I have a lot of questions about the difference between a deed of trust and a mortgage.

And also, what is the difference in a foreclosure?

I believe that all states allow mortgages. And some states allow Deeds of Trusts.

There is a legal difference that is mostly a technicality and I won't bore you with it. The real difference between the two has to do with the foreclosure method.

There are two foreclosure methods. One is judicial, or through the courts. The other is non-judicial.

Deeds of trust are generally foreclosed on through a non-judicial process. Each state is a little different, but generally in most situations a lender can foreclosure pretty quickly on a deed of trust. Here is how it works in California, for example:

The lender files a Notice of Default that is a public record and that hits your credit report if you are a borrower, as a "foreclosure notice" or something like that.

90 days later, the lender files a Notice of Trustee Sale, with a date and time of a public trustee sale.

About 3 weeks later, a third party trustee holds a public sale in a room somewhere, and the property is sold to the highest bidder.

The lender is automatically a bidder, and the amount you owe in total to that lender is the amount of their automatic bid, called a credit bid.

The trustee prepares a trustee's deed and this is recorded in the county where the property is located. This deed is evidence of ownership and the deed is made out to either the lender, if they ended up with the high bid (their credit bid was not topped by anyone), or by a bidder if someone bid higher than the lender's credit bid.

The process with judicial foreclosure is a bit more onerous. Basically, the lender files a lawsuit for foreclosure and records a notice of that foreclosure proceeding in the county records. This results in a lis pendens, a legal notice of litigation that affects the property.

If you want to contest the foreclosure, you have to file an answer. This is a legal process so your answer is filed at the courthouse. Then there is a hearing. And then there is a sale done by the court or by a third party acting under a court ordered power of sale.

Some states give the borrower a period to reclaim the property, called redemption, under certain circumstances. The judicial process often takes longer than the non-judicial foreclosure. And often, since the court is already involved, the lender ends up with a judgment against the borrower.

This judgment can be a money judgment often called a deficiency judgment.

Even in states like Nevada that generally use deeds of trust, a deficiency judgment can be obtained against a borrower. The lender does the non-judicial foreclosure, and then files a motion with the court. The court has not been involved up until now. But now the court grants the motion and this lets the lender get a deficiency judgment against the borrower.

What if a second mortgage or second deed of trust lender forecloses?

If the second forecloses, they end up in one of two scenarios:

Their "credit bid" lets them get the property back. Now they own the property but it still has the first mortgage or first deed of trust on it.

Or:

Someone outbids them and someone else ends up with the property as the new owner. Subject to the first mortgage which is still on it.

If the second lender wants to foreclose, they have to keep the first lender from foreclosing. The second lender, either the second mortgage holder or the second deed of trust holder, must make your payments for you to the first mortgage or first deed of trust holder. These payments are made for you and added to how much you owe, along with higher interest and charges for this "advance to the first" that they've made for you.
But let's see why that doesn't happen much these days. And why you may end up holding the bag for a big judgment for a second mortgage.

If the second lender is owed $50,000, and the first lender is owed $300,000, and the property is only worth $250,000, then the second lender has no equity and they won't foreclose. They don't want to have to spend money advancing money to the first, and then foreclosing. Because they'll end up with the property back and they'll be upside down! Why do they want to be upside down?? Talk about turning the tables!

So no, that doesn't happen.

Instead, the second mortgage (or deed of trust) lender will let the property go and their secured loan becomes an unsecured loan.

But you still owe the money to them.

And now they can pursue the borrower as the holder of a note that is unsecured, just like any other loan, credit card or debt that someone owes to an unsecured creditor.

So all the things that can be done against you if you don't pay your bills can be done by the second mortgage holder. They are an unsecured creditor, no different from a credit card debt you don't pay, or a medical bill you don't pay.

And if you care to learn more…

Please watch this video on short sales and foreclosures. This is a screen shot — just type in your email and I'll get you to the real video. It's geared to homeowners and Realtors who want to know everything they can about short sales.