In a title theory scenario, what happens upon a borrower's default?

In a title theory scenario, the lender holds the legal title to the property while the borrower retains equitable title. This means that upon a borrower's default, the lender has the right to take possession of the property more straightforwardly than in lien theory states, where the borrower retains legal title throughout the mortgage term. The lender can initiate the foreclosure process to reclaim the property, as they are considered the legal owner. Therefore, when the correct answer states that the lender may take possession of the property upon default, it aligns with the principles of title theory, where the lender's ownership gives them specific rights in case of default.

The other options do not accurately represent the situation in a title theory context. The borrower does not retain both legal and equitable title upon default, as the lender's legal rights supersede those of the borrower in such scenarios. Similarly, automatic transfer of title to a third party does not occur simply because of default; legal proceedings are required. Finally, the borrower is not forced to pay off the entire mortgage immediately upon default; rather, lenders tend to follow a structured foreclosure process that may allow time for resolutions before possession is gained.