Mortgage terms differ by location, and we simplify the differences
June 1, 2014 (Newswire) - A commercial loan, if secured by deed of trust, can be foreclosed much faster and much more cheaply than a commercial loan secured by a mortgage. California, like most of the states in the West, is a deed of trust state. This is why the trust deed investment business (hard money mortgage business) is so large in California.
So what is the difference between a mortgage and a deed of trust? The professionals at CRE-Finance LLC explains that a mortgage has two parties - the mortgagor and the mortgagee. The mortgagor is the party who gives away a mortgage to his property. In other words, the mortgagor is the borrower. By the way, any time you see a legal word ending in "or", that is the party giving away something.
The lender is the mortgagee. He is the party receiving the mortgage as security for his loan. Any time you see a legal word ending in "ee", that is the party receeeeiving something. In this case the mortgageeeeeee is receeeeeiving a mortgage as security for his loan. If the mortgag-OR (borrower) doesn't make his payments, the mortgag-EE can foreclose the mortgage.
In order to foreclose a mortgage, the mortgagee (lender) must use the courts. In most states, the courts are backed up for months and months. This can be a very slow process.
Many of the states east of the Mississippi are mortgage states; i.e., a commercial lender has to foreclose his commercial mortgage loan using the very slow courts. If only there was a way to bypass the slow-pokey court system ...
A deed of trust is a three-party document (trustor, trustee, beneficiary), rather than a two-party document (mortgagor, mortgagee). A deed of trust bypasses the need to use the courts to foreclose a commercial loan. Therefore it is much faster to foreclose a deed of trust than a mortgage.
What's the difference between trust deed and a deed of trust? Nothing. They're identical.
Here's the way a deed of trust works. The trustor (borrower) gives away bare legal title to the property to the trustee. The trustee is a neutral, private intermediary, trusted by both sides of the contract, who holds the bare legal title to the property for the benefit of the beneficiary (lender).
Think of the trustee like a stakeholder. Suppose my son, Aaron, and I wanted to bet $50 over who was going to win the NBA championship. Let's suppose that neither of us trusted the other. We could give the money to Mickey, a mutual friend, to hold until the NBA Championship was over. We would each give Mickey instructions, "Here is $50 from each of us. Please give the winner the entire $100." (And then I would fire Mickey when he fails to give me the $100, even though I lost. No wonder my son doesn't trust me!)
Please note that the trustee is NOT some court, although he is often either an attorney or a title company. He's just a private guy or a private company, not some slow-pokey governmental official.
The trustee holds bare legal title for the benefit of the beneficiary (lender) until the debt is repaid. If the borrower fails to make his payments, the beneficiary notifies the trustee, who then schedules a PRIVATE foreclosure sale (Trustee's Sale) about four months later. I screamed the word "private" because there is no slow-pokey court or government official involved. Without any involvement of the courts, the trustee can conduct a trustee's sale, and, if no one bids at the sale, issue a Trustee's Deed in favor of the beneficiary.
Several times I used the expression, "bare legal title". Bare legal title is just the right to hold title to the property until a deed of trust or mortgage loan is paid. It's called "bare" legal title because the trustee does not own any of the other rights of ownership - like the right to occupy the property, the right to exclude others, the right of quiet enjoyment (stop bugging me on my property!!!), and the right to collect rents.
If you have any questions regarding commercial real estate or are seeking financing, please reach out to Richard Tretsky at 212-257-7307 or Todd Tretsky at 212-257-7305 or visit us on the web at www.cre-finance.com.