The addition of the trustee is one of the items that differentiate mortgages from trust deed investments. Many new borrowers of this type of security instrument become confused because mortgages involve only two parties: the lender and the borrower instead of the three parties set up in trust deed investing: the lender, the borrower and the trustee.
Role of the Trustee
In trust deed investments there is a third party—a trustee—whose job is to hold the physical title of the property that secures the loan until the borrower pays the loan in full. The trustee has no association with the borrower or the lender but is an independent third party. In some states this role can be held by a lawyer but in other states a title company performs the role of the trustee in trust deed investments. Not only does the trustee hold onto the title of the property during the loan period, the trustee is also the one that takes care of returning the title of the property to the borrower once he pays the loan in full.
The Role of the Trustee in Foreclosure Proceedings
If the borrower defaults on a trust deed loan, the trustee is the one with the “Power of Sale.” The trustee files a Notice of Default, but in most instances the trustee will appoint another trustee to handle the foreclosure under a Substitution of Trustee. Following the 90 day period where it appears in the public records and the 21-day notification in the newspaper the trustee has the power to sell the property on the steps of the courthouse without any type of court procedure taking place.
During the 90-day period following the recording of the Notice of Default the borrower can bring the payments current and pay the trustee’s fees in order to reclaim the property. Once the Trustee’s sale is complete and the property is sold, the borrower has no recourse to reclaim his property.
Deed of Trust or Mortgage: How to Choose
The decision concerning the borrower’s property and the way the loan is handled is not a decision that he or the lender makes but is defined by the laws of the state where the property is located. There are advantages and disadvantages to both with the deed of trust investing option more beneficial for the lender, especially in cases where the loan goes into default. The time from filing the Notice of Default until the time the property goes up for sale is much shorter than the foreclosure period covered by a mortgage with the latter sometimes taking as long as a year.
Since the trustee in any deed of trust is a third party that is not connected to investor or borrower, there is no potential conflict of interest as there might be in a standard mortgage transaction. In some cases the borrower may know someone in the bank or mortgage company and make an arrangement with them to intercede on their behalf, but this conflict of interest is not possible in a trust deed because of the unbiased position of the trustee. This makes trust deed investing extremely attractive for the potential trust deed investor.