Real Property 101 for Community Bankers in the Spilman Footprint

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What is the difference between a Deed of Trust and a Mortgage?
 
The terms “Deed of Trust” and “mortgage” are often used by people interchangeably. Both serve to give the lender a lien as collateral for a loan but, these liens are effected differently. Mortgages are used in more states (approximately 30) than Deeds of Trust, but Deeds of Trust are more common within Spilman’s Mid-Atlantic footprint. Focusing on this geographical region, the Deed of Trust is the preferred or required security instrument for real property in the following states: Maryland, North Carolina, Tennessee, Virginia and West Virginia. Mortgages are used in Kentucky, Ohio and Pennsylvania.
 
A Deed of Trust is a written instrument whereby the grantor (usually the borrower) conveys equitable title in real property (collateral) to a trustee for it to hold as security for the beneficiary (i.e., the lender) pursuant to the terms of the Deed of Trust. The borrower retains legal title to the real property. A Deed of Trust is recorded at the Register of Deeds in the county where the real property is located. A Deed of Trust typically involves three parties:

1.    the grantor (sometimes called the trustor or borrower),
2.    the lender (usually called the beneficiary), and
3.    the trustee (an independent third party).
 
When the debt is fully repaid, the Deed of Trust is marked as satisfied and thereby legal title to the real property is conveyed back to the borrower. Unlike a mortgage, a Deed of Trust can be foreclosed upon by the Trustee by judicial sale or power of sale.
 
A mortgage is a written instrument in which an owner of property gives a lien on the property to a lender as security for the payment and performance of loan obligations. The owner is the mortgagor and the lender is the mortgagee. The owner retains use of the property and the lien is removed when the loan is repaid. It is more akin to a Security Agreement than a Deed of Trust.
 
The following chart summarizes some of the key differences between a Deed of Trust and a mortgage.

 

Deed of Trust

Mortgage

Number of Parties

Three

Two

Who holds title during repayment

Third party trustee

Borrower holds title, but pledges it to the lender as security for the loan

Format of foreclosure sale

Power of sale or judicial sale

Judicial sale

 
Do I need to record my Deed of Trust or mortgage? How do I know whether I will have priority over subsequent purchasers?
 
The answers to these questions vary from one jurisdiction to the next, and can be determined by reviewing the state’s recording act. A recording act is a state law that determines which party prevails when the same property is transferred to multiple people. There are three types of Recording Acts:

1.    Pure Race,
2.    Pure Notice, and
3.    Race-Notice.
 
In a Pure Race jurisdiction, recordation of the deed is the only relevant factor. The party who records first is the party who prevails. North Carolina, Delaware and Louisiana are the only remaining Pure Race jurisdictions. Ohio has adopted a Pure Race statute for mortgages, but applies a Race-Notice statute to deeds and all instruments other than mortgages.
 
By contrast, in a Pure Notice jurisdiction, a subsequent bona-fide purchaser will prevail over an earlier purchaser if the earlier purchaser’s deed was not recorded and the subsequent purchaser did not know of the earlier transfer. A bona-fide purchaser is one who pays fair consideration for property without any knowledge or reason to have knowledge that the seller previously transferred the property to a different person. In a Pure Notice jurisdiction, notice is the only relevant factor. It does not matter if either party records. However, a subsequent purchaser will be charged with notice if a prior purchaser records.
 
Finally, in a Race-Notice jurisdiction, the rule allows a subsequent bona-fide purchaser to prevail over an earlier purchaser if the subsequent purchaser did not know of the earlier transfer and the subsequent purchaser’s deed was recorded before the first purchaser’s deed.
 
The following chart summarizes the recording statutes in effect in our footprint:

State

Statute

Type of Recording Act

Kentucky

Ky. Rev. Stat. Ann. § 382.270

Race-Notice

Maryland

Md. Code Ann., Prop., § 3-203

Race-Notice

North Carolina

N.C. Gen. Stat. § 47-20

Pure Race

Ohio

Ohio Rev. Code §§ 5301.23, 5301.25

Pure Race for mortgages, Race-Notice for deeds and other instruments except mortgages

Pennsylvania

21 Pa. Cons. Stat. § 351

Race-Notice

Tennessee

Tenn. Code Ann. §§ 66-26-105, 66-26-103

Race-Notice

Virginia

Va. Code Ann. § 55-96

Race-Notice

West Virginia

W. Va. Code §40-1-9

Race-Notice

How do the states in your footprint treat property owned by husband and wife?
 
Before jumping into an answer to this question, it is helpful to review a few common forms of real property ownership. The most familiar form of ownership is fee simple ownership. The owner of a fee simple interest owns title to the property and has absolute rights of use and possession of the property, subject to any easements, restrictions or other encumbrances on the title.
 
Another familiar form is the leasehold interest. A leasehold interest is created when the owner of a fee simple interest (the landlord) grants another party (the tenant) a temporary right to use and possess the property. The lease sets out the extent of these rights. When the term of the lease ends, these rights revert to the owner. It is possible to secure a loan with a leasehold interest but, the lease would need to be recorded in most, if not all, jurisdictions.
 
Where the property is held by two or more people, the form of ownership may be either:

1.    a tenancy in common,
2.    a joint tenancy, or
3.    a tenancy by the entirety.
 
A tenancy in common is a tenancy held by two or more people, in equal or unequal shares, each person having an equal right to possession over the entire property, but no right of survivorship. The term “right of survivorship” means a tenant’s right to succeed an estate upon the death of another tenant. In other words, in a tenancy in common, the share of the property held by the decedent will pass to the estate, and the heirs will become tenants in common with the surviving property owner.
 
A joint tenancy is a form of shared ownership, where each owner has an undivided interest in the property. This type of ownership creates a right of survivorship, which means that when one owner dies, the other owners absorb the deceased owner’s interest. To form a joint tenancy, each joint tenant must take his or her share at the same time, all joint tenants must acquire title by the same instrument, each joint tenant must have an equal interest in the property, and each joint tenant must have the right to possess the entire property.
 
Tenancy by the entirety is an interest in property that can be held only between a husband and wife in which each party has a right of survivorship over the property and which neither party can terminate without the consent of the other. Tenancy by the entirety requires all of the elements for a joint tenancy, plus marriage.
 
Turning now to our footprint, each state in our footprint, with the exception of West Virginia and Ohio, recognizes a grant of property to husband and wife as tenants by the entirety. In West Virginia, common law estates by the entirety have been abolished. When any joint tenant or tenant by the entireties of an interest in real or personal property dies, his or her share passes as if he or she had been a tenant in common. In Ohio, tenancies by the entirety were recognized by statute until 1985. Tenancies by the entirety created prior to that time remain valid. Conveyances to husband and wife with the right of survivorship from 1984 forward are recognized as a joint tenancy. In contrast, Kentucky, Maryland, North Carolina, Pennsylvania, Tennessee and Virginia each recognize tenancy by the entirety. Kentucky and Virginia, however, require that the right of survivorship and the intention to create a tenancy by the entirety must be clearly indicated in the devise. If the right of survivorship is not expressly provided for, any conveyance to as husband and wife is presumed to be as tenants in common.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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