Deed of trust (real estate)

In real estate in the United States, a deed of trust or trust deed is

a deed wherein legal title in real property is transferred to a trustee, which holds it as security for
a loan (debt) between a borrower and lender. The equitable title remains with the borrower. The
borrower is referred to as the trustor, while the lender is referred to as the beneficiary.
DEFINITION OF A MORTGAGE DEED
A mortgage deed is a document in which the mortgagor transfers an interest in real estate to
a mortgagee for the purpose of providing a mortgage loan.
The mortgage deed is the evidence of the interest transferred to the mortgage holder. Often
simply referred to as the mortgage, the mortgage deed is the document transferred to the
mortgage holder.
When a real estate owner secures a loan through a mortgage, it is necessary for the owner to
transfer an interest in the property to secure the loan. The real estate interest transferred is the
right to retain a lien on the property, and the right to foreclose upon the lien if the mortgage is not
paid as agreed.
Bankruptcy
Bankruptcy helps people who can no longer pay their debts get a fresh start by liquidating assets
to pay their debts or by creating a repayment plan. Bankruptcy laws also protect financially
troubled businesses. This section explains the bankruptcy process and laws.

About Bankruptcy
Filing bankruptcy can help a person by discarding debt or making a plan to repay debts. A
bankruptcy case normally begins when the debtor files a petition with the bankruptcy court. A
petition may be filed by an individual, by spouses together, or by a corporation or other entity.
All bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy
Code.
There are different types of bankruptcies, which are usually referred to by their chapter in the
U.S. Bankruptcy Code.

Whats the difference between Chapter 7 and Chapter 13?

Chapter 7 bankruptcy is also known as total bankruptcy. Its a wipeout of many (or all) of your
debts. Also, it might force you to sell, or liquidate, some of your property in order to pay back
some of the debt. Chapter 7 is also called straight or liquidation bankruptcy. Basically, this is
the one that straight-up forgives your debts (with some exceptions, of course).
Chapter 13 bankruptcy is more like a repayment plan and less like a total wipeout. With Chapter
13, you file a plan with the bankruptcy court detailing how you will repay your creditors. Some
debts will be paid in full, some will be paid partially or not at all, depending on what you can
afford. Chapter 7 = wipeout. Chapter 13 = plan.

Chapter 7: Liquidation
Liquidation under a Chapter 7 filing is the most common form of bankruptcy. Liquidation
involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it
and distributes the proceeds to the creditors. Because each state allows for debtors to keep
essential property, Chapter 7 cases are often "no asset" cases, meaning that there are not
sufficient non-exempt assets to fund a distribution to creditors.[9][10]
United States bankruptcy law significantly changed in 2005 with the passage of BAPCPA, which
made it more difficult for consumer debtors to file bankruptcy in general and Chapter 7 in
particular.
Advocates of BAPCPA claimed that its passage would reduce losses to creditors such as credit
card companies, and that those creditors would then pass on the savings to other borrowers in the
form of lower interest rates. Critics assert that these claims turned out to be false, observing that
although credit card company losses decreased after passage of the Act, prices charged to
customers increased, and credit card company profits soared.[11]

Chapter 9: Reorganization for municipalities

A Chapter 9 bankruptcy is available only to municipalities. Chapter 9 is a form of reorganization,
not liquidation. Notable examples of municipal bankruptcies include that of Orange County,
California (1994 to 1996) and the bankruptcy of the city of Detroit, Michigan in 2013.

Chapters 11, 12, and 13: Reorganization

Bankruptcy under Chapter 11, Chapter 12, or Chapter 13 is more complex reorganization and
involves allowing the debtor to keep some or all of his or her property and to use future earnings
to pay off creditors. Consumers usually file chapter 7 or chapter 13. Chapter 11 filings by
individuals are allowed, but are rare. Chapter 12 is similar to Chapter 13 but is available only to
"family farmers" and "family fisherman" in certain situations. Chapter 12 generally has more
generous terms for debtors than a comparable Chapter 13 case would have available. As recently
as mid-2004 Chapter 12 was scheduled to expire, but in late 2004 it was renewed and made
permanent.

Chapter 15: Cross-border insolvency

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added Chapter 15 (as a
replacement for section 304) and deals with cross-border insolvency: foreign companies with
U.S. debts.

United States Trustee

The United States Attorney General appoints a separate United States Trustee for each of twentyone geographical regions for a five-year term. Each Trustee is removable from office by and
works under the general supervision of the Attorney General.[25] The U.S. Trustees maintain
regional offices that correspond with federal judicial districts and are administratively overseen
by the Executive Office for United States Trustees in Washington, D.C. Each United States
Trustee, an officer of the U.S. Department of Justice, is responsible for maintaining and
supervising a panel of private trustees for chapter 7 bankruptcy cases.[26] The Trustee has other
duties including the administration of most bankruptcy cases and trustees.[27] Under section 307
of title 11, a U.S. Trustee "may raise and may appear and be heard on any issue in any case or
proceeding" in bankruptcy except for filing a plan of reorganization in a chapter 11 case.[28]

The Automatic stay

Bankruptcy Code 362[29] imposes the automatic stay at the moment a bankruptcy petition is
filed. The automatic stay generally prohibits the commencement, enforcement or appeal of

actions and judgments, judicial or administrative, against a debtor for the collection of a claim
that arose prior to the filing of the bankruptcy petition. The automatic stay also prohibits
collection actions and proceedings directed toward property of the bankruptcy estate itself.
In some courts, violations of the stay are treated as void ab initio as a matter of law, although the
court may annul the stay to give effect to otherwise void acts. Other courts treat violations as
voidable (not necessarily void ab initio).[30] Any violation of the stay may give rise to damages
being assessed against the violating party.[31] Non-willful violations of the stay are often excused
without penalty, but willful violators are liable for punitive damages and may also be found to be
in contempt of court.
A secured creditor may be allowed to take the applicable collateral if the creditor first obtains
permission from the court. Permission is requested by a creditor by filing a motion for relief
from the automatic stay. The court must either grant the motion or provide adequate protection to
the secured creditor that the value of their collateral will not decrease during the stay.
Without the bankruptcy protection of the automatic stay creditors might race to the courthouse to
improve their positions against a debtor. If the debtor's business were facing a temporary crunch,
but were nevertheless viable in the long term, it might not survive a "run" by creditors. A run
could also result in waste and unfairness among similarly situated creditors.
Bankruptcy Code 362(d) gives 4 ways that a creditor can get the automatic stay removed.

Foreclosure
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a
borrower, who has stopped making payments to the lender, by forcing the sale of the asset used
as the collateral for the loan.[1]
Formally, a mortgage lender (mortgagee), or other lienholder, obtains a termination of
a mortgage borrower (mortgagor)'s equitable right of redemption, either by court order or by
operation of law (after following a specific statutory procedure).[2

The mortgage holder can usually initiate foreclosure at a time specified in the mortgage
documents, typically some period of time after a default condition occurs. Within the United

States, Canada and many other countries, several types of foreclosure exist. In the U.S., two of
them namely, by judicial sale and by power of sale are widely used, but other modes of
foreclosure[6] are also possible in a few states.

Judicial foreclosure
Foreclosure by judicial sale, more commonly known as judicial foreclosure, which is available in
every state (and required in many), involves the sale of the mortgaged property under the
supervision of a court, with the proceeds going first to satisfy the mortgage; then other lien
holders; and, finally, the mortgagor/borrower if any proceeds are left. Under this system, the
lender initiates foreclosure by filing a lawsuit against the borrower. As with all other legal
actions, all parties must be notified of the foreclosure, but notification requirements vary
significantly from state to state. A judicial decision is announced after the exchange of pleadings
at a (usually short) hearing in a state or local court. In some rather rare instances, foreclosures are
filed in federal courts.

Nonjudicial foreclosure
Foreclosure by power of sale, also known as nonjudicial foreclosure, is authorized by many
states if a power of sale clause is included in the mortgage or if a deed of trust with such a clause
was used, instead of an actual mortgage. In some states, like California and Texas, nearly all socalled mortgages are actually deeds of trust. This process involves the sale of the property by the
mortgage holder without court supervision (as elaborated upon below). This process is generally
much faster and cheaper than foreclosure by judicial sale. As in judicial sale, the mortgage holder
and other lien holders are respectively first and second claimants to the proceeds from the sale.

Strict foreclosure
Other types of foreclosure are considered minor because of their limited availability. Under strict
foreclosure, which is available in a few states including Connecticut, New Hampshire and
Vermont, suit is brought by the mortgagee and if successful, a court orders the defaulted
mortgagor to pay the mortgage within a specified period of time. Should the mortgagor fail to do
so, the mortgage holder gains the title to the property with no obligation to sell it. This type of
foreclosure is generally available only when the value of the property is less than the debt
("under water"). Historically, strict foreclosure was the original method of foreclosure

Strict foreclosure/judicial foreclosure

In the United States, there are two types of foreclosure in most states described by common law.
Using a "deed in lieu of foreclosure," or "strict foreclosure", the noteholder claims the title and
possession of the property back in full satisfaction of a debt, usually on contract.
In the proceeding simply known as foreclosure (or, perhaps, distinguished as "judicial
foreclosure"), the lender must sue the defaulting borrower in state court. Upon final judgment
(usually summary judgment) in the lender's favor, the property is subject to auction by the
county sheriff or some other officer of the court. Many states require this sort of proceeding in
some or all cases of foreclosure to protect any equity the debtor may have in the property, in case
the value of the debt being foreclosed on is substantially less than the market value of the real
property; this also discourages a strategic foreclosure by a lender who wants to obtain the
property. In this foreclosure, the sheriff then issues a deed to the winning bidder at auction.
Banks and other institutional lenders may bid in the amount of the owed debt at the sale but there
are a number of other factors that may influence the bid, and if no other buyers step forward the
lender receives title to the real property in return.

Nonjudicial foreclosure
Historically, the vast majority of judicial foreclosures have been unopposed, since most
defaulting borrowers have no money with which to hire counsel. Therefore, the U.S. financial
services industry has lobbied since the mid-19th century for faster foreclosure procedures that
would not clog up state courts with uncontested cases, and would lower the cost of credit
(because it must always have the cost of recovering collateral built-in).[citation needed] Lenders have
also argued that taking foreclosures out of the courts is actually kinder and less traumatic to
defaulting borrowers, as it avoids the in terrorem effects of being sued.[citation needed]
In response, a slight majority of U.S. states have adopted nonjudicial foreclosure procedures in
which the mortgagee (or more commonly the mortgagee's servicer's attorney, designated agent,
or trustee) gives the debtor a notice of default (NOD) and the mortgagee's intent to sell the real
property in a form prescribed by state statute; the NOD in some states must also be recorded
against the property. This type of foreclosure is commonly referred to as "statutory" or
"nonjudicial" foreclosure, as opposed to "judicial", because the mortgagee does not need to file
an actual lawsuit to initiate the foreclosure. A few states impose additional procedural
requirements such as having documents stamped by a court clerk; Colorado requires the use of a
county "public trustee," a government official, rather than a private trustee specializing in

carrying out foreclosures. However, in most states, the only government official involved in a
nonjudicial foreclosure is the county recorder, who merely records any pre-sale notices and
the trustee's deed upon sale.

Acceleration
Acceleration is a clause that is usually found in Sections 16, 17, or 18 of a mortgage. Not all
accelerations are the same for each mortgage, as it depends on the terms and conditions between
lender and obligated mortgagor(s). When a term in the mortgage has been broken, the
acceleration clause goes into effect. It can declare the entire payable debt to the Lender if the
Borrower(s) were to transfer the title at a future date to a purchaser. The clause in the mortgage
also instructs that a notice of acceleration must be served to the obligated mortgagor(s) who
signed the Note. Each mortgage gives a time period for the debtor(s) to cure their loan. The most
common time periods allot to debtor(s) is usually 30 days, but for commercial property it can be
10 days. The notice of acceleration is called a Demand and/or Breach Letter. In the letter it
informs the Borrower(s) that they have 10 or 30 days from the date on the letter to reinstate their
loan. Demand/Breach letters are sent out by Certified and Regular mail to all notable addresses
of the Borrower(s). Also in the acceleration of the mortgage the lender must provide a payoff
quote that is estimated 30 days from the date of the letter. This letter is called an FDCPA (Fair
Debt Collections Practices Acts) letter and/or Initial Communication Letter. Once the
Borrower(s) receives the two letters providing a time period to reinstate or payoff their loan the
lender must wait until that time expires in to take further action. When the 10 or 30 days have
passed that means that the acceleration has expired and the Lender can move forward with
foreclosing on the property.

Mortgage underwriting in the United States

Mortgage underwriting in the United States is the process a lender uses to determine if
the risk of offering a mortgage loan to a particular borrower under certain parametersis
acceptable. Most of the risks and terms that underwriters consider fall under the three Cs of
underwriting: credit, capacity and collateral.

To help the underwriter assess the quality of the loan, banks and lenders create guidelines and
even computer models that analyze the various aspects of the mortgage and provide
recommendations regarding the risks involved. However, it is always up to the underwriter to
make the final decision on whether to approve or decline a loan.

Credit reports
Credit is what the underwriter uses to review how well a borrower manages his or her current
and prior debts. Usually documented by a credit report from each of the three credit
bureaus, Equifax, Transunion and Experian, the credit report provides information such as credit
scores, the borrowers current and past information about credit
cards, loans,collections, repossession and foreclosures and public records (tax
liens, judgments and bankruptcies). Typically, a borrowers credit is highly related to the
probability that the loan will go into default (failure to make monthly installments).
In reviewing a credit report, the credit score is considered. The credit score is an indicator of how
well a borrower manages debt. Using a mathematical model, the data regarding each item on the
credit report is used to produce a number between 350 and 850, known as the credit score.
Higher scores represent those with less risk. When lenders refer to a representative credit score,
they are referring to the median score. When multiple borrowers are involved typically the
borrower with lowest median score is the one that is considered the representative credit score.
Other loan programs may consider the person that earns the most money, also known as the
primary wage earner, that has the representative credit score. On many loan programs there are
minimum score guidelines.
The most influential aspect of the credit report is quality of the credit on a persons current
housing. For an example, if the borrower already has a mortgage, whether or not the borrower
has paid that mortgage on time is indicative of how well they will pay in the future. This also
holds true with people that rent. A lender will typically analyze the most recent 1224 months of
the borrowers housing history (also called Listing History). Delinquencies during that time
period are usually unacceptable.
In addition, the history of payment of loans and revolving credit is considered. A lender may
require that a certain number of deposit accounts be opened for at least 24 months and have
recent activity with on time payments to build a pattern of responsible use of credit.

The credit report also contains the borrowers past derogatory credit. This
include collections, charge offs, repossession, foreclosures, bankruptcies, liens and judgments.
Typically, if any of these items are present on the report, it increases the risk of the loan. For
more serious blemishes such as foreclosures and bankruptcies, a lender may require up to two to
seven years from the date of satisfaction indicated by the report before approving a loan.
Furthermore, the lender may require the borrower to reestablish the credit by obtaining a certain
amount of new credit to rebuild their credit. It is also the prerogative of the lender to require that
all collections, charge offs, liens and judgments be paid prior to closing the loan.

Income analysis
Capacity refers to the borrowers ability to make the payments on the loan. To determine this,
the underwriter will analyze the borrowers employment, income, their current debtand
their assets.
While reviewing the borrowers employment, the underwriter must determine the stability of the
income. People who are employed by a company and earn hourly wages pose the lowest
risk. Self-employed borrowers pose the highest risk, since they are typically responsible for the
debt and well-being of the business in addition to their personal
responsibilities. Commission income also carries similar risks in the stability of income because
if for any reason the borrower fails to produce business, it directly influences the amount of
income produced. Usually if self-employment or commission income is used to qualify for the
mortgage, a two year history of receiving that income is required. Although a bonus (sometime it
is indicated as "incentive pay" by many corporations) is part of the paystub income, a two-year
employer verification is also required.
Documentation of the income also varies depending on the type of income. Hourly wage earners
who have the lowest risks usually need to supply paystubs and W-2 statements. However, selfemployed, commissioned and those who collect rent are required to provide tax
returns (Schedule C, Schedule E and K-1). Retired individuals are required to prove they are
eligible for social security and document the receipt of payments, while those who receive
income via cash investments must provide statements and determine the continuance of the
income from those payments. In short, the underwriter must determine and document that the
income and employment is stable enough to pay the mortgage in years to come.

Collateral
Collateral refers to the type of property, value, the use of the property and everything related to
these aspects. Property type can be classified as the following in the order of risk from lowest to
highest: single family residence, PUD, duplex, townhouse, low rise condominium, high
rise condominium, triplex and four-plexes and condotels. Occupancy is also considered part of
collateral. A home can be owner occupied, used as second home or investment. Owner occupied
and second homes have the least amount of default, while investment properties have higher
occurrences of default. Depending upon the combination of occupancy and type of collateral, the
lender will adjust the amount of risk they are willing to take.
Besides occupancy and property type, value is also considered. It is important to
realize price, value and cost are three different characteristics of a home. Price is the dollar
amount that a seller agrees to sell a house to another party. Cost is the dollar amount needed to
build the home including labor and materials. Value, which is usually the most important
characteristic, is the dollar amount that is supported by recent sales of properties that have
similar characteristics, in the same neighborhood and appeal to a consumer. Under fair marketing
circumstances when the seller is not in distress and the housing market is not under volatile
conditions, price and value should be very comparable.

Automated underwriting
Fannie Mae and Freddie Mac are the two largest companies that purchase mortgages from other
lenders in the United States. Many lenders will underwrite their files according to their
guidelines, but to ensure the eligibility to be purchased by Fannie Mae and Freddie Mac,
underwriters will utilize what is called automated underwriting. This is a tool available to lenders
to provide recommendations on the risk of a loan and borrower and it provides the amount of
documentation needed to verify the risk.
It is important to remember that the approval and feedback is subject to the underwriter's review.
It is also the responsibility of the underwriter to evaluate the aspects of the loan that is beyond
the scope of automated underwriting. In short, it is the underwriter that approves the loan, not the
automated underwriting.
On the other hand, automated underwriting has streamlined the mortgage process by providing
analysis of credit and loan terms in minutes rather than days. For borrowers it reduces the
amount of documentation needed and may even require no documentation

of employment, income, assets or even value of the property. Automated underwriting tailors the
amount of necessary documentation in proportion to the risk of the loan.
Reduced documentation
Many banks also offer reduced documentation loans which allows a borrower to qualify for a
mortgage without verifying items such as income or assets. Naturally these are higher
risk loans and often come with higher interest rates. Because less documentation is provided on
the capacity of the borrower, there is a high emphasis on the credit andcollateral. To mitigate the
risk of reduced documentation loans, lenders will often not lend to higher LTVs and limit the
loans to smaller loan amounts, compared to loans that are fully documented.

Approval decision
After reviewing all aspects of the loan, it is up to the underwriter to assess the risk of the loan as
a whole. Each borrower and each loan is unique and many borrowers may not fit every guideline.
However, certain aspects of the loan may compensate for the lack in other areas. For an example,
the risk of high LTVs can be offset by the presence of a large amount of assets. Low LTVs can
offset the fact that the borrower has a high debt to income ratio and excellent credit can
overcome the lack of assets.
In addition to compensating factors, there is a concept known as layering of risk. For an
example, if the property is a high rise condo, occupied as an investment, with a high LTV and a
borrower who is self-employed, the cumulative effect of all these aspects yields higher risk.
Though the borrower may meet all requirements under the guidelines of the loan program, the
underwriter must exercise caution.
There is an old saying in lending: If your portfolio does not have one foreclosure, you are not
accepting enough risk. Underwriters should review a loan from a holistic point of view;
otherwise they may turn down a loan that is high risk in one aspect but low risk as a whole.
IT systems
Banks generally use IT systems available from various vendors to record and analyze the
information, and these systems have proliferated.[1] Here's a primer on what many of them mean.
These include the "loan origination system" (also called a loan operating system) (LOS) as well
as other tools such as Fannie Mae and Freddie Mac's automated underwriting systems the

"Desktop Underwriter" and "Loan Prospector".Examples of LOSs are CreditPath by Davis +

Henderson and Fiserv's UniFi PRO.[2]