Which statement about mortgages is true in lien theory?

In lien theory, the statement that the mortgage merely encumbers title is accurate. This theory holds that when a mortgage is created, it does not transfer ownership of the property to the lender; rather, it establishes a lien against the property. The borrower (mortgagor) retains ownership and the right to possess the property while the lender (mortgagee) holds a legal claim to it until the mortgage is paid off.

Because the mortgage serves to secure the loan, it gives the lender a financial interest in the property, which can lead to foreclosure if the borrower defaults. This principle highlights the difference in how property ownership is viewed under lien theory versus other theories, such as title theory, where the lender may have greater ownership rights until the loan is repaid.

Understanding this concept is crucial for those involved in property management and real estate transactions, as it informs the way rights and responsibilities are allocated between lenders and borrowers in the context of secured financing.