With respect to a real estate mortgage loan, there are two important and related documents. First there is the promissory note. This is the dept. It is the "promise to pay." The promissory note is a nogotiable instrument which can be bought and sold, and transfered to someone else. Without the note, there is no debt. It is very difficult, if almost impossible for the lender to prove that they are owned money without the original note. The second document is the deed of trust. It is the security or collateral document for the loan. With the recording of the deed of trust, there is placed a lien against the property of the borrower. This security interest is then used if the loan goes into foreclosure.
There are two distinct types of collateral documents for a loan. The first is a mortgage, and the second is a deed of trust (also known as a trust deed). While both documents are collateral for a loan, the difference between the two is the way in which they are foreclosed. The mortgage is foreclosed judicial, and the deed of trust is foreclosure through a non-judicial process. The judicial foreclosure is a law suit and is processed through the courts. If is very complicated and may take a long time before the lender can recoup the money that was loaned. The "non-judicial foreclosure is a statutory process which is handled by the trustee. It is a much simpler process for a non-judicial foreclosure than for a judicial foreclosure. Usually there is notice and reinstatement period, followed by a notice of sale period. The non-judical foreclosuer can be completed in just a few months.
Under a mortgage, there are two parties. The borrower is known as the mortgagor and the lender is known as the mortgagee. Under a deed of trust, there are three parties. The borrower is known as the trustor, the lender is known as the beneficiary, and a trustee. The trustee is granted the "power to sell" the property, if the borrower (trustor) defaults on the loan. Some states place limitations on who can be a trustee, while other state will allow anyone who agrees, to be the trustee. Usually the trustee is an attorney or a title company. However, it may also be the lender.
As previously stated, the trustee is conveyed the power to sell the property if there is a default under the terms of the loan. Therefore, to release the deed of trust, the trustee "reconveys" the power to sell back to the property owner. The release
document for a deed of trust is known as a deed of reconveyance. For a reconveyance to be processed, the lender delivers to the trustee written authorization to reconvey (release) the deed of trust. The lender (beneficiary) may at anytime appoint a new trustee to act for them. This change of trustee is accomplished through a document know as a Substitution of Trustee. To release the loan, it is also important for the trustee to receive the original promissory note. Because note are negotiable instrument and can to bought and sold, only with the original note, does the trustee know who the owner is and from whom to accept written instruction.
As long as the deed of trust remained unreleased, there is a lien against the property of the borrower. Even though it may appear that the loan has been paid in full, the exact terms of the loan are contained on the promissory note, not the deed of trust. Under home equity loans, even if the loan balance is reduced to zero, the loan may still exist against the property. The borrower may obtain more funds through the terms of the home equity loan. It is therefore important to make sure the proper release documents are recorded. Until this is done, there is a lien against the borrower's property which may have priority to any subsequent loan.