Form-of-the-Week: Trust Deed Listing – Exclusive Right to Sell a Note and Consent for Use of Electronic Documents and Digital Signatures – Form 112 and 109
Trust deed investments
Investors looking for higher yields with low risk often consider investing cash in trust deed notes with fixed interest rates during periods of stable consumer and asset (real estate) inflation expectations. A trust deed investor invests cash in a trust deed note by:
- making a loan evidenced by a note in favor of the investor and secured by a trust deed lien on real estate they qualify as adequate security for repayment on a default;
- buying an existing trust deed note held by another; or
- making a loan evidenced by a note in favor of the investor and collaterally secured by an existing note and trust deed held by the borrower.
A loan collaterally secured by an existing trust deed note is indirectly secured by real estate. This is a transaction a real estate broker or agent may arrange for a fee. If the collateralized loan becomes delinquent, the lender repossesses the trust deed note pledged to secure repayment, not the underlying real estate.
Here, the pledged trust deed note secured by the real estate is not in default. On repossession of the trust deed note due to a delinquency in the collateralized loan it secures, the lender becomes the holder and owner of the trust deed note repossessed to satisfy the collateralized loan.
Consider a carryback seller who holds a note and trust deed received on their installment sale of a property. The carryback seller wants to retain ownership of the note (as opposed to selling it to obtain funds). Thus, to borrow money, the holder of a trust deed note temporarily assigns the note and trust deed to a lender as collateral pledged to secure the loan, a process called hypothecation.
Thus, the sole security for the loan is the existing trust deed note — not the real estate. To document the collateralized loan transaction, the borrower signs and delivers to the lender a collateral note and security agreement as evidence of the debt owed and trust deed pledge arrangements. [See RPI Form 438]
The borrower also signs a security device and records it in the country where the real estate is located to give notice of the security link between the new loan and the existing trust deed note, called a Collateral Assignment of Deed of Trust (and note). [See RPI Form 446]
On a default in the collateralized loan, the lender repossesses the trust deed note which is the security for the loan. However, the lender does not foreclose on the underlying real estate which is security for the repossessed trust deed note.