There are two general ways that mortgages are structured. The structure affects how the foreclosure procedures are performed should you not make your mortgage payments. In title theory states, the lender owns the property and deeds it back to the borrower when the loan is repaid. In lien theory states, the borrower owns the property and the lender has a lien on it. Title theory states are more commonly found in the eastern part of the country, with more lien theory states in the western United States.
In either a title theory state or lien theory state, the general effect is the same. The lender’s rights in the property are only for the purpose of securing the loan. If the borrower abides by the terms of the note and mortgage, the lender has no right to interfere with the borrower’s use and enjoyment of the property.
Note: There is a third way mortgages are structured, which is a hybrid of title theory and lien theory. It is called the intermediary theory. In an intermediary theory state, the borrower has title, but the lender can take title if there is a default.
A lien is the interest a creditor has in your property. It secures the debt and gives the creditor the legal right to take your property if you fail to meet the terms of your debt agreement. A lien is not a bad thing in and of itself, though, because without the protection liens give lenders, far fewer loans would be made.
The differences in the theories may become important when the borrower fails to abide by the terms of the mortgage loan. The foreclosure process varies from state to state, with some state laws being more favorable to the borrower and some to the lender. Since state laws control the real property located within that state, every person must follow the laws of his or her particular state.