What does the title theory indicate regarding property ownership during a mortgage?

The title theory in the context of mortgages indicates that the lender holds legal title to the property while the borrower retains equitable title. This means that, although the borrower is in possession of the property and has the right to use it, the lender technically holds the title until the mortgage obligation is fulfilled.

This arrangement reflects a fundamental aspect of a mortgage in states that follow the title theory, which contrasts with the lien theory where the borrower retains full legal title and the mortgage merely serves as a lien against the property. Thus, under the title theory, the lender has the right to take possession of the property through foreclosure should the borrower default. This structure emphasizes the lender's interest in the conventional security of the mortgage, ensuring that they have a legal claim to the property until the debt is settled.

Understanding this differentiation is crucial for analyzing mortgage arrangements and the implications of property ownership during the life of a loan.