A trust deed, also commonly understood as a “deed of trust”, is a legal instrument used as security by lenders and other interest holders of real property to secure debt. Debt incurred on the property is usually used in the form of a mortgage to buy a property. The note ensures lenders and lien holders that the collateral (property) will help the creditor collect payments for the amount borrowed should the borrower fail to make payments.
The trust deed is nearly synonymous with terms applicable in a mortgage. That is, while both a mortgage and trust deed use real property as collateral to secure the loan they gave, the difference between the two is the method in which the property is vested and the foreclosure process.
There are three parties to a trust deed, whereas in a conventional mortgage there are only two parties. The three parties of a trust deed are the borrower, lender, and trustee. In a trust deed the title of the property is transferred to a trustee, who possesses the real property note on behalf of the lender. The loan is held by the trustee until the loan is paid off, at which point the property would be held exclusively by the property owner.
Trustees manage the foreclosure process and enforce lenders rights to collect on defaulted debt. Should the property owner fall behind on payments, the trustee is responsible for implementing the foreclosure process. Foreclosures of trust deeds are subject to nonjudicial foreclosure, which simply means the foreclosure process is under the supervision of the court. This results in faster foreclosure proceedings and significant savings for the bank.
In a typical example of property purchases, most homeowners obtain mortgages to buy properties. In this common scenario, the mortgage borrower is the grantor of the trust deed. The trustee is the one who has rights to title until the debt is paid in full. In other words, homeownership is not truly valid until the debt is paid off. If the property’s debt is not paid back, resulting in default, the holder of the mortgage can sell the property, assuming the consummation of the foreclosure process.
In California, the most common form of a mortgage is a trust deed. This means that the title of a borrower’s property is held by an independent third party (usually a trustee or escrow company) as a means of securing a lender’s mortgage loan.
Case Law As It Relates to Trust Deed
Case Review: Wilson v. Steele (1989)
The case, Wilson v. Steele (1989) 211 Cal.3d 1053., involved real estate buyers who purchased a note secured by a trust deed. The deed was purchased from an unlicensed contractor who lent the homeowner, Williams, the money for construction. When the assignee, Steele, tried foreclosing on the property he was prevented. Steele claimed he was protected as the holder in due course and therefore should be entitled to the interest in the property.
The issue the court was tasked to answer was whether a contractor’s unlicensed status is a defect which may be asserted against the contractor’s assignee who is a holder in due course. The superior court granted judgment in favor of the Steele’s and terminated an injunction that prevented the Steele’s from foreclosing on the property.
The plaintiff, Wilson, who was the William’s family estate special administrator, reasoned that the unlicensed status of the contractor who sold the note meant that the contract was invalid, void, and otherwise not enforceable. The court of appeal agreed on the basis that the contracts formation was invalid because the contractor was not licensed and therefore could not legally be a part of a construction agreement. Although a holder in due course has an interest or stake in a particular property, the illegality of the agreement terminates the contract.
Case Review: Harrison v. Common Land Title Ins. Co. (1979)
The case, Harrison v. Common Land Title Ins. Co. (1979) 97 Cal.3d 973., involved a dispute between a buyer and a title company regarding an undisclosed trust deed on a property.
When purchasing a property, a buyer (Harrison) used the services of a title company (Common Land Title Ins. Co.). After escrow closed, Harrison discovered that there was an undisclosed trust deed on his property. Common Land Title Ins. Co.’s coverage for Harrison’s property included a maximum $100 stated liability to the insured name. However, Harrison was not named an insured party on the final title report. Harrison sued Common Land Title Ins. Co.
The Superior Court contended that while Harrison had suffered financial loss, Harrison was not insured through Commonwealth Land Title Ins. Co’s. final title report. Therefore, even though Harrison had relied on the insurance company’s information to purchase the property, he could not justifiably indicate that he had relied on their title report to make the purchase. Commonwealth Land Title Ins. Co. was not held liable.
Case Review: Barry v. Raskov (1991)
The case, Barry v. Raskov (1991) 232 Cal.App.3d 447., involved a novice investor lender who brought action against a loan broker, alleging fraud and misrepresentation.
Barry was a retired person with a large savings account however had no investment experience. A mortgage loan broker (Raskov) told Barry about the benefits of investing in home loans. His company provided borrowers who could not obtain loans from banks or other loan institutions due to poor credit with a high interest loan. Raskov said that any investment Barry made would be guaranteed “one hundred per cent” and that he “would not lose one cent”.
Raskov said Barry could invest $55,000 into a borrower’s second mortgage that had a first trust deed of $100,000 and earn 23% on the investment, plus more over time. Raskov hired an appraiser who valued the borrower’s property at $400,000. Raskov told Barry that his investment would be protected as the property’s value was significantly higher than the totaling loan amounts. Barry agreed to invest the $55,000, and Raskov made $30,000 in commission.
However, the borrower immediately defaulted on the loan, and Barry began losing his promised monthly earnings. Upon further inspection, Raskov learned that the borrower’s property value was actually only $98,000, not the appraised value of $400,000. Barry filed suit against Raskov.
The Superior Court ruled in favor of Barry, but did not hold Raskov liable for punitive damages. Upon appeal, the Court of Appeals did rule that Raskov was liable to Barry for fraud and negligence in his failure to independently verify the appraiser’s property report. The court determined that the employer of an independent contractor — in this situation, Raskov employed the appraiser — will be liable for the contractor’s torts.