Final answer:
In states that follow the "Lien" or "Mortgage Contract Theory," the buyer holds the title to the property, with a lien placed by the lender to secure the loan. The buyer is the legal owner, but if they default on the loan, the lender can foreclose on the property.
Step-by-step explanation:
When it comes to the title of property subject to a finance agreement in states that follow the "Lien" or "Mortgage Contract Theory," the buyer holds title to the property. Under this theory, the buyer is considered the legal owner, and the mortgage is a lien against the property rather than a title-holding instrument. However, although this represents ownership, the lender holds a security interest that grants certain rights in the event of default, allowing them to foreclose on the property to recoup their loan.
In this system, there is no neutral third party or court holding onto the title like one might see with escrow arrangements in other contexts. Instead, the buyer's ownership is subject to the terms of their mortgage, and full title is encumbered by the lien placed upon it by the lender.
The described arrangement puts focus on the importance of those loans as assets for banks, underlining the borrower's commitment to repay the borrowed amount over time, which confirms the bank's stake in the value of the property.