Trust Deed Basics
A trust deed and mortgage are similar in that both are used by lenders to secure repayment of a loan with real estate. However, a mortgage only involves two parties, the lender and borrower, while a trust deed requires three parties: the lender, borrower and a trustee. The trust deed must be in writing and signed by the borrower, typically called the trustor in the document. In order to be valid, the trust deed must also specifically name the lender, called the beneficiary in the document, and a trustee. Under this arrangement, the trustee holds legal title to the real estate, but does not take any action unless the loan secured by the trust deed goes into default and the lender instructs the trustee to start a foreclosure.
Power of Sale
The defining aspect of a trust deed is the power of sale conferred on the trustee. The essence of the power of sale is that the borrower pre-authorizes the trustee to sell the real estate if there is a default committed by the borrower regarding repayment of the loan. When the default occurs, the lender instructs the trustee to exercise the power of sale, which can only be properly exercised in accordance with state laws regarding written notice of the default and sale.
The first step in exercising the power of sale in a trust deed is recording a notice as required by state law in the government recording office where the real estate is located. For example, California state law requires the trustee to record a notice of default and specifies that the contents of the notice must include an identification of the trust deed, information regarding the nature of the default and a statement that the lender has elected to foreclose on the real estate to satisfy the remaining loan obligation. Arizona law requires the trustee to record a notice of sale and provides a form of notice for the trustee to use. If the trustee does not strictly follow the state's notice requirements for exercising the power of sale, the borrower may file a lawsuit to prevent a foreclosure sale.
Trust Deed Sale
Before the trust deed sale occurs, state law typically requires further notice that will specify the date, time and place where the sale takes place. This notice cannot be given until a specified period of time elapses since the originally recorded notice. For example, both California and Arizona law mandate that at least a 90-day period of time pass after recording the first notice before the trust deed sale can be noticed.The sale is conducted in the form of an auction by the trustee with the remaining loan balance submitted by the lender serving as the minimum bid. If no one appears at the sale and bids more than the lender's minimum, the lender acquires ownership of the real estate.