In some states, homeowners facing foreclosure might find that a trustee is involved in the process. To understand what a foreclosure trustee is and the trustee’s part in the foreclosure, homeowners must first understand the main documents they signed when they bought their home: the promissory note and mortgage (or deed of trust).
Too often, home buyers are rushed through closing, signing a flurry of papers without getting a fair explanation of what’s in the documentation. But once you fully understand the paperwork, you can then understand the role of a foreclosure trustee.
Primary Documents in a Home Loan Transaction
In a home loan transaction, a lender typically requires a borrower to sign a promissory note and a security instrument, either a mortgage or a deed of trust or a similarly named document.
Promissory Notes
When asked what document creates a home loan, many homeowners’ first answer is likely to be “the mortgage.” In reality, the promissory note defines the loan terms, including the amount of principal, interest rate, length of the loan (frequently called the “term”), monthly payment amount, and other details.
The promissory note creates the obligation for the homeowner to pay back the loan.
Security Instruments: Mortgages and Deeds of Trust
Mortgages and deeds of trust are similar because they’re both agreements in which a borrower puts up the title to real estate as security (collateral) for a loan. But these documents differ in two major ways:
A Deed of Trust Involves a Trustee (Mortgages Don't)
A mortgage has two parties: a borrower and a lender. However, a deed of trust has three parties: a borrower, a lender, and a trustee.
Depending on state law, the trustee might be an individual, like an attorney, or a business entity, like a bank, title company, or a trustee company. The trustee gets legal title to the secured property when the loan is taken out and holds it until the borrower pays the debt in full. If, however, the borrower doesn’t repay the loan, the trustee carries out a foreclosure.
Deeds of Trust Are Foreclosed Out of Court With a Trustee Handling the Process
Mortgage foreclosures go through court with an attorney managing the foreclosure. But in states where lenders use deeds of trust, the deed of trust gives the trustee the authority to sell the home through a nonjudicial foreclosure if the borrower defaults (fails to make payments).
The trustee handles the nonjudicial foreclosure process( at the lender's request) by preparing the foreclosure documentation, filing it in the land records, and holding the sale. Also, if the borrower wants to get caught up on the loan or repay the debt in full to stop the foreclosure, the trustee deals with the reinstatement or payoff process.
Trustees: Neutral Administrators of the Foreclosure Process?
State law typically requires trustees to act impartially in foreclosures. So, hypothetically, the trustee is a neutral third party. In reality, most trustees are hired by the lender and therefore have a financial interest in favoring the lender. Trustees are often attorneys that also represent the lender in other matters or who are affiliated with the lender’s attorneys in some other way.
Because the lender selects the trustee, which makes money from handling foreclosures, the trustee mostly looks out for the lender’s interest (not the homeowner’s interest) in a foreclosure.
Getting Help With Foreclosure
If you’re facing a nonjudicial foreclosure and having trouble getting information from the trustee, like a reinstatement or payoff quote, consider talking to a local foreclosure attorney. An attorney can also advise you about how foreclosure works in your state and let you know if you have any defenses to the foreclosure.
If you need help working out an alternative to foreclosure, like a loan modification, consider contacting a HUD-approved housing counselor.