Cue the national anthem.

Thanks Carrie, I knew you’d win Idol from day one. Now we can begin. Home ownership is part of the American dream, a necessary ingredient to health, happiness and prosperity. As Delmar O’Donnell famously said in the Coen Brothers classic, O’ Brother Where Art Thou?, “You ain’t no kinda man if you ain’t got land.”

Perhaps Delmar overstated a touch, but the point remains: Americans take pride in owning their homes. They buy fertilizer to make the grass greener, perform all variety of fixer upper type jobs for all sorts of different reasons. In the spring, tulips. In the winter, shiny lights. You get the idea.

But wait. What if, despite all appearances to the contrary, that tidy, freshly painted bungalow was owned by the bank and not by John and Jane Homeowner?

I know what you’re saying (or thinking). Yeah, yeah, we get it, the housing market is in shambles, foreclosure rates are high. Enough already! Stop kicking a dead horse, how much more bad news can we take? We enjoy reading this blog despite the fact that it discusses bankruptcy every single day. Don’t push us any further. We know John and Jane. They’re lovely people who have great jobs and 2.3 kids. They’re current on their mortgage, save the lecture. They own their home. Choose a more uplifting topic, perhaps creditor harassment. It’s been awhile since you wrote about adversary lawsuits or whatever. Go back to that, really can’t wait (eyes roll).

Well, sorry folks, I’m not talking about the housing crisis, I’m talking about an interesting particularity of state property law that can affect the speed of foreclosure and whether you technically own your home.

Lien Theory States vs. Title Theory States

For homes encumbered by a mortgage, there are two basic theories of ownership under the various state property laws. In lien theory states, the borrower owns title to their home despite the outstanding mortgage obligation. The borrower, in a lien theory state, holds the deed while they’re making mortgage payments. They’re considered homeowners even though the bank has a security interest in their property. Good news for John and Jane.

Title theory states operate differently. In a title theory state, the borrower receives a deed to their home, however, they don’t actually keep title to the property during the loan term. In exchange for financing, the title theory borrower agrees to allow the lender to hold the deed in trust pending payment of the loan. The borrower has the right to use the home, cut the grass, plant the tulips etc. but they won’t actually own the home until the mortgage has been paid and the lender releases the deed. Bad news for John and Jane.

These competing ownership theories have a big impact on state foreclosure law. Lien theory states, who see the borrower as the rightful owner,  make it harder for a lender to foreclose, usually requiring court oversight of the entire process. By contrast, title theory states, who view the property as already technically owned by the lender, make it much easier to foreclose through a more informal sale at the courthouse steps after a basic notice period. The point is not as much whether you own your home as much as whether your state legislature believes you own your home. Their attitudes shape policy, which in turn impacts your day to day comings and goings.

Modern Trends

In states where the deed of trust is prevalent, buyers will receive title from sellers and then sign a deed of trust with their mortgage lender as beneficiary. The borrower owns clear title to the property subject to terms of the deed of trust. In the background, a third party trustee is authorized to sell the property if the terms of the deed of trust aren’t met. The deed is literally “held in trust” until the loan is satisfied. When the loan has been paid off, the lender will record a deed of re-conveyance, which grants the borrower clear title. The deed of trust system operates in a very similar fashion to the title theory state.

In intermediate theory states, title remains with the borrower until default.

Although these distinctions are largely academic, be sure to check with your attorney to verify the current practice in your state.