Session 14
Foreclosure with More Than One Lien on Property (Part 2)
** See attached
Agreement for Sale (A. Document)
-- There is only an agreement for sale; no promissory note. -- Agreements for sale are used for seller financing.
14.1
14.1 I. VOLUNTARY LIENS II. FINANCE INSTRUMENTS III. LIEN THEORY VS. TITLE THEORY IV. TRUST DEED (DEED OF TRUST)
Trustee's Deed (Book definition)
A deed, executed by a trustee, transferring title from the trust to the successful bidder at a trustee's sale.
Deficiency Judgment (Book definition)
A personal judgment against a borrower if the lender / creditor does not receive the amount of the lien prlus the costs associated with foreclosure at a foreclosure sale.
Notice of Default and Trustee's Sale (Book definition)
A statement by a trustee providing constructive notice to the world that the foreclosure proceedings has begun.
Foreclosure with More Than One Lien on Property
A. Foreclosure of a prior lien may terminate a subordinate lienholder's interest. B. Any junior lienholder has the right to cure a default on a prior lien and foreclose the junior lien. C. If a junior lien is foreclosed, the property is delivered to the highest bidder subject to any higher priority liens.
Statutory Right of Redemption (Book definition)
Allows a mortgagor (debtor) to redeem property for a set period of time after a foreclosure sale, regardless of the timing of other events. -- The timeframe for statutory right of redemption after a judicial foreclosure in AZ is six months. -- The timeframe after a tax lien auction is three years.
Agreement for Sale (C. Process at closing)
At closing of the purchase of the property, buyers should record the agreement for sale to show that they are the owner of record.
Mortgage (Defeasance / Payoff)
At payoff, the lender is required to deliver a satisfaction of mortgage to the borrower within 30 days of payoff.
Bankruptcy's Effect on Foreclosure
Bankruptcy of the borrower will stop a foreclosure or forfeiture process.
Non-judicial Foreclosure (Bidding Process at a Trustee's Sale)
Bidding Process: there are three possibilities: 1. Excess Money Bid: Any excess funds belong to the foreclosed borrower. 2. If No One Bids: The lender usually bids and receives ownership. 3. Insufficient Money Bid: There is a possibility of a deficiency judgment against the borrow. ** Foreclosure costs are always paid first from the money bid.
Lis Pendens (Book definition)
Book definition: A recorded document giving constructive notice of a pending legal action against a specific piece of property.
Judicial Foreclosure
Deeds of trust, mortgages, and land contracts (agreements for sale) may be foreclosed judicially. The steps in this process are as follows: A. The lender files a lawsuit, records a lis pendens, and the debt is accelerated. A lis pendens is a document that states that litigation is pending against the property owners. B. In the court action, if the court finds that the borrower is in default, a judgement is entered against the borrower, and the judge orders the sheriff to sell the property at public auction. C. A sheriff's sale is held, and the highest bidder receives a sheriff's certificate of sale. This certificate of sale does not transfer ownership to the bidder. D. After the sheriff's sale, the borrower has a six month statutory redemption period. It may be reduced to 30 days if the owner abandons the property. E. If the borrower does not redeem the property, the holder of the sheriff's certificate receives a sheriff's deed, which conveys full title. *** Prior to the sheriff's sale, the borrower has the equitable right of redemption, also called equity of redemption, which allows the borrower to redeem the property and terminate the foreclosure.
QUIZ 14-A (Page 367)
QUIZ 14-A (Page 367)
Sheriff's Sale (Book definition)
Sheriff's Sale: A property auction (judicial foreclosure sale) ordered by the court to pay back the lender when the borrower defaults.
Hypothecation
The pledging of a property to be the security for a loan without giving up possession of it as is with a mortgage or deed of trust.
Trust Deed (Parties)
Trust Deed (Parties): 1. Trustor 2. Beneficiary 3. Trustee
Trust Deed (When in default)
Trust Deed in Default: The lender has two options: 1. Option #1: Exercise trustee's power of sale (non-judicial foreclosure). 2. Option #2: Exercise judicial foreclosure. Foreclosed in the same way as a mortgage.
UNIT 14-B QUIZ (Page 376)
UNIT 14-B QUIZ (Page 376)
V. DEED IN LIEU OF FORECLOSURE
V. DEED IN LIEU OF FORECLOSURE
V. MORTGAGE
V. MORTGAGE
VI. AGREEMENT FOR SALE
VI. AGREEMENT FOR SALE
VI. FORECLOSURE WITH MORE THAN ONE LIEN ON PROPERTY
VI. FORECLOSURE WITH MORE THAN ONE LIEN ON PROPERTY
VII. DISTRESSED PROPERTY TRANSACTIONS
VII. DISTRESSED PROPERTY TRANSACTIONS
VIII. FIX AND FLIPS
VIII. FIX AND FLIPS
Agreement for Sale (E. Land contract in default)
When a land contract is in default, the seller has two options: 1. Judicial Foreclosure -- The seller may foreclose judicially (as with a mortgage) only if the original land contract includes an acceleration clause. 2. Forfeiture Action -- Book definition: An option for dealing with the default of a vendee in a land contract whereby the vendor terminates the vendee's interest. -- The seller must give buyer a grace period within which to reinstate the payments. It may be as short as 30 days or as long as 9 months depending on the percentage of purchase price already paid by the buyer. -- After a grace period expires, the seller may complete the forfeiture action to terminate the buyer's interest. -- If the buyer refuses to vacate, the seller may initiate a forcible detainer (eviction action) to evict the buyer.
Voluntary Liens (Table Comparison)
** See attached table comparison
Non-judicial Foreclosure (Book definition)
-- A foreclosure by a trustee under the power of sale clause in a security instrument without the involvement of a court. -- Not used in all states.
Short Sale
-- A lender-approved sale in which the loan balance is higher than the property's value. -- The lender agrees to accept a reduced (short) payoff. -- Book Definition: The proceeds are not sufficient to cover the mortgage amount(s).
Trustee
-- A third party who is given the naked legal title (also known as the power to sell or power of sale) is the trustee. -- The trustee has the authority to sell the property at foreclosure when the trustor is in default. -- May only act under written instructions from the beneficiary and only in two instances: 1. When the trust deed is paid in full (defeasance). 2. When the trust deed is in default
Naked Legal Title (Book definition)
-- Also called Bare Legal Title -- An interest in real property that lacks the usual rights and privileges enjoyed by an owner, for example, that which is held by a trustee in a deed of trust.
Forcible Entry and Detainer Action (Book Definition)
-- Also called Ejectment. -- A summary legal action to regain possession of real property; especially, a lawsuit filed by a landlord to evict a defaulting tenant and regain possession of the property.
Equitable Right of Redemption (Book definition)
-- Also called Equity of Redemption. -- The right of a debtor to redeem the property from foreclosure proceedings prior to a confirmation of sale.
Bank Owned Property (REO, Real Estate Owned)
-- Also known as REO and Bank Owned. -- This is a transaction in which the lender had acquired the property through a foreclosure auction (trustee's sale) and is selling the property on the open market. -- Book definition: Property acquired by a lending institution through foreclosure and held in inventory.
Trust Deed (Defeasance / Payoff)
-- At payoff of a trust deed, a deed of reconveyance is the document that evidences the release of a deed of trust. -- The beneficiary (lender) instructs the trustee to send the deed of reconveyance to the trustor. This must be done within 30 days of payoff.
Agreement for Sale (D. Process at payoff)
-- At payoff of an agreement for sale, the seller delivers the deed to the buyer. -- The buyer should then record the deed to indicate that the land contract has been paid in full.
Forebearance
-- Book definition: A. legally binding promise to refrain from doing a particular act. -- This is a legally binding arrangement between a borrower and lender in which the lender agrees to delay foreclosure. -- The lender agrees to temporarily reduce, postpone, or suspend the mortgage payment and not proceed with foreclosure if the borrower brings the loan current within the specified time.
Deed in Lieu of Foreclosure
-- Instead of going through foreclosure, the borrower gives the lender the property in return for cancellation of the debt. -- The lender takes over the property subject to superior and subordinate liens, if any.
Voluntary Liens
-- Liens placed against a property with the owner's consent. The three types of voluntary liens in Arizona are: 1. Trust deeds 2. Mortgages 3. Agreements for sale -- Hypothecation is a pledge of real property as security without giving possession of the property to the lender.
Trustor
-- The borrower is the trustor under the Deed of Trust. -- By signing the deed of trust, the trustor conveys naked legal title (also known as bare legal title) to the trustee and retains equitable title.
Security Instrument
-- The security instrument hypothecates the property as collateral for the debt. Includes provisions for the lender to foreclose if the borrower is in default. -- Creates a voluntary lien on real property to secure repayment of the debt. 1. States the legal description of the property. 2. Usually recorded by the lender to establish priority of the lien. 3. May be a trust deed, mortgage, or agreement for sale. -- Creating this instrument gives a creditor the right to sell the 'collateral property' to satisfy the debt if the debtor fails to pay according to the terms of the agreement.
Promissory Note
-- This note/instrument is a legally binding promise of borrower to repay the debt. Serves as evidence of the debt. -- Specifies a promise to pay a certain amount of money to a person within a specific time frame. The note states: 1. Who the lender and borrower are 2. The amount of the debt 3. The interest rate 4. The pattern of payments (e.g., monthly, quarterly, etc.) ** The note does not describe the collateral and is usually not recorded.
Deed of Trust (Trust Deed)
-- Three party security instrument which conveys 'bare legal title' to a trustee. -- Borrower (trustor) has legal title. Lender is the beneficiary. It allows the trustee to sell the property if the trustor defaults, thereby bypassing the judicial foreclosure procedure (using a Power of Sale clause). -- This is the document used by all Arizona lenders to place a lien on real property. -- Prior to 1971, Arizona lenders could only use a mortgage as security for a loan, and the only way to foreclose a mortgage is through a court action (judicial foreclosure). -- In 1971, Arizona law changed this so lenders could secure loans with a trust deed, which allows either a non-judicial foreclosure or a judicial foreclosure. A. Trust Deed Documents B. Parties C. Defeasance (Payoff) D. Trust Deed in Defaust
Judgment (Book definition)
1. A court's binding determination of the rights and duties of the parties in a lawsuit. 2. A court order requiring one party to pay damages to the other.
Judicial Foreclosure
1. A lawsuit filed by a lender or other creditor to foreclose on a mortgage or other lien. 2. A court ordered sheriff's sale of property to repay the debt. 3. In AZ, the borrower has both the equitable right of redemption before the sale and a statutory right of redemption after the sale. 4. The statutory period of redemption is 6 months or 30 days if the borrower has abandoned the property.
Agreement for Sale
1. An agreement for sale is a contract for the sale of the property and a financing instrument all in one. 2. The deed transferring ownership is not delivered until the buyer has made the final payment. 3. Book definition: A carryback document between the buyer and the seller. The seller does not give a deed to the buyer until paid in full; therefore the seller retains legal title, and the buyer has equitable title. 4. An agreement for sale is also called a: -- Contract for the sale of real estate -- Land contract -- Contract for deed -- Vendor's lien
Trust Deed (Documents)
1. Promissory Note: The promise to repay the debt. Serves as evidence of the debt. 2. Trust Deed: Secures the note with the property as collateral.
Mortgage (Promissory Note & Mortgage)
1. Promissory Note: A promise to repay the debt. The note serves as evidence of the debt. 2. Mortgage: -- A security instrument which secures the note with real property as collateral. -- It is a voluntary lien on real property in order to secure repayment of a debt.
14.2
14.2 V. MORTGAGE VI. AGREEMENT FOR SALE
14.3
14.3: I. NON-JUDICIAL FORECLOSURE
14.4:
14.4: II. JUDICIAL FORECLOSURE
14.5
14.5 III. Deficiency Judgments IV. Bankruptcy's Effect on Foreclosure V. Deed In Lieu of Foreclosure VI. Foreclosure with More than One Lien on Property VII. Distressed Property Transactions VIII. Fix and Flips
Sheriff's Deed (Book definition)
A deed issued by the court to a property purchaser from a foreclosure sale or sale under a judgment.
Deed of Reconveyance (Book definition)
A deed that a trustee signs and gives to the trustor (the borrower) to convey title back to the trustor when the loan (deed of trust) has been paid in full. Compare Satisfaction of Mortgage.
Loan Modification
A loan modification is an agreement between a borrower and lender that changes the loan terms in an effort to avoid foreclosure.
Lien Theory vs. Title Theory
A. Lien theory: -- A concept of financing where loans such as trust deed or mortgage creates a lien against the property, and no ownership is conveyed to the lender. -- Tile remains with the borrower and is not transferred to the lender. B. Title theory: -- A financing concept where the mortgagee (or beneficiary) holds naked title to the property until the loan is repaid. -- Once the debt is repaid, the lender conveys legal title to the owner (borrower). C. Arizona is a lien theory state.
Reinstatement Period
Book definition: In a deed of trust, this is the period of time the trustor has to pay all costs, fines and fees prior to the trustee sale.
CHALLENGE ACTIVITY 14.1
CHALLENGE ACTIVITY 14.1
CHALLENGE ACTIVITY 14.2
CHALLENGE ACTIVITY 14.2
CHALLENGE ACTIVITY 14.3
CHALLENGE ACTIVITY 14.3
CHALLENGE ACTIVITY 14.4
CHALLENGE ACTIVITY 14.4
CHALLENGE ACTIVITY 14.5
CHALLENGE ACTIVITY 14.5
Distressed Property Transactions
Distressed Property Transactions: A. Short Sale B. Bank Owned Property (REO, Real Estate Owned) C. Forbearance D. Loan Modification
I. NON-JUDICIAL FORECLOSURE
I. NON-JUDICIAL FORECLOSURE
I. VOLUNTARY LIENS
I. VOLUNTARY LIENS
II. FINANCE INSTRUMENTS
II. FINANCE INSTRUMENTS I. Promissory Note 2. Security Instrument
III. DEFICIENCY JUDGMENTS
III. DEFICIENCY JUDGMENTS
III. LIEN THEORY VS.. TITLE THEORY
III. LIEN THEORY VS.. TITLE THEORY
IV. BANKRUPTCY'S EFFECT ON FORECLOSURE
IV. BANKRUPTCY'S EFFECT ON FORECLOSURE
IV. TRUST DEED (DEED OF TRUST)
IV. TRUST DEED (DEED OF TRUST)
Fix and Flips
Investors often buy foreclosed and other distressed properties and repair them for resale at a profit. In AZ, the following provisions apply: A. Licensed contractors are not required to perform all improvements if the property is intended to be owner-occupied and not sold or leased. B. Licensed contractors are required to perform all improvements if: -- The property is offered for sale or lease; or sold or leased within one year of completion or issuance of a certificate of occupancy, and.. -- The aggregate price of improvements is $1,000 or more. C. If buildings or improvements are constructed without a building permit, the local government agency may require the: -- Owner to obtain a permit retroactively or -- The structure to be demolished.
Mortgage (When in default)
Mortgage in Default: The lender's only remedy when a mortgage is in default is forced sale through a judicial foreclosure action.
14-B Foreclosure
Overview: Learning Objectives: 1. Describe the process of non-judicial foreclosure versus judicial foreclosure. 2. Discuss advantages and disadvantages of a deed in lieu of foreclosure. 3. Distinguish between senior and junior lienholders. 4. Describe post-foreclosure remedies including deficiency judgements and anti-deficiency statutes. 5. Recall state requirements for fixing and flipping property.
UNIT 14-A Financing Documents
Overview: The term instrument refers to a written legal document that establishes the different rights and duties of the parties involved. There are two types of real estate finance documents or instruments: A promissory note and an accompanying security instrument, such as a deed of trust, mortgage, or agreement for sale. In this unit, we'll look at each of these. Learning Objectives: 1. Differentiate between a promissory note and a security instrument. 2. Explain the concept of hypothecation. 3. Contrast the use of a deed of trust and a mortgage as a security instrument. 4. Explain the use of an agreement for sale, also called a land contract.
Mortgage (Parties)
Parties: 1. Mortgagor: The borrower who signs and gives the mortgage. 2. Mortgagee: The lender who receives the mortgage.
Agreement for Sale (B. Parties)
Parties: 1. Vendor: The seller in an agreement for sale or land contract. 2. Vendee: The buyer in an agreement for sale or land contract.
Beneficiary
The lender is the beneficiary in a trust deed (one who receives a benefit).
Deficiency Judgments
This is a judgement obtained by a lender in civil court when a foreclosure sale brings less than the amount owed. 1. Arizona law prohibits a deficiency judgment in certain situations if the property is: -- 2.5 acres or less in size -- And used as a single one-family or single two-family dwelling. 2. If a married couple signed the loan and one spouse gave the other spouse a quit claim deed to the property (such as in a divorce), it does not relieve the granting spouse of liability for a deficiency judgment. ** The law relating to deficiency judgments is very complicated. Always recommend that a client seek the advice of legal cousel if asked about deficiency judgements.
Non-judicial Foreclosure
This process is available only with a deed of trust; mortgages may not be foreclosed non-judicially. The steps in this process are as follows: A. The beneficiary (lender) instructs the trustee to begin the foreclosure. B. The trustee records a Notice of Default and Trutee's Sale. Recording the notice provides constructive notice to the world that the foreclosure proceeding has begun. C. The trustee sends the Notice of Default and Trustee's sale to the trustor (borrower) and to anyone who has recorded a Request for Notice of Default (usually the seller or second lien holder). The foreclosure notice must also be posted on the property to provide actual notice. D. The trustor has a 90-day right of reinstatement that allows the trustor (borrower) to cure the default by paying all back payments (plus costs and penalties) at any time before the foreclosure sale (trustee's sale). E. The trustee must wait at least 90 days from recording of the Notice of Default and Trustee's Sale before holding the trustee's sale. F. The trustee's sale is held, and a Trustee's Deed Upon Sale (aka a trustee's deed) is delivered to highest bidder after the full amount is paid. The trustee's sale is a public auction that is usually held on the steps of the county courthouse. G. There is no redemption period for the trustor after the trustee's sale. H. Finally, there is a bidding process at a Trustee's Sale (next card). I: Arizona law prohibits a deficiency judgment after a trustee's sale if the property is 2.5 acres or less in size and is used as a single one-family or single two-family dwelling. This includes owner-occupied and non-owner-occupied properties.