also give the defaulting borrower a statutory right of redemption, that is, the borrower has a period of time after the actual court order of foreclosure where he has the right to buy back, or redeem, his property. During that time, the lender cannot do anything with the property, and the borrower often remains in the property during the entire redemption period. In certain states, such as Michigan and New York, a judicial foreclosure can take years. A recent Wall Street Journal article discussed the fact that two Manhattan hotels had been finally set for foreclosure after an 18-month court battle and over $380 million of unpaid debt and fees.
If you would like more information regarding the use of mortgages versus deeds of trust, or what type of document is used in a particular state, you can contact your local title company or GRS Group for information.
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