A defeasance clause provides for the mortgage security interest to end when the borrower pays the debt and fulfills the secured obligations. For exam purposes, connect defeasance with payoff and release.
What is the Defeasance Clause?
The clause describes the borrower’s right to have the mortgage interest discharged after satisfying the loan obligations. California’s Department of Real Estate explains this concept in its reference-book glossary.
A borrower does not necessarily have to wait until the final loan payment to own the home. The effect of a mortgage depends on state law and the security instrument. The lender’s security interest and the borrower’s ownership are different concepts.
How Does It Work in a Lien Theory State?
Under lien theory, the borrower retains title while the lender has a lien securing repayment. Paying off the loan clears that mortgage lien; it does not transfer ownership to the borrower for the first time. The required satisfaction or release document and recording procedure depend on state law.
Title theory is often taught as a security conveyance of legal title, with the borrower retaining equitable ownership. Deeds of trust involve a trustee, and their treatment varies by state. Do not assume that use of a deed of trust alone establishes how a state classifies title. See our title theory and lien theory guide and the California DRE discussion of encumbrances.
Defeasance vs. Alienation
Defeasance: the mortgage security interest ends after the debt and secured obligations are satisfied.
Alienation, or due-on-sale: the lender may demand the outstanding balance when the secured property or an interest in it is transferred without the required consent. It is not an automatic ban on every transfer. Federal law protects specified transfers for qualifying residential loans; see 12 U.S.C. § 1701j-3.
What to Remember for the Real Estate Exam
Match the trigger to the clause: payoff → defeasance; transfer → alienation. If the question specifies lien theory, remember that the borrower already holds title. Follow the question’s facts and applicable state law instead of memorizing an unsupported list of states.
