A deed of trust is a financial instrument used in some states in place of a mortgage. It essentially is the transfer of interest in land or property by a mortgagor-borrower to a mortgagee-lender to secure the payment with collateral of the borrowers debt. A deed of trust or “trust deed” serves the same purpose as a security type but it does differ from a typical mortgage.
A deed of trust is an agreement between 3 parties: the borrower, the lender and a trustee. In exchange for a loan of money from the lender, the borrower places legal title to the real property in the name of the trustee who then holds it for the benefit of the lender or mortgagee. The lender is named in the deed as the beneficiary. The borrower holds equitable title and possession of the property under a deed of trust. The terms of the deed provide that the transfer of legal title to the trustee will be void on the timely payment of the debt. If the borrower defaults in the payment of the debt, the trustee is empowered by the deed to sell the property and pay the lender the proceeds to satisfy the debt.
A trustee can sell the property under a right called “foreclosure by power of sale”. A foreclosure by power of sale is not supervised nor does it take place in a court. Therefore it is a non-judicial sale or foreclosure. Because there is not a supervisor or judis in the process, there is a very good possibility that there will be conflict over who retains title. Therefore, the title to the property is less secure than a property purchased at a judicial foreclosure sale where transfer of title is secure.
The lender may also purchase the property under the provisions of a deed of trust. This is not the same in a foreclosure sale, unless the contract or agreement states otherwise. This is because the mortgagee must act impartially in selling the property to satisfy the existing debt obligation. There are some mortgages however, that provide for foreclosure by power of sale.
The procedure for a foreclosure by power of sale is regulated by statute, a characteristic shared by a judicial foreclosure. Every party with an interest in the sale has a right to be informed within a stated period of time of the sale. The sale must also be published by law in local newspapers thus becoming public information. The property is then put up for sale at public auction soon afterwards. This is to ensure that the property will sell for full market value in the open marketplace.