To properly secure property two instruments are needed:

1. A Promissory Note
2. A Mortgage or (Deed of Trust)

The Promissory Note is between the obligor (borrower)and the obligee (lender) and it must have the following six features in order to be valid:

1. Identify the parties.
2. Be in writing.
3. Include the promise to pay.
4. Terms of payment.
5. Signed by the borrower.
6. Delivered by the borrower and accepted by the Lender. (It should include the rate of interest to be charged).

The "principal" is the amount of the total obligation in the note without regard to interest or penalties. The so called "prepayment privilege" allows the borrower to pay off the loan without penalty. A less desirable feature for the borrower is the "acceleration clause" that permits the lender to demand immediate payment of the entire balance if the borrower misses even a single payment. It is critical that the borrower sign the note since he is the party sought to be charged. Sometimes the borrower is referred to as the "maker" of the note.

Hypothecation is the term which describes the borrower's right to maintain possession of the property even though it serves as collateral for the note. (The opposite of hypothecation is pledging, whereby possession is given up). The "mortgagor" is the borrower and the mortgagee is the lender.

An important provision of the mortgage is the "defeasance clause" which states the basis upon which the mortgage will be defeated. Normally this is when the note is paid in full. Important covenants that almost always appear in the mortgage are:

1. Pay taxes
2. Promise against removal
3. Insurance
4. Good repair (cannot commit waste)
5. Acceleration Clause

The "due-on sale clause" gives the lender the right for full payment whenever the property is sold or otherwise transferred. This is also sometimes referred as an alienation clause. This prevents the borrower from allowing the purchaser to assume their loan.

If the mortgage property should ever be taken by eminent domain the "condemnation clause" provides that the lender has first right to the proceeds in order to satisfy the note. When the note is paid, the lender will execute a document called satisfaction of mortgage which is essentially a release of the mortgage instrument. Mortgages must be recorded if they are to be effective against subsequent claims. Also the release of the mortgage must be recorded as well. A "partial release" is a practice whereby the lender will permit a partial sale of the encumbered property without the mortgage lien.

It is important to distinguish between someone who takes "subject to" the mortgage, assumes the mortgage and the "novation". If there is no due-on-sale clause the borrower can sell his property and allow the buyer to take "subject to" the remaining mortgage. However, the borrower remains personally liable for the loan. If the buyer "assumes" the existing mortgage with the approval of the lender, the buyer becomes personally obligated. Then the lender will look to the buyer first upon default. However, if the buyer does not pay, the borrower will still be liable. The best approach is the novation whereby the lender agrees to substitute the buyers liability and to totally release the borrower from any personal liability on the note.

There may be various mortgages or encumbrances on property. The certificate of reduction describes how much of the loan remains to be paid and the estoppel certificate is a sworn statement where the borrower states the amount owed and the interest rate. The first mortgage to be recorded has the most priority and the debt with the highest priority is always satisfied first. Hence, it is referred to as a "senior mortgage" and a lower priority instrument is referred to as "junior mortgage". If a lender voluntarily accepts a lower priority this is referred to as subordination. The chattel mortgage is a debt secured by personal property.

Foreclosure occurs when a borrower becomes delinquent on a loan. The judicial foreclosure has three key features:

1. The defendants interest in the property are terminated.
2. The property is sold at public auction.
3. The lender debt is satisfied from the sale.

Junior mortgage holders participate as defendants in a foreclosure action by filing a surplus money action. The notice of lis pendens is filed in the County records to inform the public that a law suit has been filed against this property. An important privilege held by the borrower is his "equity of redemption" which allows him to pay the delinquent amounts due up to and including the time the property goes on sale. He has to pay off all amounts due including penalties and interest. Note, that the lender can "bid the loan" which means that no payment will be required from him up to the amount of the debt. A deficiency judgement is required when the auction of the property doesn't bring enough proceeds to satisfy the debt. The deed obtained by the buyer at a public auction is referred to as a referees deed or a sheriff's deed.

The power of sale clause permits the lender to foreclose on the property without having to go to court. It requires a notice of default to be placed of record, a waiting period, public advertisements and finally a sale to the public at auction. A statutory equity of redemption permits the defaulting borrower to redeem the property for a reasonable period of time even after the public auction. Again, he must pay all costs, loans, etc.

The "deed in lieu of foreclosure" is a unique instrument whereby the borrower voluntarily conveys the mortgage property back to the lender instead of requiring a full foreclosure proceeding. This is sometimes referred to as the "friendly" foreclosure and should always be accompanied by a full release.

The installment land contract is the instrument whereby the seller retains interest in the property by not conveying a deed. Foreclosure under this arrangement can sometimes be onerous and States including Maryland have enacted laws to protect the borrower. For example, in Maryland there is a 40% rule whereby the borrower who obtains an equity position of 40% can require the seller to convey a proper deed to the property.

The deed of trust instrument is somewhat different from a mortgage but has the exact same purpose or use. In Maryland, the deed of trust is the most commonly used instrument. The parties to the deed of trust are the borrower (trustor), the lender (beneficiary), and the third party (trustee). The borrower conveys title to the trustee which holds it in trust until the promissory note is paid in full. The title that the trustee holds is sometimes referred to as "naked title" or "bare title".

Upon default, the trustee is instructed to utilize the "power of sale" clause always included in a deed of trust and to sell the property without the necessity of going to court. A trustee can be an individual or corporation, however, a corporation trustee is generally more reliable. The power of sale clause gives the trustee the right to foreclose and sell the property and convey ownership to the purchaser. However, this does not mean that the trustee might not want to use a judicial foreclosure in certain circumstances. This may be when there are several parties involved and/or multiple mortgages or liens on a property that must be satisfied.

When the promissory note is satisfied, the lender sends the note, and deed of trust to the trustee instead of the borrower. This includes a "request for reconveyance" whereby the trustee conveys all interest to the borrower or issues a release deed.

The power of sale foreclosure is strictly construed by law and must be complied with as follows:

1. Default must be proved
2. Public record notice
3. All waiting periods complied with
4. Public advertising of public auction
5. Properly held public auction must be held
6. Trustee deed used to transfer title

As is the case with any foreclosure sale the proceeds first pay the expenses of the sale, then the lender, then junior claims and if there is any amount left over it goes to the borrower.

The key advantages to a deed of trust are as follows:

1. Upon default the lender can direct the trustee to take possession and protect the property from waste.
2. Foreclosure can take place promptly.
3. The power of sale clause is faster and less expensive than a court proceeding.
4. The trustee himself has the right to convey title after a foreclosure sale.
5. So long as the power of sale provisions and local laws are followed, the statutory equity of redemption is cut off subsequent to a proper sale.