Encumbrances

Encumbrances

*Encumbrances –

A claim, lien or liability attached to the binding upon a property

Any claim, liability, right or interest attached to and binding on real property that is held by someone other than the owner of the property, it diminishes value of the owner’s estate but does not prevent transfer of title

*Lien –

A monetary claim, right to foreclose (Example: right to foreclose, mortgage, property tax, mechanics, judgment)

Two Types of Encumbrances:

Non-Money Encumbrances –

*Easement (permanent irrevocable right to use someone else’s property)

*Lease – right to use temporarily

*C. C. R. ’s (Conditions, Covens, and Restrictions) – deed restrictions

Affect the physical condition or use of the property (Example: easements, restrictions)

Liens –

*Monetary

*Example: mortgage, property tax, mechanic, judgment

Money encumbrances that affect title because they are changes against the property making the property the security of a debt (Example: Taxes, mortgages)

Liens are secured debts such as:

Mortgage

property tax All of these can cause the

Mechanics lien sale of the property or

Judgment foreclosure.

A lien holder has the right to go after a property, in order to satisfy the debt.

Four Kinds of Liens:

1. Voluntary Lien –

property owner agrees to the lien’s creation

(Example: an owner executes a mortgage)

2. Involuntary Lien –

Created by law without action on the part of the property owner

(Example: real estate taxes)

3. *Specific Lien –

*A claim against a described property

(Example: mortgage/property tax is a lien against the (described)

property only)

*General Lien –

A claim against everything a person has (no description), usually affects all the property of the debtor, both real and personal

(Example: judgment/court order is a lien against everything, I. R. S. – Internal Revenue Service has the right to go after everything in order to satisfy the debt or debts of a descendant (deceased person) through process called probate)

*A General lien is the final step for a creditor to take to receive compensation for a debt.

priority of Liens: 1. Property taxes are always in first lien position (this a lien against the property for local/state government services 2. Special Assignments – these get in front of all liens, except property taxes (charges for improvements, such as street paving) 3. All other liens, except mechanics liens which establish priority on the day that the work begins. All other liens are established on the date of recordation, including I. R. S. (Internal Revenue Service)

Six Types of Liens:

1. *Judgment –

A decree issued by the court

(Example: to make payment of money – money judgment)

2. *Attachment –

legal seizure of property of a defendant in a lawsuit and holding of property in the custody of the court as security for satisfaction of a judgment (Example: An attachment prevents an individual from giving away property in order to prevent the sale of property to satisfy debts. )

3. *Mechanic’s lien –

A statutory lien created in favor of mechanics (laborers) and material men (suppliers of material) to secure payment for materials used and services rendered during the improvement, repair or maintenance of real property

4. *Mortgage –

A contract in which property is hypothecated) promised without giving up possession) to secure payment of money, security for debt

(Example: Mort (dead) gage (pledge) – if in default (break pledge) the lender can go after the debtor’s property

5. Deed of Trust (Trust Deed) -

Trustor (borrower/mortgagor) gives/conveys Bare Legal Title (power to sell) to a Trustee (third party), during the time of payments of the Deed of Trust the Trustor (borrower/mortgagor) has equitable title in the property with the Trustee (Third Party), however the Trustor (borrower/mortgagor) still owns the property

*In Arizona, it is illegal to give title to a Beneficiary (lender/mortgagee)

A financing instrument in which the bare legal title is conveyed by the trustor (borrower/mortgagor) to a trustee (third party) as security for the debt owed to the beneficiary (lender/mortgagee)

4. Land Contract (Agreement for Sale or Contract for Deed) –

Financing instrument between a Buyer and Seller, in which the Buyer takes possession and use of the property, but does not acquire title until fulfillment of agreement in the contract (usually repayment of the loan)

1. *Judgment –

A decree issued by the court

(Example: to make payment of money – money judgment)

Judgment Requires –

In order to become a lien, it must be recorded in the county, in which issued and is for all the debtor’s property in that county

Debtor’s property is other counties can be subject to the judgment, after filing transcript of judgment in those counties

Collection of judgment is made when the court is petitioned to issue a writ of execution. The writ of execution (execution) is when the court directs the sheriff to seize and sell as much of the debtor’s property as necessary to pay the debt.

*A judgment lien is in effect for 5 years from its rendering. It may be renewed by filing an affidavit within 90 days of the judgment’s expiration

Once the judgment debt is satisfied, the debtor demands and records satisfaction of the judgment to clear the records 2. *Attachment –

legal seizure of property of a defendant in a lawsuit and holding of property in the custody of the court as security for satisfaction of a judgment (Example: An attachment prevents an individual from giving away property in order to prevent the sale of property to satisfy debts. )

Attachment (writ of attachment) Requires –

Creditor asks for a writ of attachment from court and records it. This writ of attachment creates a lien on the property prior to the judgment decision. The writ of attachment assures the creditor that there will be property available to pay the debt.

A writ of attachment (attachment) is issued after the creditor has posted a bond or deposit. This bond or deposit may be used to cover any loss that the debtor may receive while the property is in the courts custody, if the judgment does not go in favor of the debtor.

Debtor may not convey title to property which is not mortgaged while lawsuit is being determined

3. *Mechanic’s lien –

A statutory lien created in favor of mechanics (laborers) and material men (suppliers of material) to secure payment for materials used and services rendered during the improvement, repair or maintenance of real property

Mechanic’s Lien Requires –

*Within 20 days of commencement of work, the contractor must deliver to all interested parties –Notice of Lien

*General contractors must record their claim (debt) within 120 days of completion of work

*Subcontractors and material men (suppliers of material) must record their claim (debt) within 120 day after the completion of work by the general contractor.

*If a property owner records a notice of completion (of work), then the general contractor and supplier must record their claims within 60 days.

*Only the person who was contracted with the owner of the residence may record a mechanic’s lien, not just anyone who worked on the job may record a mechanic’s lien

Completion of Work Means –

Actual completion of work

Use and/or occupation of the improvement by the owner/agent

Written acceptance

Final inspection and written acceptance by the governmental entity from which the building permit was issued

Cessation of labor for 60 consecutive days, besides those of strike, act of God or material storage

Must be verified (sworn to) before recordation

Contract must be in writing with the owner occupant residence (single family, duplex or condominium) in order to file a lien

Lienor has 6 months from date of recordation of claim to file a lawsuit to foreclose

Example:

Hire Contractor 1/19 Lien Priority Positions Work began 1/22 1. Mechanic’s lien 1/22 First Mortgage recorded 2/17 (it started the day work Work Completed 3/4 began not recorded date) Mechanic’s lien recorded 4/29 2. 1st

Mortgage

*Priority of mechanic’s lien is on the date in which the work began

4. *Mortgage –

A contract in which property is hypothecated) promised without giving up possession) to secure payment of money, security for debt

(Example: Mort (dead) gage (pledge) – if in default (break pledge) the lender can go after the debtor’s property

Hint:

Or – giver

Ee – receiver

*Mortgagor –

borrower, owner, person who pledges the house, individual who gives the mortgage

*Mortgagee –

lender, individual who receives the mortgage (contract) and note

principal Note has –

Mortgagor signs the principal note (evidence of debt)

principal note is negotiable (can be transferred)

Two Kinds of Endorsements: (principal notes) 1. Endorsement in blank is a guarantee to payment in due course (has taken a negotiable instrument) 2. Endorsement without recourse does not guarantee payment in due course

*Estoppel Certificate –

(Certificate of No Defense or Declaration of No Set-Off)–

Used for mortgage assignment (lender sells a mortgage) from one person to another

Statement from the lender attesting to the borrower certifying the validity of the debt (a guarantee from the borrower)

This certificate is used by the selling lender of a mortgage. When a lender sells a mortgage and note to another lender, the new lender wants assurance that the lending amount and terms of the notes are correct. The mortgagor (owner of the property) signs an Estoppel Certificate acknowledging the full amount of debt

*Subrogation –

Is when a substitution of a new person (entity) in place of a creditor, in which the rights of the new person (entity) succeeds in relation to debt

(Example: when a lender sells a mortgage and note to a new lender, the new lender would have subrogation and not lose lien priority when transferring the mortgage and note.

Eight Mortgage Clauses: 1. *Acceleration Clause –

(speed up) If borrower defaults, the lender may call up the entire debt due in payable immediately. A clause in which the lender has a right to “call up” the total amount owed on the property due immediately upon occurrence of a specified event (Example: default (failure to keep a promise) of payments can cause acceleration)

$100,000 amount still owed on property

$700 monthly payment

X 4 months behind

$2,800 owed currently, however in the

Acceleration Clause, $100,000 is now due 2. *Alienation Clause (Due on Sale Clause) –

Call in debt upon transfer of property, due upon sale

A clause that is a type of acceleration clause, in which the lender, upon the property owner’s selling of property (transfer of property), owes the total mortgage and note 3. *Subordination Clause –

Mortgagee (lender) agrees to take a junior (or lower priority lien) position

A clause that states that the mortgagee (lender) gives up priority lien position to an anticipated future lien

Example: Construction financing (interim financing)

$100,000 Lot

- $30,000 Cash down payment

$70,000 Loan Subordinate

$400,000 Construction Loan (due upon completion) Riskiest loan and wants the first position, that’s why the above first loan is subordinate

$470,000 for whole loan called a Take Out Financing this becomes the permanent loan 4. Release Clause –

If mortgagor (borrower) pays off a portion of the loan, the mortgagee (lender) will release a portion of the property from the loan

A clause that permits the mortgagor (owner) to obtain a release of a specific parcel or parcels of real estate property from the mortgage, upon payment of a specified portion of the loan

(Example: Used in new home developments with the Blanket Mortgage, where the mortgage covers several pieces of property and contains a partial release clause, this allows for selling off of parts of the land at different times) 5. Defeasance Clause –

A clause that voids the mortgage upon complete repayment of the debt (mortgage and note) 6. Prepayment Penalty Clause –

A clause that stipulates there is a penalty to the debtor if paying the loan off prior to the agreed time of repayment of loan 7. Or more Clause (Repayment Clause) –

Mortgagor (borrower) may pre-pay the loan without a pre-payment penalty

A clause that permits partial or full repayment of the loan, prior to the loan’s due date without penalty

(Example: If the mortgage states “payment is $600 a month or more …” this indicates more payment is allowed) 8. Non-disturbance Clause –

A clause that states that the mortgagee (lender) will not terminate the tenancies of lessees (renters), who pay their rent, if the mortgagee (lender) forecloses on the property

Types of Mortgages:

*Blanket Mortgage –

One mortgage that covers several pieces of property and contains a partial release clause, this allows for selling off of parts of the land at different times

A single (one) mortgage that ‘blankets’ or covers two parcels of land as security

(Example: all new home developments have blanket mortgage, they have a mortgage on the property and gradually sell off parts (lots), and a partial release clause is a clause that permits the mortgagor (owner) to obtain a release of a specific parcel or parcels of real estate property from the mortgage, upon payment of a specified portion of the loan)

*Junior Mortgage –

A mortgage that is subordinate (junior or underneath) in lien priority to another existing mortgage on the same piece of real estate property

*Open End Mortgage –

Allows for or calls for future advances to be made on the mortgage

A mortgage which allows for or calls for future advances to be made on the loan (this mortgage may have a changing interest rate and eliminates rewriting of mortgage)

*Variable or Adjustable Rate Mortgage (A. R. M. )–

When interest rate is subject to periodic adjustment

A mortgage that has an interest rate that is subject to periodic adjustment (changing interest rate)

Example:

Index – Federal Treasury Bills or whatever using for that date

Margin – 2%

Cap per Adjustment – 1%

Lifetime Cap – 5%

Your interest rate would be 5 ½%

*Package Mortgage –

Includes some personal property along with real estate property

(Example: this mortgage is used in new residential properties that have personal property items included in the sale of the home)

purchase Money Mortgage –

A mortgage the is created by the Buyer that is in favor of the Seller, as part of the purchase price

*Term Mortgage (Straight Mortgage)–

Entire loan balance paid in one lump sum payment (if there are any payments at all, these would be interest only payments

A mortgage that is not amortized, meaning that the loan amount is paid in one lump sum payment (instead of payments made over the duration of time, the entire payment is due in its entirety)

(Example: Construction loan is paid upon completion, in one lump sum, with interest payments during the construction

Reverse Annuity Mortgage –

A mortgage in which the mortgagee (lender) makes a monthly payment to the mortgagor (borrower), thus the loan amount increases with each payment (Example: this mortgage is used by older mortgagors (borrowers) with large equities

Shared Appreciation Mortgage –

A mortgage that in exchange for a reduced interest rate, the mortgagee (lender) participates in a portion of the appreciation of the property (Very rarely used)

Ways to Take Over a Loan: 1. Cash to Mortgage –

Take title by grantee (Buyer) taking over the existing loan for the property and then paying the Seller the equity (difference in the purchase price) in cash 2. *Assumption of Mortgage –

purchaser agrees to pay existing loan and the seller is relieved of the primary responsibility (in the worst case of the default, the Buyer would only owe the deficiency)

Taking title by the grantee (Buyer) assuming (taking) and agreeing to pay the sum due on the existing note and mortgage, the grantee (Buyer) becomes primarily responsible for the note and mortgage 3. *Subject to Mortgage –

The purchaser accepts no responsibility for the loan and the Seller is primarily responsible (in the worst case of default, the Buyer would lose the property)

Taking title by the grantee (Buyer) ‘subject to’ the mortgage, however is not personally liable for mortgage repayment of the note, instead the grantor (maker of the note) stays responsible, but the grantor (Buyer) can lose the property through default and foreclosure

*Reduction Certificate (Reduction Statement) –

When the mortgagee (lender) signs and advises the Buyer of the amount of the unpaid balance (mortgage left) on the property, usually used in loan assumptions

Mortgage Foreclosure –

Judicial procedure goes through the courts, force of sale

A mortgage foreclosure is a court procedure in which the court decides to sell a real estate property in order to satisfy a debt

If a property sells at auction, for less than the amount owed on the property, the mortgagee (lender) may be able to sue for deficiency judgment. A deficiency is the difference that is still owed after selling a property to satisfy a debt.

Example: $120,000 mortgage on property

- $100,000 property sold at foreclosure auction

$20,000 deficiency

*In Arizona, the laws states that no deficiency judgments may be issued if the property is 2 ½ acres or less in size and is a one or two family residence (must have both parts to be exempt)

Two Ways to Prevent a Mortgage Foreclosure: 1. The (Deed in Lieu of Foreclosure) deed of the real estate property is given to the mortgagee (lender) in lieu of foreclosure (However, this can only be done if the property does not have other liens on the property and it does not preserve or help one’s credit. ) 2. During the sheriff’s sale of the foreclosed property, the mortgagor (borrower) brings enough money to satisfy the money owed to the mortgagee (lender) and any other costs of indebtness.

5. Deed of Trust (Trust Deed) –

Trustor (borrower/mortgagor) gives/conveys Bare Legal Title (power to sell) to a Trustee (third party), during the time of payments of the Deed of Trust the Trustor (borrower/mortgagor) has equitable title in the property with the Trustee (Third Party), however the Trustor (borrower/mortgagor) still owns the property

*In Arizona, it is illegal to give title to a Beneficiary (lender/mortgagee)

A financing instrument in which the bare legal title is conveyed by the trustor (borrower/mortgagor) to a trustee (third party) as security for the debt owed to the beneficiary (lender/mortgagee)

Three Individuals Involved in a Deed of Trust (Trust Deed) –

Trustor –

Borrower, mortgagor, owner of property, signs principal note which is evidence of debt

Trustee –

Third party, holds the bare legal (naked) title of the property, has power to sell and convey title if the trustor defaults on payments to the beneficiary (lender, mortgagee) (Examples of Trustee: any attorney, real estate broker, insurance agent, title insurance company, bank, savings and loan association, trust company, credit union, thrift company, small loan company

Beneficiary –

Lender, mortgagee

*Trust Deed Pay-Off –

When the note (mortgage) is satisfied (paid in full), through notification from the beneficiary (lender, mortgagee) that this has been done. The Trustee records a Reconveyance Deed. This means the deed is transferred back to the mortgagor (owner). The Reconveyance Deed is evidence of pay-off; however the original note and trust deed will remain in the Trustee’s files for seven years.

Steps in a Trust Deed Foreclosure (non judicial foreclosure) –

1. Beneficiary (lender) notifies the Trustee (Third Party) that the Trustor (borrower) is in default (late in payments)

2. Trustee (third party) records and sends to Trustor (borrower/owner) a “Notice of Default and Intent to Sell”

3. Then there is a 90 day waiting period that advertises the property for sale. During this Right of Reinstatement period the Trustor (borrower/owner) may pay only what is late on (payments are not accelerated) and the process stops

4. Trustee’s (Third Party) Sale of property 4. Successful bidder receives a Trustee’s Deed (there is no redemption period after the Trustee’s Sale – meaning the Trustor (borrower/owner) has forfeited the property

No deficiency judgment (difference between the indebtedness sued upon and the sale’s price or market value of the real estate property at the foreclosure sale) can be rendered if a foreclosed property is a one or two family residence on 2 ½ acres or less in size. This is an Arizona law.

Trustor (third party) has the option of doing a judicial foreclosure, instead of a Trust Deed foreclosure. This means there is an (This is done if the mortgagor (owner) is continually making late payments making it difficult for the mortgagee (lender).

6. Land Contract (Agreement for Sale or Contract for Deed):

Financing instrument between a Buyer and Seller, in which the Buyer takes possession and use of the property, but does not acquire title until fulfillment of agreement in the contract (usually repayment of the loan)

Two Individuals in the Land Contract –

Hint:

Or – giver

Ee – receiver

Vendor –

Seller

Vendee –

Buyer

Land Contract has –

The land contract is recorded for protection of the Vendee (Buyer). The recording is recorded within 60 days of the Vendee’s (Buyer’s) escrow completion.

The Vendor (Seller) keeps the legal title to the land, after the creation of the contract. However, the Vendor (Seller) does not have any interest in the land. The Vendor’s (Seller’s) interest is only the land contract its self which is personal property only.

Vendee (Buyer) has equitable title in the real estate property and has a right to demand transfer of legal title to the property, upon repayment in fulfillment of the agreement.

Steps in Land Contract Foreclosure: 1. If vendee (Buyer) defaults, the vendor (Seller) may bring court action to regain possession of the property or foreclosure may be effected by notice

2. Enforcement of foreclosure can not be effected, until the expiration of the following time periods set by law have occurred:
· 30 days have passed, if the vendee (buyer) has paid less than 20% of the purchase price

· 60 days have passed, if the vendee (Buyer) has paid more than 20% but less than 30% of the purchase price

· 120 days have passed if the vendee (Buyer) has paid more than 30% but less than 50% of the purchase price

· 9 months have passed if the vendee (Buyer) has paid more than 50%

· 3. There is not a redemption period (time period to claim land) after the foreclosure.

Advantages of a Land Contract for a Vendor (Seller) – 1. Avoids paying discount points 2. No appraisal necessary 3. Able to sell even in a tight money market

Advantages of a Land Contract for a Vendee (Buyer) – 1. Usually buys with less cash down, compared to new financing 2. No qualifying for loan 3. Interest rat may be less, compared to new financing

Review of Comparing Mortgage Foreclosure VS Trust Deed Foreclosure:

Mortgage Foreclosure Trust Deed Foreclosure

Title Theory Lien Law Theory

Mortgage conveys title Mortgage represents a lien to the

(ownership) to mortgagee mortgagee (lender)

(lender)

*Arizona uses this form of foreclosure

(Since it is illegal to give title to a Beneficiary (lender), only can give right to sell

Judicial Non-Judicial

Lender records Lis Pendens Beneficiary notifies Trustee (Third

(Suit Pending – pending Party) that Trustor (Seller) is in

litigation) causes the default

acceleration clause to begin

meaning the payment owed is

payment in its entirety paid in full

Court orders Decree of Foreclosure Trustee (Third Party) records and sends to Trustor (Buyer/Owner) a

Notice of Default and Intent to Sell

property advertised for sale at Trustor (Third Party) has a 90 day

Least once a week for four weeks Right of Reinstatement

Sheriff’s Sale Trustee’s (Buyer/Owner) Sale is held

Successful bidder receives Successful bidder receives Trustee’s

purchase Certificate – not deed, Deed

no conveyance of title

After the sale, there is a six During the reinstatement period, the

month redemption period debt does not accelerate. Trustor

(Statutory Right of Redemption) (Buyer/Owner) need only to

Redemption period can be reduced ‘get current’. Beneficiary (lender)

to 30 days, if the property chooses to accelerate the Beneficiary

is abandoned by the mortgagor must foreclose by judicial process

(Borrower, Buyer, Owner)

Anytime during the process, up

Until expiration of the Redemption

period (six months) the mortgagor

(Buyer/Owner) still owns the property

At the end of the six month redemption

period, the bidder receives a Sheriff’s

Deed for the property

possible Test Questions:

1. Are C. C. R. ’s material (important) to the Buyer?

Yes, C. C. R. ’s (Conditions, Covens and Restrictions are material to the Buyer. C. C. R. ’s are deed restrictions on a property and is important information when making a decision on purchasing a property.

2. What is an easement?

An easement is permanent irrevocable right to use someone else’s property.

3. Are all liens encumbrances?

Yes, all liens are encumbrances. An encumbrance is a claim attached to a property. A lien is a monetary claim. Liens are debts, thus an encumbrance. Therefore, all liens are encumbrances.

4. Are all encumbrances’ liens?

No, all encumbrances are not liens. Liens are monetary claims. Encumbrances are claims to an attached property. All debts are not liens. You can have a claim to a property that is not monetary, such as an easement (permanent irrevocable right to use someone else’s property).

5. What is the final step a creditor can take in order to receive compensation for a debt?

The final step a creditor can take in order to receive compensation for debt is called execution. A writ of execution directs the sheriff to seize and sell as much of the debtor’s property as necessary to pay the debt.

6. What is a court seizure of property before a judgment is issued?

A court seizure of property before a judgment is called a writ of attachment. A writ of attachment is a legal seizure of property of a defendant in a lawsuit and holding of property in the custody of the court as security for satisfaction of a judgment.

7. How long is a judgment good for?

A judgment (lien) is good (valid) for 5 years from its rendering. It may be renewed by filing an affidavit within 90 days of the judgment’s expiration

8. How long does a contractor have to record a (mechanic’s) claim against a property?

A contractor has 120 from the day of completion to file a (mechanic’s) claim against a property.

9. How long does a subcontractor have to record a (mechanic’s) claim against a property?

A subcontractor has 120 days from the day of the general contractor’s completion day to record a (mechanic’s) lien.

10. In determining the order of lien priority, when is a mechanic’s lien placed?

A mechanic’s lien begins on the day that the work began on the property and is placed in that priority order.

11. What is hypothecate?

Hypothecate means to promise without giving up possession or to pledge something a security without giving up the property (Example: a mortgage)

12. Who holds title to a mortgaged property?

A mortgagor (borrower) or person who pledged the property in a mortgage is a person who holds the title. The borrower retains title because Arizona is a lien-theory state.

13. What is an Estoppel Certificate (No Defense Certificate or Declaration of No Set-Off?

An Estoppel Certificate (No Defense Certificate or Declaration of No Set-Off is certificate is used by the selling lender of a mortgage. When a lender sells a mortgage and note to another lender, the new lender wants assurance that the lending amount and terms of the notes are correct. The mortgagor (owner of the property) signs an Estoppel Certificate acknowledging the full amount of debt.

14. Who is the mortgagor?

The mortgagor is the Buyer (the one who makes the pledge to mortgage).

15. Who is the mortgagee?

The mortgagee is the Lender.

16. Who owns the property during a foreclosure during the redemption period?

During the redemption period, the mortgagor (Buyer/Owner) still owns the property.

17. If you want to find out if a mortgage is assumable, how do you find out?

Look for the alienation clause in the mortgage. The alienation clause is a clause that is a kind of acceleration clause. The clause is one in which the lender, upon the property owner’s selling of property (transfer of property), owes the total mortgage and note

18. Prioritize the following liens?

Special Assessment I. R. S. Property Taxes

The following liens should be in this order of lien position: 1. Property Taxes 2. Special Assessment 3. I. R. S. Property taxes are always in first lien position (this lien is against the property for local/state government services. Special Assignments – these get in front of all liens, except property taxes (charges for improvements, such as street paving). All other liens, except mechanics liens which establish priority on the day that the work begins, are established on the date of recordation, including I. R. S. (Internal Revenue Service)

19. Which lien has priority and on what date?

Example: Hire Contractor 1/19 Work began 1/22 First Mortgage recorded 2/17 Work Completed 3/4 Mechanic’s lien recorded 4/29

The Mechanic’s Lien takes first priority on 1/22 and the First Mortgage is in second on 2/17. Mechanic’s lien begins on the first day of work, not on the day of recordation.

20. What is the essence of a foreclosure?

The essence of a foreclosure is to provide security for the lender (mortgagee). The lender needs assurance that their loan will be honored and this is done in a foreclosure.

21. What is the major purpose of a trust deed?

A trust deed has replaced a mortgage security for the lender. The trust deed avoids the judicial process in foreclosure by having a Trustee (Third Party) hold the Bare Title (power to sell).

22. Is there an acceleration clause in a trust deed?

No, there is not an acceleration clause in a trust deed. During the reinstatement period of 90 days the Trustor (borrower/owner) may pay only for what’s late, not the full amount.

23. During the non-judicial period of foreclosure does debt accelerate?

No, the debt does not accelerate in a non-judicial period of foreclosure (trust deed) because during the reinstatement period of 90 days the Trustor (borrower/owner) may pay only for what’s late, not the full amount.

24. Do lenders like mortgages or trust deeds?

Lenders like trust deeds because there is not a judicial process in trust deed and no acceleration clause, so the Trustor (borrower/owner) can pay just what is currently owned, not the entire amount.

25. What is bare legal title?

Bare legal title is what is given to a Trustee (third party) from the Trustor (borrower/owner) in a trust deed. The Trustee (third party) holds the bare legal title gives the Trustee (third party) the right to sell the property, if the Trustor (borrower/owner) is default on payments. The bare legal title does not mean the Trustee is the owner of the property.

26. Who owns the property in a trust deed?

The Trustor (borrower/owner) still owns the property in equitable title. The Trustee (third party) has the bare title, meaning that the trustee has the right to sell the property if in default, however does not own the property. It is illegal in Arizona for an owner to give title to property to a Beneficiary (lender).

27. Who receives payments in a trust deed?

The Beneficiary (lender) receives the payments from the Trustor (borrower/owner) in the trust deed. The Trustee (third party) is not involved, unless there is a default.