By Jon Roland:
When I was a real estate investor and agent back in the 1960s and 1970s in Texas the deed of trust (mortgage) form most of us used for financing real estate was the Texas State Bar form, or the language of it. It was two pages of fine print (consisting of a single sentence!) that enabled state rules for nonjudicial foreclosures by a trustee appointed by the lender but in theory independent of him, with a fiduciary duty to both lender and borrower, and the deed of trust contained provisions that protected the rights of both. For example, it protected the borrower by providing that when the note was paid in full, the trust would dissolve automatically, and the borrower would then have clear title as far as the lender was concerned. It was customary for the lender to also sign an instrument called the release of lien, but that was only to confirm the fact of full payment. In principle, it would also work to return the note to the borrower marked “paid” and signed by the lender or his agent. It also required the lender or his assigns to notify the borrower of any change in his address or that of his servicing agent, and required him to credit any payments sent to that address. That would have protected a borrower who made all payments on time from being foreclosed upon if the servicing agent failed to convey the payments to the owner and holder of the note. It also enabled the borrower to sue to “quiet title” if he made all payments on time and the lender failed to perform according to the terms of the note and deed of trust, or to sue for injunction to prevent an improper foreclosure. If he sued for such an injunction, the lender was required, under the longstanding ‘best evidence rule”, to produce the original signed note, not a copy or an affidavit that he or his attorney was the “owner and holder” of the note. Each signed note was a separate obligation, and if it could not be produced as evidence at trial, the court would find that the borrower owed no money, and indeed, could get judgment for the return of all sums already paid.
Sometime during the 1980s lenders began using their own deed of trust forms that reduced the protections for borrowers, until now many of them seem to be using forms that provide no protections at all. I have examined at least one that does not even allow the borrower to get clear title to his home if he pays off the note in full and on time. Such degraded “deeds of trust” convert the sale into little more than a long-term lease in which the borrower gets no equity in a home that is enforceable in court. If the lender does finally grant a release of lien, it is an indulgence and not something he may be legally required to do. Such deeds of trust are in my view unconscionable, but courts have little choice but to enforce them as written, or not written.
No one should ever finance the purchase of real estate using such deed of trust forms. Never sign any legal document you have not read and thoroughly understand. If you don’t understand it, ask a lawyer to explain it to you. If a lawyer lets you sign such an instrument, he should be sued for malpractice, and disbarred. Lenders who use such forms should have all their notes cancelled, be put out of business, and the loan officers put in prison for fraud.
When I was in the real estate field, especially when I was a buyer, I would usually add provisions to a deed of trust to provide additional protections, to which the lender almost always agreed. You don’t have to accept the form the lender provides, and if he does not agree to reasonable added protections your position, then walk away from the deal. You will likely be better off leasing the property. At least under a lease the landlord will generally be obligated to make major repairs.
Here are the key provisions you should insist in including in a deed of trust:
- Upon payment of the note in full according to its terms, or if late payments are accepted by the owner and holder of the note, or his servicing agent, the deed of trust is dissolved, and the lien must be released.
- The borrower must be notified of any changes of ownership of the note, and of any changes in the servicing agent, including the address to which payments are to be made, before the next payment is due, and the address for service of process if a legal action is taken.
- The owner and holder of the note is required to credit all payments made to and accepted by the the lender or his servicing agent at his last known address, even if the servicing agent fails to deliver the payments to the owner and holder of the note.
- Reasonable attorney fees of up to 10 percent of the remaining balance on the note may be added to the end of the note only if the borrower refuses or is unable to pay, and not for a dispute concerning credit for payments made or the amount of the remaining balance.
- In the event of legal action by the owner and holder of the note, he must produce the original signed note, not a copy or an affidavit.
- The owner and holder of the note may not assign the note to a party out of state without the signed consent of the borrower.
- Charges for things like taxes, insurance, or reasonable repairs, shall be paid only out of a fixed escrow account, bearing no interest, and not added to the balance of the note, although the escrow balance may be required to be paid before the lien is released, and the borrower always has the option to pay all such charges directly.
There should also be a warranty deed that provides:
- The seller (grantor) is the sole owner, with power to sell and convey.
- There are no prior liens or other claims on the title to the property.
- The seller will pay all costs to settle any such prior claims to the title or any part thereof, or if unable to defend them, to refund all sums paid and any consideration received, plus ten percent interest from receipt thereof.
- The seller has secured the deed, at his expense. with a title policy from a title insurance company able to cover all claims and to defend the title in court.
- If the buyer (grantee) incurs any cost to defend his title, that cost must be compensated by the seller, with interest and reasonable attorney fees.
If enough people, or the courts, had insisted on such terms, we could have avoided the financial crisis of 2008 that almost collapsed the world economy, and which still threatens it. People have the power to prevent another world depression if they only demand non-fraudulent mortgages and other credit instruments at the inception. Speculative securitization could have been prevented had people made more educated choices, or gotten better legal advice.
If you are threatened with foreclosure, don’t fall for some of the schemes that some people are peddling. Yes, something like a quiet title action might work in a case where the deed of trust provides you some protections, or in a state that upholds the “best evidence rule”, but otherwise you are at the mercy of the lender and if the lender won’t renegotiate, you are better off saving your money and walking away and renting.