In most states, lenders use a mortgage to secure their claim to the property. In others, such as California, a deed of trust does the trick. The deed is given to a third-party trustee, who holds it until you pay off the loan. If you default, the trustee can use the trust deed to sell the house. Some owners at risk for foreclosure have found ways to invalidate the trust deed.
Devils in the Details
Courts have wiped out trust-deed liens because of simple errors. Giving the wrong legal address for the property or the wrong amount of the debt can render the deed unenforceable. In some cases, the error is easy to fix, and the court will rule the deed is enforceable. In other bankruptcy cases, however, courts have held that because of the errors, the lenders' rights to the property are trumped by the rights of the bankrupt homeowner.
Names and Notaries
Every state has a legal procedure required for transferring real-estate titles. If the procedure isn't followed, a deed, mortgage or trust deed isn't going to hold up in court. In California, for example, the trustor -- the person taking out the mortgage loan -- has to sign the deed. The signature has to be notarized, to confirm that it's the real thing. The county registry of deeds then records the deed in its files, so the current ownership becomes public record.
Dividing Note and Deed
When a bank sells your loan to another bank, the deed of trust gets transferred too. The note and the deed should always stay together. Early in the 21st century, some banks began using computerized registration systems that assigned the deed to one company while transferring the promissory note elsewhere. Judges have invalidated many of the trust deeds involved with these systems. In an unrelated North Carolina case, the promissory note wasn't signed until the day after the trust deed was signed. A court ruled that the deed referred to a debt that didn't exist when it was signed. Thus, it was unenforceable.
Even if the deed of trust is sound, you can stop the trustee from enforcing it if you have a valid defense against foreclosure. A trustee doesn't usually have to go to court to foreclose, but if you're active-duty military, you may have the right to a court hearing. If the trustee forecloses without a deed, that's unenforceable. If the lender made a major error, such as not recording your loan payments, that could be a valid defense as well. Keep in mind that in a non-judicial foreclosure, you have to file in court yourself to stop the foreclosure, as there's no hearing otherwise.
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