A. Early mortgage history
In the early years, a mortgage - property pledged to secure a debt - was an actual assignment of that property to a lender. During the period of time that the mortgagor still owed the mortgagee part of the original loan, the lender had physical use of the land and was entitled to any rents or revenues generated from the land. Thus, in the ‘earlier forms of mortgages, title to the land pledged as security for a loan was truly transferred to the lender. Abuses on the part of lenders brought about more careful wording in the mortgage instruments. Slight delays in repaying the loan often resulted in “legal default,” with borrowers forfeiting any rights to the recovery of title to their land. An outgrowth of the early experiences of both lenders and borrowers is the current day distinction between the title theory and lien theory of mortgages.
B. Lien theory
Lien theory is a more modem approach to creating loan security and is used in most states. In lien theory states, the lender is considered to hold a lien, rather than title, against the property for security of the debt. A lien is the right to have property sold to satisfy a debt. In the event of default on the promissory note, foreclosure proceedings are initiated, and the title is conveyed from the borrower to the lender. The mortgage remains with the property until the debt is paid, even if ownership of the property changes.
C. Title Theory
Fewer than 20 states subscribe to this concept of mortgages. In states with title theory, a mortgage is assumed to represent an actual conveyance of title to the mortgagee, and the document is usually called a “mortgage deed.” This can be seen as very similar to the early mortgages in which the mortgagee owned legal title and could take possession or collect revenues from the property during the term of the loan. All of the title theory states have adopted one or several approaches to eliminating abuses in such mortgages. One altemative is to employ what is called intermediate title theory. Although this approach requires formal court action to rescind the borrower’s legal rights to the property, the mortgagee can assume possession of the property between the time of default and the sheriffs sale. While this system protects the lender against any property, it also protects the mortgagor from eviction without the legal process. Another approach requires that foreclosure proceedings must be held, as in lien theory states. This requirement makes these states’ mortgage laws equal in borrower protection to that of lien theory states’ requirements. The only difference is in the formal wording of the instrument.
D. Deeds of Trust
As mentioned earlier, the typical mortgage involves only two parties, the lender and the borrower. However, in a trust deed, also known as a deed of trust, the borrower conveys the land to a third party. The third party holds the land in trust for the benefit of the holder of the note. The primary reason some states use this form is that the deed of trust can be foreclosed easily and quickly by a trustee’s sale under a “power of sale” clause. In prescribed situations, court proceedings may be minimized or eliminated.
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