Probably the most important single trust arises when a corporation borrows money for a long period of time and pledges some of its property as collateral. The corporation, like the individual borrowing on real estate, must sign a mortgage by which the title over certain property is temporarily relinquished. In the case of a small loan the borrower can give his promissory note and the mortgage paper directly to the lender, but a large corporation needs sums so great that they cannot be obtained from any one source, but must be gathered from a number of investors. So in place of one promissory note, the corporation issues bonds each representing a part of the debt. Obviously the mortgage cannot be divided into separate instruments for distribution among the lenders, and it must be surrendered to one party. In the early days of corporate financing, it was customary to intrust the holding of this mortgage to one of the larger investors, but in recent years this service has been performed by a trust company, which is then said to act as "trustee under corporate mortgage."

The nature of this trust may best be understood by describing the procedure in which it is actually handled. The directors of a railroad seek funds for undertaking permanent improvements on the line, and therefore vote to place a mortgage on part of their property, to which proposal the stockholders give approval. After all the details have been decided upon, the company's attorneys then prepare a mortgage indenture, or contract. This instrument contains a detailed description of the property which is being hypothecated. It may consist of real estate such as terminals and tracks. When equipment such as rolling stock is pledged, this property forms the basis of what is known as an "equipment trust." A third form of security is the "collateral" trust, which consists of personal property, such as stocks or bonds of railroads controlled by the corporation making the loan, or general securities owned by the corporation.

The mortgage indenture also defines the relations among the parties concerned. In the case of physical equipment the railroad company is allowed to retain physical possession of the property, for it must continue to use the terminals and to operate the trains. The legal title to all this property is conveyed to the company acting as trustee, which holds it in behalf of the bondholders. The mortgage with these provisions is then submitted to the trust company. All the covenants or stipulations are carefully examined, and if they are satisfactory the company executes or signs the mortgage and thus acknowledges its acceptance of the trust. It then records the mortgage in the public office of the secretary of the state where the property is located. The bonds are delivered to the trustee for authentication, by which procedure the trustee compares the bonds with the provisions of the indenture, to prevent the corporation from issuing securities either in excess of the amount authorized or contrary to the terms of the mortgage. When the trustee has verified the validity of the bonds, they are then returned to the issuing corporation.

Provision is sometimes made during the life of the mortgage for its gradual amortization, so that the payment of the outstanding principal is distributed in installments over the entire period instead of remaining at the full amount on maturity. The corporation does this by giving the trustee a certain sum periodically as a sinking fund to retire a portion of the bonds. Whether or not a sinking fund is provided, the entire issue is finally retired at the expiration of the loan, and the trust company destroys the certificates. When the claims of the bondholders as to dividends and principal have been fully settled, the trust company returns the legal title of the property to the railroad. If, on the other hand, the borrowing corporation defaults in the payment of either interest or principal, or fails in complying with any other terms of the mortgage, the trust company must then assume certain obligations. Although the trust company has under no condition guaranteed the value of the bonds, it is nevertheless expected to take every measure possible to protect the security holders. If the borrowing corporation fails to observe the provisions of the mortgage, it is the duty of the trustee to foreclose the mortgage and to have the property sold for the benefit of creditors in a manner already described in connection with an ordinary lien on a house.