Final answer:
The clause in a deed of trust requiring the full principal to be paid upon default is known as an acceleration clause. It ensures that the lender can demand immediate repayment, protecting their investment, and it creates a legal obligation similar to that which a cosigner or a bond issuer might have.
Step-by-step explanation:
The clause in a deed of trust that stipulates the full principal amount is due upon certain defaults is called an acceleration clause. This clause is common in real estate finance and it allows the lender to demand that the borrower pay off the entire balance of the loan immediately if specific conditions, often connected to defaults on payments or other covenants, are not met.
The acceleration clause is implemented to protect the interest of the lender. For instance, if a borrower consistently fails to make payments, the lender can invoke the acceleration clause to recoup the outstanding loan amount rather than continuing to risk further non-payment.
The existence of this clause also provides a strong incentive for the borrower to adhere to the terms of the loan agreement.
It's important to understand that other players can be involved in assuring the repayment of loans, such as a cosigner, who legally pledges to repay the loan if the primary borrower does not.
This distributes the risk for the lender. Meanwhile, bondholders of a company have a somewhat similar protection, as a bond issuer is legally bound to make payments over time, and failing those, bondholders can push for bankruptcy proceedings to recover their investments.