Final answer:
In title theory states, the mortgagee holds the deed to the property until the mortgage loan is fully repaid. Escrow is often used to manage payments such as home insurance and property taxes, simplifying the process for the homeowner as part of their normal monthly payment.
Step-by-step explanation:
In title theory states, the correct answer to the question of who holds the deed when a mortgage is established is that the mortgagee holds the deed. This means that the lender, not the borrower (mortgagor), holds the title to the property until the loan is fully repaid. This is distinct from lien theory states, where the borrower holds the title to the property and the lender has a lien on it.
The concept of Escrow is related because it serves as an intermediary holding account where deeds can be placed until all conditions of a sale are met, including the payment of home insurance and property taxes by the third party, making it easier for homeowners as these expenses are managed as part of their normal monthly payment.
To clarify, a deed itself is a document that represents the ownership of the property. If a borrower defaults on their mortgage, the lender can foreclose on the property to recoup their losses because, in a title theory state, they hold the deed to the property. Understanding the difference between title theory and lien theory is critical for real estate transactions and how property rights are managed in the event of a mortgage default.