Mortgages and deeds of trust: lien and title theory, loan types, and mortgage clauses

Debt and security

The promissory note is the borrower's promise to repay. A mortgage or deed of trust pledges real property as security. Hypothecation means pledging property while retaining possession. In a mortgage, the borrower is the mortgagor and the lender is the mortgagee. A deed of trust involves the trustor (borrower), beneficiary (lender), and trustee, whose authority comes from the security instrument and law.

Title theories

Under lien theory, the borrower retains title and the lender holds a lien. Under title theory, legal title is conveyed as security while the borrower retains equitable title. Intermediate theory generally treats the mortgage as a lien until default, when legal title shifts. The instrument's name alone does not establish the state's theory or foreclosure procedure; applicable law and the instrument's terms control.

Loan types

A fixed-rate loan keeps its stated interest rate constant; taxes and insurance can still change the total monthly payment. An adjustable-rate loan changes its rate under a formula, typically an index plus a margin, subject to applicable caps.

A fully amortized loan pays off principal through scheduled payments by maturity. A partially amortized loan leaves a balloon balance. An interest-only loan pays no principal during its interest-only period. Negative amortization adds unpaid interest to principal.

Conventional loans are not federally insured or guaranteed. Federal Housing Administration loans are federally insured; Department of Veterans Affairs loans are federally guaranteed. A blanket mortgage covers multiple parcels. A package mortgage covers real estate and specified personal property.

Clauses and their effects

• Acceleration: permits a demand for the remaining debt after a specified trigger, commonly default.
• Due-on-sale or alienation: addresses an ownership transfer.
• Defeasance: provides for the security interest to end when the debt obligation is satisfied.
• Subordination: changes lien priority.
• Partial release: frees one parcel from a blanket lien under agreed conditions.
• Prepayment: addresses early repayment and any permitted charge.
• Power of sale: authorizes a sale through the procedure the law permits.

Identify the obligation first, then the collateral, then the clause that changes the parties' rights.