“ThernHistorical Origins of America’s Mortgage Laws” by Andra Ghent, AssistantrnProfessor of Real Estate and Arizona State University’s W.P. Carey School of Business, examines the differing legalrnframeworks for foreclosures, redemption rights, and deficiency judgments in differentrnstates and focuses on how and when they came into existence.  </p

Ghent saysrnthat differences between title theory and lien theory underlie many of the differences from state to state.  Ifrna state follows title theory, the lender retains title to the property until such time as the borrower pays off the mortgage while under lien theory, the borrower owns the property during the duration of the mortgage and the lender’s interest in the property is limited to situations in which the borrower defaults on the mortgage. </p

Despite at least four distinct attempts over the last century to create a uniform mortgage code the author says mortgages today continue to be governed by a very diverse set of state laws with older states much more likely tornhave adopted title theory from the English system.  There is some tentative evidence that titlerntheory may also have a role in circumventing usury law.</p

States also differ in whether the standard real estate security instrument is a mortgage or a deed of trust. With the latter the legal title to the property is entrusted to a third party known as the trustee. Unlike a mortgage where there are only two parties, there are three parties in a deed- of-trust transaction and the trustee sells the property if the borrower defaults. In states that follow the lien theory of mortgages, the equitable title nevertheless remains with the borrower. The main reason some states use a deed of trust rather than a mortgage is because, when lenders began including power-of-sale clauses into mortgages, some judges viewed it as improper for the lender himself to be able to sell the property.</p

Some states require the lender to go to court and receive a judge’s approval to foreclose while in others the lender may sell the property himself if the mortgage contains a power-of-sale clause or, in the case of a deed of trust the trustee is obliged to sell the property on the lender’s behalf. States that allow the lender to sell the property without a judge’s approval are known as nonjudicial foreclosure states. </p

Another state by state variation is in redemption rights</bwhich allowrnthe borrower to redeem the property by paying off the entire balance of the mortgage. A redemption period isrnthe time frame during which the borrower has redemption rights. Whenrnthe period precedes the foreclosure sale they arernequitable redemption rights; when they follow they are known as statutory redemption rights. Because statutory redemption rights cloud the title of the property for prospective buyers at the foreclosure auction, they are arguably more problematic for lenders than equitable redemption rights. </p