What is a Trust Deed?

Most people are familiar with the word mortgage. That instrument is hardly ever used in California and other western states. The mortgage is a two-party instrument and is, in fact, a contract for a loan. The two parties are the mortgagor (borrower) and mortgagee (lender). This loan contract is recorded against the real property.

Unfortunately, a default on the part of the mortgagor induces many traumas which California lenders escape. A mortgagee (lender) in the Midwest, when faced with a default, (1) calls an attorney, and (2) files a lawsuit commonly known as a “judicial foreclosure.” This is truly a lawsuit with all of its unpleasant ramifications, eventually resulting in a court ordered marshal’s or sheriff’s sale, usually one to two years after the default.

Not only is this a very lengthy and expensive process, it also involves the mortgagor’s “right to redeem the property.” After the foreclosure sale, the mortgagor (borrower) has, usually, one year to redeem the property that they lost.

In the early building boom of California, the eastern banks were courted to loan on California real estate. A far superior LENDER’S DOCUMENT was devised, i.e. the TRUST DEED. The trust deed is actually a three-party instrument which is recorded against the property and secures a separate document--a promissory note.

The trustor (borrower) would sign a promissory note in favor of the beneficiary (lender). That note would have typical mortgage-like terms, including a principal balance, an interest rate, periodic (monthly, quarterly or annual) payments and a due date. The note would also contain terms like late fee, prepayment penalty, etc. At the same time the trustor signs the promissory note, they would also sign a deed of trust. This deed of trust, or trust deed, is actually a deed to the property that is held in trust by a third party--the trustee. A trustee is usually a title company, escrow company or a company affiliated with a large lender. As an example, Foothill Conveyance Corporation (a V.I.P. companion company) acts as trustee for thousands of real estate loans.  

In the event of a default in California and other western states using this instrument, a NON-JUDICIAL foreclosure is initiated. In California the process is extremely simple. It is a two step process and takes slightly less than four months. Most importantly, there is NO RIGHT OF REDEMPTION by the trustor. A more detailed description of the foreclosure process is available.  Though the Judicial foreclosure process is available to California lenders, this process is rarely used.  A detailed explanation of this process and the reasons for its choice would be too confusing to add to this simple outline.

This excellent lenders’ document was all that was necessary to open the floodgates for billions of dollars of eastern money to fuel the continued California real estate phenomenon.