Title Theory vs. Lien Theory

The more you search for the difference between title theory and lien theory online, the less you’ll know. If you search for whether your state is a lien theory or title theory state, you’ll find an equal number of articles saying it’s lien theory as you’ll find saying it’s title theory. Of course, you can find anything you want online, but why is something that seems black-and-white so poorly understood? This topic is a fascinating example of how facts can become distorted and amplified the more articles are written about them, and as legal language shifts over time.

The original context of the terms “lien theory” and “title theory” focused on whether the borrower in a mortgage was more like a tenant or an owner. In this context, “title theory” treated the borrower as a tenant living in the lender’s property, while “lien theory” saw the lender as having a lien on the borrower’s property.

William H. Lloyd, in the 1923 edition of The Yale Law Journal, describes the lien theory of mortgages as a relatively “new theory.” This article, titled “Mortgages-The Genesis of the Lien Theory” references the old English common law mortgage, in which the borrower’s rights in the mortgaged property were “in some respects less than a tenant….”¹ Thus, the old legal doctrine was that the lender owned the property, and the borrower was more like a renter who only gained ownership rights after payment of the entire mortgage. The lien theory then developed in defiance of this doctrine, and was based on the new idea that the borrower had all rights of ownership in the property, so long as they made timely payments on their loan. Thus, lien theory developed as a way to give the borrower almost all ownership rights, instead of the lender.

In the present day, no state in the country operates under “title theory” in the way this term was originally construed; nowhere in the United States is the borrower treated mostly as a renter in their mortgaged property.

In the present day, when a borrower takes out a loan and the lender holds legal title, the rights of the lender are extremely limited; the lender only may sell the property in the very specific circumstance that the borrower defaults on the loan. In every other respect, the borrower is the owner–not the renter–of the property. In an early 20th century case in Virginia, the court phrased this perfectly, saying that the borrower has all benefits of ownership, and the lender has only “the bare legal title to the property conveyed” and has “no beneficial interest therein.” ²

As this ruling demonstrates, even when the borrower does not hold the legal title to the property, the lender (or trustee) has almost no rights whatsoever in the property; the lender/trustee only has the right to sell the property in the specific event that the borrower defaults on the loan. All states in the U.S. give rights of ownership to the borrower on a loan, except in the limited circumstance that the borrower defaults. The original definition of “lien theory,” as described earlier in the 1923 edition of The Yale Law Journal, was that the borrower had almost all rights of ownership, and the lender only had a lien on the property. Thus, all states in the present day would be considered “lien theory” by this early definition of this term.

So why are there all these lists online distinguishing between title theory states and lien theory states? This is because “title theory” now commonly describes only one specific aspect of a mortgage, which is how it is foreclosed. As Rocket Mortgage describes, “the main difference between title and lien theory is seen when foreclosure proceedings happen.”³ In the present day, the defining characteristic of lien theory vs. title theory relates solely to foreclosure. For example, “Massachusetts is a title theory state with nonjudicial foreclosure (rather than a lien theory state)” according to Dr. Singer of the Harvard Law School.⁴ 

In lien theory states, if a borrower defaults on their mortgage, the lender has to go to court to ask permission to initiate foreclosure. By contrast, in title theory states, the lender has the right to nonjudicial foreclosure; that is, the lender does not have to ask the court for permission to foreclose on the loan. In these title theory states, the lender has the title right of sale without going to court, but has no other ownership rights in the property. This title right of sale that the lender holds applies only if the borrower defaults on the loan; in no other circumstance can the lender take the property from the borrower and sell it.

Though the terms “title theory” and “lien theory” have changed significantly, and now really only describe foreclosure, this definition seems fairly straightforward… right? Wrong! We’re just getting started with the confusion and complexity relating to title/lien theory.

As we’ve just described, in states that are lien theory, the lender must go through the court system to foreclose on a mortgage. This is expensive and time-consuming for the lender. Thus, in these states, lenders generally do not use mortgages at all; they primarily use trust deeds instead of mortgages. With a deed of trust, the lender does not need a court’s permission to foreclose a loan, no matter where in the country the foreclosure takes place.

With a trust deed, an impartial third party–the trustee–holds legal title to the property. Thus, neither the borrower nor lender has legal title, since legal title is held by the trustee. The trustee has the conditional, limited power of sale in the specific event that the borrower defaults, and has this limited power on behalf of the lender. In no other way does the trustee or lender have any ownership rights in the property.

As described earlier, “lien theory” and “title theory” now only describe whether a mortgage must be foreclosed in court, and have nothing to do with trust deed foreclosure. Trust deeds are a title theory-style instrument, meaning that lenders avoid court when foreclosing. Trust deeds are a title theory-style instrument that can be used in lien theory states, since lien theory only relates to whether mortgages are foreclosed in court or not. Lenders hate court foreclosure. Thus, most lien theory states function like title theory states because most home loans are trust deeds, not mortgages, in those states, so that lenders can avoid court.

So how do you distinguish between a lien theory and title theory state? The key is to know how a mortgage is foreclosed in that state. For example, Oregon is a lien theory state because mortgage foreclosure must go through the courts. However, the vast majority of all loans secured by residential real property in Oregon are trust deeds, for the sole reason of avoiding court foreclosure. Remember that a trust deed features nonjudicial foreclosure no matter what state it’s in. Since most Oregon foreclosures are nonjudicial, it would seem tempting to say that Oregon is a title theory state. However, all mortgages in Oregon must be foreclosed in court, so Oregon is lien theory, which is why most lenders avoid mortgages in Oregon and use trust deeds instead. The key is that in no situation does the lender hold the title right of sale in Oregon. Even with a trust deed, the title right of sale title is held by the trustee, not the lender. Thus, Oregon acts like a title theory state in that the borrower usually does not hold title, but the lender never holds title, so it is not a title theory state.

In Georgia, on the other hand, the lender holds the title right of sale in the event that the borrower defaults on their mortgage. The lender holds the title in a manner similar to how the trustee holds title in a deed of trust; they hold this legal title only for the purpose of selling the property if the borrower defaults. The key difference here is that in Oregon, the lender never holds title; in Georgia, the lender may hold bare legal title in a mortgage. Thus, by the modern definition, Oregon is lien theory, and Georgia is title theory, which is entirely based on whether or not the lender may hold legal title in a mortgage. In neither state does the lender hold title in a deed of trust; with a trust deed, the title is held by a third party trustee.

In the 19th and early 20th centuries, the current mortgage law in all states would have been considered lien theory, because the lender has almost no rights of ownership over the borrower’s property. Though this topic has changed dramatically over the last few hundred years, the overall shift from the lender having ownership rights to the borrower having these rights has been clear and decisive.

1. William H. Lloyd, Mortgages-The Genesis of the Lien Theory, 32 Yale L. J., 233-246 (1923) https://www.jstor.org/stable/788407#metadata_info_tab_contents
2. Charles E. Van Fossen, The Prevailing Theory of Mortgages and Deeds of Trust in Virginia, 1 Wm. & Mary Rev. Va. L. 71 (1951), https://scholarship.law.wm.edu/wmrval/vol1/iss3/2
3. Bowling, Lauren, ‘Defeasance Clause: Definition And Overview,’ www.rocketmortgage.com, Rocket Mortgage LLC, https://www.rocketmortgage.com/learn/defeasance-clause, accessed 12/27/2022
4. Joseph William Singer, Mortgagor Cannot Challenge Foreclosure Because Of Lack Of Evidence Of Valid Mortgage Assignments,” www.scholar.harvard.edu, Boston, MA, Harvard University, 2015, https://scholar.harvard.edu/jsinger/blog/mortgagor-cannot-challenge-foreclosure-because-lack-evidence-valid-mortgage-assignments, accessed 12/27/2022

Other sources used in this article:
Sammid J. Mansoor, ‘Virginia Mortgage Law Basics,’ www.avvo.com, https://www.avvo.com/legal-guides/ugc/virginia-mortgage-law-basics-1, accessed 12/27/2022
Jayne Thompson, ‘Lien Theory of Mortgages,’ www.sfgate.com, San Francisco, CA, Hearst Newspapers, https://homeguides.sfgate.com/lien-theory-mortgages-94265.html, accessed 12/27/2022