LIEN Theory vs. TITLE Theory

There are two methods in the United States to secure loans made for the purchase of real property. In the first five parts of this Tutorial, we really have been focusing on the first method known as Lien Theory. In Lien Theory states, the real property is pledged, that is, mortgaged, to the lending institution, which has a lien on the real property. Any purchaser of the property takes subject to the lien. (With the advent of the credit rating system, banks now insist on being paid off before the property is sold. This is known as a “due on sale” clause” which requires the seller to pay off the bank before the property can be conveyed.)

The second method is called Title Theory. In Title Theory states, the buyer of the property actually conveys the property to a third party to hold in trust. The conveyance document is called a Deed-In-Trust. The Deed-In-Trust simultaneously accomplishes two things:

1) The property is conveyed to a third-party Trustee who holds the property in trust. Namely, the Trustee is the owner-in-title of the property.
2) The property is the security against the debt. Should the owner/buyer default in paying the debt, the 3rd party trustee transfers the property to the Lender, which is the “beneficiary” of the trust.
Here is a diagram demonstrating the two transactions:

Land: Debt:
Buyer owner-in-equity Lender “beneficiary”
⇓ ⇓ ⇓ ⇓

Now we have multiple problems to solve: Who is the mortgagee – the Lender or MERS? How can MERS, as owner-in-title of the security interest call itself the “beneficiary” when the Lender, for the last 300 years, was the “beneficiary” of the deed-in-trust? In fact, how can MERS call itself the “beneficiary” when MERS is never the beneficiary – only the owner-in-title!!!

To sort out this mess, we need to take three steps to clarify the terms in use.