California Real Estate Practice Exam

A subordination clause written into a 1st trust deed would benefit the:

1. beneficiary

2. lender

3. trustee

4. trustor

The correct answer is: beneficiary

A subordination clause in a first trust deed serves to prioritize the rights of the lender in the event of a default or foreclosure. By inserting such a clause, the borrower (or trustor) is agreeing that the lender's claim to the property will take precedence over any other subsequent liens or interests that may arise. This effectively allows the lender to maintain their priority status, ensuring their investment is well-protected should the property owner encounter financial difficulties. This clause is particularly favorable to the beneficiary, who is the recipient of the benefits from the trust deed, as it ensures that their right to recover debts is not jeopardized by additional loans taken on by the trustor. In real estate transactions, having a subordination clause can allow lenders to feel more secure in their investment, as it mitigates the risks associated with potential future liens on the property that might otherwise threaten their ability to recover funds if the property is sold or foreclosed upon. The other parties mentioned, including the lender, trustee, and trustor, may have different motivations or concerns in such arrangements, but the primary benefit of the subordination clause directly enhances the security position of the beneficiary in the trust deed.