Collateral Transfer in Private Money Note

[Robert Shoffner]

Suppose you have a private lender that wants to keep their money working and getting interest.  If you have a private mortgage/deed of trust with a transfer of collateral or collateral transfer clause, do you have to cancel the mortgage/deed of trust first, then sell and have the closing?  

I have had a private note with this feature and the last time (or two) I tried this, the closing attorney insisted on sending the money back to the private lender.  I can only guess that the deed of trust/mortgage must be cancelled prior to closing, so when the attorney is disbursing, they don't see the lien there anymore.

Anyone with lots of experience on this, what do you suggest?