A trust deed is the security document used in most title theory states. By law in these states, the borrower does not really own the property until the final payment is made.
A trust deed involves three parties:
1. Trustor (the borrower)
2. Trustee
3. Beneficiary (the lender)
Let's creatively simplify this to help you understand, and then we will put it more formal terms. Let's work with two scenarios involving a trust deed.
SCENARIO 1
Trustor: Hey Beneficiary, can I borrow some money?
Beneficiary: Ughh I've got so much going on. I can lend you the money, but I really do not feel like dealing with you. Give the legal title to a Trustee who will receive it, and then he will have the right to sell it. He will act as a neutral party between the two of us. Sound good?
Trustor: Sounds good.
Trustor then GIVES legal title to the trustee who RECEIVES it.
Everybody is happy; the sun is out, birds are chirping, and the trustor has been making all the payments. So one day the beneficiary calls up the trustee.
Beneficiary: Hey Trustee, remember that guy the Trustor?
Trustee: Ya, what about him?
Beneficiary: He is a great guy, made every payment like clockwork, he owes me nothing now. Can you do me a favor?
Trustee: Sure, what's up?
Beneficiary: I would like to request that you reconvey that legal title back to him.
Trustee: Ok I got it, you are making a request of reconveyance.
Trustee: Hey trustor, the Beneficiary thinks you are a great guy, and he has requested that I reconvey the property to you.
Trustor: That is great!, But what if he does not remember this? After all, he is a busy guy.
Trustee: No problem, here is a reconveyance deed. Now do not lose this! This will be your evidence that everything is paid off.
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SCENARIO 2
Trustor: Hey Beneficiary, can I borrow some money?
Beneficiary: Ughh I've got so much going on. I can lend money but I really do not feel like dealing with you, so give the legal title to my friend the Trustee who will receive it, and then he will have the right to sell it. He will act as a neutral party between the two of us. Sound good?
Trustor: Sounds good.
Trustor then GIVES legal title to the trustee who RECEIVES it.
Everybody is not happy; clouds are out, birds are not chirping, and the trustor has not been making all the payments. So one day the beneficiary calls up the trustee.
Beneficiary: Hey Trustee, remember that guy the Trustor?
Trustee: Ya, what about him?
Beneficiary: He sucks, I can't stand him! He promised to pay me back, and he has not, what a jerk! Can you do me a favor?
Trustee: Sure, what's up?
Beneficiary: Can you sell the house and get my money back? I have given him notice and nothing has happened. Sell the house in a trustee's sale for me and bring me the money from that sale, since this loan is not being paid. After all, the house is the collateral for the loan.
Trustee: Hey Trustor, the Beneficiary says you are not living up to your side of the contract. So sadly I must give you a notice of the trustee sale.
The sale process is a whole other topic that is relevant for when you practice real estate but not as relevant for passing your exam. However, to understand the sale process, you must first understand these parties involved and their respective roles.
Let's review this in more formal terms.
The first thing people get confused about is why is the person with an "or" in their title receiving a loan when we learn that the "or" gives and "ee" receives.
In order to get the loan, the trustor signs the deed of trust and gives legal title to the trustee.
The trustee receives that legal title. The legal title represents the right to sell the property.
The trustee is usually a title insurance company or an attorney that is invisible to the public. They are a neutral third party that holds the title for the beneficiary, who is the lender.
In title theory states when they say the borrower has title, they are referring to equitable title, which is what the borrower has. Equitable title is the present right to possession with the right to acquire legal title once a preceding condition has been met-that condition being paying off the loan. That is a fancy way of saying, you can live there and enjoy the property, but if you mess up, you can lose your property. Defaulting can mean more then just not paying loan-it can also be doing something to excessively damage the value of the property.
When the final payment is made, the lender will sign a request of reconveyance to the trustee, and the trustee will issue a reconveyance deed to the trustor.
A reconveyance deed is used in conjunction with a trust deed, and its purpose is to clear the title of any liens pertaining to the note and trust deed. Simply said, it is the evidence that you do not owe any more money. After you pay off your loan, you do not want to lose that piece of paper! That is your evidence that the debt was paid off.
In the case of the borrower defaulting on the loan, the beneficiary would notify the trustee. The trustee would notify the trustor and give them a time period to get the payments up to date. If the payments are not made, the trustee would conduct a non-judicial foreclosure, also known as a trustee's sale, or what is more commonly known as just "foreclosure".