In a nonjudicial foreclosure, the third party who normally handles the foreclosure process is called a "trustee." In theory, a foreclosure trustee is a neutral party, but the lender or loan servicer usually chooses the trustee, who is often affiliated with the lender or the lender’s attorney. Few states have laws addressing the neutrality of foreclosure trustees. So, trustees typically look out for lenders' interests, rather than borrowers' interests, in foreclosures because they have a financial incentive to do so.
A lender normally requires a borrower to sign either a mortgage or a deed of trust in a home loan transaction. This document creates a security interest in the borrower’s property. When you give a lender a security interest in your property, the property acts as collateral for the debt.
Lenders in some states, like Ohio and New York, use mortgages to create a security interests in properties. In other places, like California and Oregon, lenders use deeds of trust or a similar-sounding document. For example, in Georgia, the document that gives a lender a security interest in a property is called a "Security Deed."
Mortgages and deeds of trust tend to have many of the same general provisions. For example, most mortgages and deeds of trust require the borrower to have homeowners’ insurance and maintain the property in good condition. Also, both mortgages and deeds of trust give the lender the ability to sell the home through a process called foreclosure if the borrower fails to make payments or breaches the contract in some other way.
While mortgages and deeds of trust are similar in many ways, one significant difference between these documents is the parties involved. A deed of trust usually has three parties: the borrower, the lender, and a trustee. A mortgage, though, only involves two parties: a borrower and a lender.
The other major difference between mortgages and deeds of trust is how the foreclosure process works. Mortgages are ordinarily foreclosed judicially (though not always), while deeds of trust are often foreclosed nonjudicially.
Depending on state law, a trustee might be an individual, like an attorney, or a business entity, like a bank or a title company. Sometimes, state law limits who may act as a trustee in specific ways. For example, in Washington, foreclosure trustees must have a physical presence in the state by maintaining an office in the state with telephone service at such address.
The trustee comes into play if you fall behind in loan payments and go into foreclosure. Again, in states where lenders use deeds of trust or a similar instrument containing a power of sale clause, a lender may foreclose out of court in a process called a nonjudicial foreclosure. At trustee typically manages the nonjudicial foreclosure process.
Trustees are supposed to act as an impartial administrator in a nonjudicial foreclosure. The trustee isn't supposed to advocate for either side, and generally must use diligence and fairness when conducting the foreclosure. But because the lender usually chooses the trustee, who might also be affiliated with the lender or the lender’s attorney, trustees often have a financial incentive to represent the lender’s interests in a foreclosure.
If you’re facing a nonjudicial foreclosure and have questions about the trustee’s role in the process or you want to learn whether you have any defenses to the foreclosure, consider talking to a local foreclosure attorney where you live.