Real Estate Law - UNIT TEN - REAL PROPERTY SECURITY DEVICES

Not all transfers trigger the due-on-sale provision of notes. Which of the following is an exception?

(a)transfers resulting from the death of one of the co-borrowers (b)transfers resulting from the dissolution of a marriage (c)transfers resulting from the foreclosure of a junior lien.

If the sale proceeds after a judicial foreclosure are less than the foreclosing mortgage debt, the mortgagor has a _______ period of redemption.

1 year

Very few deficiency judgments are granted, because they are not possible in the following four situations:

1. Foreclosure is under a power-of-sale clause. (No deficiency judgments for mortgages or trust deeds foreclosed under power of nonjudicial sale are allowed.) 2. The foreclosing lien is a purchase-money loan. There can be no deficiency judgment when the seller provided credit. The seller started out owning the property and ends up owning it, a situation called a purchase-money mortgage. 3. Money advanced by a third-party lender for purchase purposes is also a purchase-money loan. A mortgagee who provides funds to purchase one to four residential units for occupancy by the mortgagor cannot obtain a deficiency judgment. Purchase-money third-party lenders can obtain deficiency judgments for five or more residential units, non-owner-occupied residential property, or nonresidential property. 4. The fair market value of the property is equal to or greater than the amount of the lien. A deficiency judgment is possible only for the difference between the fair market value of the property and the amount of the lien. This prohibits a mortgagee from bidding much less than is owed to manufacture a deficiency. 5. If a lender gives approval for a short sale involving one to four residential units, a deficiency judgment is not possible.

Upon the direction of the beneficiary, the trustee forecloses by taking the following actions:

1. Three-month notification of default 2. Notice of sale 3. Foreclosure avoidance

The seller financing disclosure requirements include

1. identification of the note or other credit documents and of the property securing the transaction; 2. description of the terms of the note or other credit document or a copy thereof; 3. disclosure of the principal terms and conditions of each recorded lien that is or will be senior to the financing being arranged; 4. a warning that if refinancing is required because of less than full amortization, such refinancing might be difficult or impossible to obtain in the conventional mortgage marketplace; 5. clear disclosure of the fact, when applicable, that a negative amortization is possible as a result of a variable or adjustable interest rate and an explanation of its potential effect; 6. an indication, when financing involves an all-inclusive trust deed, of who is liable for payments or responsible for defense in the event of attempted acceleration of a prior encumbrance and what the rights of the parties are in the event of a loan prepayment that results in refinancing, prepayment penalties, or a prepayment discount; 7. disclosure of the date and amount of the balloon payment, when involved, and a statement that there is no assurance that new financing or loan extensions will be available at the time of occurrence; 8. a disclosure, when the financing involves an all-inclusive trust deed or real property sales contract, of the party to whom payments will be made and who will be responsible for remitting these funds to payees under prior encumbrances and that if that person is not a neutral third party, the parties may wish to have a neutral third party designated for these purposes; 9. a statement that no representation of the creditworthiness of the prospective purchaser is made by the arranger and a warning that Section 580b of the Code of Civil Procedure may limit any recovering by the vendor of the net proceeds of the sale of the security in event of foreclosure (no deficiency judgment); 10. a statement that loss payee clauses have been added to property insurance to protect the seller or that instructions have or will be given to the escrow or appropriate insurance carrier or a statement that if such provisions have not been made the vendor should consider protecting himself by securing such clauses; 11. a statement that a request for notification of default has been recorded or that, if it has not, the vendor should consider recording one; 12. a statement that a policy of title insurance has been or will be obtained and furnished to the vendor and purchaser insuring their respective interests or that the vendor and the purchaser should consider individually obtaining a policy of title insurance; 13. a statement that a tax service has been arranged to report to the vendor whether property taxes have been paid on the property and who will be responsible for the continued retention and compensation of the tax service or that the vendor should assure herself that all taxes have been paid; 14. a statement about whether the security documents on the financing have been or will be recorded or a statement that the security of the vendor may be subject to intervening liens if the documents are not recorded; 15. and a statement, when applicable, that the purchaser is to receive cash from the proceeds of the transaction (a cash-out buyer), and disclosure of the amount and source of the funds and the purpose of disbursement as represented by the purchaser.

To be a negotiable instrument, a note or draft must be:

1. in writing, 2. signed by the maker, 3. an unconditional promise or order to pay another, and 4. payable on demand or at a specific time in the future, for a certain sum in money, and payable to the order of the payee or to the bearer.

Some defenses are valid against even a holder in due course. These are known as real defenses and include

1. incapacity—the maker lacked legal or mental capacity; 2. illegality—the note was executed for an illegal purpose; 3. forgery; and 4. material alteration by the holder. (If the note were raised by a prior holder, a holder in due course could collect on the original terms.)

negotiable instrument defenses

1. lack of consideration for the promise, 2. fraud on the part of Bertrand, 3. prior payment or cancellation, 4. setoffs from other claims Anthony has against Bertrand, or 5. the fact that the note was never delivered to the payee.

methods have been devised to get around the assumption prohibitions. They are at best of questionable legality and at worst could subject the property owner and broker to criminal liability for fraud against a lender. These methods include

1. long-term unrecorded lease options, 2. unrecorded land contracts, 3. friendly foreclosures, in which the lender is really the buyer and the seller does not make payments, so the lender forecloses and obtains the buyer's interest, and 4. land trusts.

The buyer may be precluded from reinstatement if

1. the buyer provided false credit information to obtain the loan, 2. the buyer moved the mobile home to avoid repossession, or 3. waste has been committed on the mobile home. In these cases, the buyer must pay the entire balance due plus costs

For a party to be a holder in due course,

1. the instrument must be proper and complete on its face, 2. the holder must have acquired the instrument before its due date without any notice as to previous dishonor, 3. the transferee must have been a good-faith purchaser for value, and 4. the transferee must have had no notice of any defenses of the maker or any defects in the title of the transferor of the paper.

Impound accounts cannot be required for single-family residences unless

1. they are required by state or federal law (such as FHA and VA loans), or 2. the trustor has failed to pay two consecutive tax payments, or the loan is 90 percent or more of the property value or sales price, and the 3. lender requires impounds.

CLASSIFICATION OF PROMISSORY NOTES

1.Straight note 2.Installment note 3.Amortized note

SELLER FINANCING

1.Wraparound trust deed

Balloon Payment

A balloon payment is described as a payment more than twice the amount of the smallest payment.

clause for prepayment without penalty

A clause that provides for payments of a specified amount "or more" allows prepayment without penalty

lease option disadvantages

A disadvantage to the buyer on a lease option agreement is that rent for a residence is not a deductible expense, but interest on a loan as well as property taxes is deductible on personal income tax returns. Because a normal loan payment is mostly interest, the purchaser on an option could be giving up a great deal more than the benefits sought.

land contract

A land contract must state the number of years required to pay it off. If taxes are included with the payments, the land contract must include the basis for the tax payment, and the taxes must be kept in a separate escrow account. Land contracts also must include a legal description of the property and must indicate all existing encumbrances.

Mortgage

A mortgage is a two-party security instrument in which the mortgagor is the owner or the buyer who gives a lien to the mortgagee. The mortgagee is the lender in cases of a hard-money loan (where money actually is advanced) or the seller in cases of a purchase-money loan (where the seller finances the buyer).

Right of redemption

A mortgagor recovering a property after a judicial foreclosure is called the right of redemption. If the sale proceeds are less than the foreclosing mortgage debt, the mortgagor has a one-year period of redemption. If the sale proceeds satisfy the foreclosing mortgagee's debt, the period of redemption is three months. By paying the purchaser at foreclosure the sale costs plus interest within the redemption period, the mortgagor can regain title. The mortgagor cannot waive this right of redemption.

Due on sale loans court decisions

A number of state courts determined that loans made by private individuals and state-licensed lenders were assumable loans despite the language in the notes

Promissory Note

A promissory note is the evidence of the debt. It is an unconditional written promise signed by the maker to pay a certain sum in money now or at a specific time in the future.

REAL PROPERTY SALES CONTRACT

A real property sales contract, contract of sale, or land contract is a two-party instrument whereby the seller (vendor) retains legal title and transfers possession to the buyer (vendee).

Straight note

A straight note is an interest-only payment note with the principal to be paid in full when due. The advantage to the borrower is a lower payment than what would be required with an amortized note

Trustee's sale

A trustee's sale is a public sale in which title is given in the form of a trustee's deed to the highest bidder. Trustee's sales, like mortgage sales, wipe out all junior encumbrances, except a mechanic's lien, where work commenced before the trust deed or mortgage being recorded.

Wraparound loan

A wraparound loan is written for the amount of the existing loan, as well as for any seller financing.

Installment note

An installment note provides for regular payments of principal and interest.

Foreclosure by court action

Any trust deed can be foreclosed by court action rather than by sale under its sale provisions. The reason for foreclosing a trust deed by court action would be to obtain a deficiency judgment. If the trust deed is foreclosed as a mortgage, the trustor has the same redemption rights as a mortgagor.

Foreclosure avoidance

At least 30 days before filing a notice of default, a party seeking to foreclose an owner-occupied residential property must contact the owner to explore options to avoid foreclosure. The notice of default must indicate that such contact was made. There is no requirement that an agreement be reached.

TRUST DEEDS

Because of the lengthy and costly foreclosure associated with mortgages, as well as the redemption rights that can accrue after the foreclosure sale, the trust deed is the most common real estate financing instrument in California.

CONSTRUCTION LOANS

Construction loans are normally short-term loans for a term of one to three years, depending on the type of building and customarily bear a higher rate of interest than permanent financing. Loan payments ordinarily are released based on performance of construction tasks. The final payment usually is not made until the mechanic's lien period has expired.

California Homeowner Bill of Rights 2013

Effective in 2013, the California Homeowner Bill of Rights was intended to guarantee fairness and transparency for homeowners in the foreclosure process. Provisions include the following: 1. Prohibition against dual-track foreclosure. When a homeowner applies for loan modification, the foreclosure process stops until the application is processed. 2. There must be a single point of contact for homeowners as to loan modification. 3. Lenders who file unverified documents (robo-signing without reading or having personal knowledge of facts stated), are subject to $7,500 fine per loan, as well as action by licensing agencies. 4. Lender violation of the foreclosure process is subject to injunctive relief, as well as damages after a sale. 5. The statute of limitations to prosecute mortgage-related crimes is extended from one year to three years. 6. To curb blight, local governments and receivers can allow time to cure code violations and can compel buyers of foreclosed property to pay for upkeep.

Acceleration upon default

Even when a note states that all payments on the note become due upon default, a borrower can cure a debt that becomes accelerated because of default of payment on principal, interest, taxes, or insurance by paying the amount in arrears plus costs up to five days before sale under a trust deed power-of-sale foreclosure, or at any time before entry of a decree on a mortgage foreclosure by court action. Trustee or attorney fees are limited by statute.

Not all transfers trigger the due-on-sale provision of notes. Exceptions include

Exceptions include transfers resulting from the death of one of the coborrowers and from the dissolution of a marriage, as well as transfers resulting from the foreclosure of a junior lien. A lender knowing of a transfer and failing to act might waive its rights to enforce the due-on-sale clause.

multi unit impound accounts

For impound accounts for one to four residential units, state-licensed lenders must pay interest of at least 2 percent.

Mortgage Forgiveness Debt Relief Act of 2007.

Forgiveness of a debt is considered a taxable gain to the debtor. This act provides that debt forgiveness to avoid foreclosure (a short sale) when the property is the principal residence of the debtor will no longer be taxed as imputed income by the federal government or by California law.

The Garn Act

Garn Act (GarnSt. Germain Depository Institution Act). The act allowed lenders to enforce due-on-sale clauses unless the loan was made or assumed under state law that allowed loan assumptions at that time. Such loans remained assumable until October 15, 1985 (a three-year window period for assumptions). The due-on-sale full enforcement by federally chartered lenders was not affected by the act.

usurious contract

If a contract is usurious, that portion of the contract calling for interest is void (interest cannot be collected). If a borrower has paid usurious interest, the borrower is entitled to recover the entire amount of the interest paid in the last two years plus treble damages (three times the interest paid) for the last year of the loan.

VA impound accounts

Impound accounts are not required on VA-guaranteed loans, although the lenders customarily require them.

FHA impound accounts

Impound accounts are required for FHA loans. Lenders on FHA loans can require a tax reserve of six months and an insurance reserve of one year.

Impound accounts

Impound accounts are trust account reserves kept by the lender for advance payments made by the borrower for property taxes and insurance. The impound account protects the lender in that funds will be available for the taxes and insurance when they are due.

Mortgage foreclosure

In the event of nonpayment by the mortgagor, the mortgagee can enforce the lien and foreclose by court action. Because foreclosure is considered an equitable action, it must be brought in superior court.

Trust deed foreclosure

In the event the trustor defaults on trust deed obligations, foreclosure is made by private sale and is relatively quick and inexpensive, because the trustee—not the trustor—has the legal title. Default can occur for a number of reasons, such as failure to make loan payments, pay taxes, to keep the property insured, or maintain the property.

SALES IN FORECLOSURE

It is illegal for any person to take unconscionable advantage of a property owner in default. The owner-occupant trustor may void an unconscionable sale of a residence within two years of the date of transaction (Civil Code Section 2945 et seq.), unless the owner-occupant was given a five-day written right to rescind.

Late charges

Late charges for a single-family dwelling loan made after January1, 1976, cannot exceed 10% of the installment due; however, a $5 minimum late charge is allowed. No late charge is allowed for payments less than 10 days late (Business and Professions Code Section 10242.5).

Lease options

Lease options could be subterfuges to avoid the due-on-sale clause as well as keep the property from being reassessed for property leases might have a large down payment (fee for the option), high rent, and an option to buy at a very low purchase price at a particular time when the existing loan is almost paid off. The courts could be expected to regard such an arrangement as a sale that triggers the due-on-sale clause. In determining whether a lease option is really a sale, the courts will consider the option cost, purchase price, and rental arrangements.

Due on sale loans can they be assumed?

Loans with due-on-sale clauses cannot be assumed.

Repossession of mobile homes

Mobile homes that have become real property are foreclosed in accordance with the trust deed. Mobile homes that are not real property are foreclosed in accordance with the Commercial Code. If the creditor repossesses a mobile home, any person liable under the contract can reinstate the contract by paying the amount in default plus costs and expenses. This right continues until the mobile home is sold in foreclosure. This right of reinstatement may be exercised only once in any 12-month period and only twice during the period of the contract.

Trust deed

Mortgages are a common real estate financing instrument in many states. California, however, favors trust deeds, and mortgages are seldom encountered.

Obligatory advance priority vs. optional advance

Obligatory advances take precedence over intervening liens, but an optional advance (not required by the original loan agreement) would be junior to intervening liens if the lender had actual notice of the intervening liens.

Deed in lieu of foreclosure

Often a mortgagee, instead of foreclosing, will have the mortgagor deed the property to the mortgagee. The mortgagee benefits by saving time and foreclosure costs, as well as by avoiding the mortgagor's rights of redemption. The mortgagor benefits by avoiding having the credit report show a foreclosure. Deeds in lieu of foreclosure often are given in exchange for cash or several months' free rent.

Prepayment on one to four residential units

On real property contract sales (land contracts) of one to four residential units, the buyer has the right to prepay; however, the lender can prohibit prepayment for 12 months after the sale.

Liens by nonowners

People who give a mortgage or trust deed on property they do not own will have created a valid lien if they later acquire title. As an example, if a son gives a mortgage or trust deed on a property owned by his father, the lienholder will have no right against the property because the lien was not given by the owner. If the son later acquires title to the property from the father, the lienholder will be able to make a claim against the property to satisfy the lien.

prepayment penalties on FHA and VA loans

Prepayment penalties are not allowed on FHA-insured or VA-guaranteed loans.

loan modifications

Real estate brokers are exempt from the Mortgage Foreclosure Consultants Act. They may arrange a loan modification but cannot charge an advance fee. Fee arrangements must state, "It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly and ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these services."

Fictitious trust deed

Recording costs are charged per page. To reduce such costs, lenders record what is known as a master fictitious trust deed that includes all of their special provisions (boilerplate). Each trust deed then can be a simple one-page document that incorporates by reference all the provisions of the fictitious trust deed.

In the case of trust deed foreclosure, second trust deed beneficiaries can make sure they are notified of any default by recording a

Request for Notice of Default.

Deficiency judgments

Should the judicial foreclosure sale bring less than the amount owed on the mortgage, the foreclosing lienholder can apply for a deficiency judgment for the difference, but must do so within three months of the sale. Only after the judicial foreclosure sale can the mortgagee sue the mortgagor for any deficiency amount.

lock-in clause

The absence of any provision allowing prepayment would have the effect of being a lock-in clause, locking the borrower in to the full interest for the term of the loan even if the loan is prepaid. To avoid this harsh effect, prepayment is allowed by statute on one to four residential units.

RESPA (12 U.S. Code 2609) limits the amount of impound accounts for federally related lenders (lenders with Federal Deposit Insurance Corporation [FDIC] insurance).

The accounts, when established, can be no more than the prorated taxes and insurance plus an estimated two months' advance charges

dragnet clause

The advances made under the loan are covered in a dragnet clause that includes the future advances and prevents a subsequent lien from taking priority over the loan advances.

Usury rate and salespeople

The broker's usury exemption does not extend to real estate salespeople. See People v. Asuncion (1984) 152 C.A.3d 422 for an example where a 288 percent interest rate was held to be usurious.

vendee real property sales contract dangers

The danger for the vendee in a real property sales contract is that the vendor might be unable to transfer marketable title to the vendee when the contract is paid. Vendees can, however, protect themselves by ensuring that the contract is recorded (the vendor must acknowledge the contract for it to be recorded) and obtaining title insurance.

Due-on-encumbrance clause

The due-on-encumbrance clause accelerates the payments on a loan if the owner places a further encumbrance on the property. Civil Code Section 2949, however, prohibits such acceleration for single-family owner-occupied dwellings. For other than a single-family dwelling, a lender can accelerate payments only if the encumbrance endangers the lender's security. (This would be a very unusual situation.)

Junior lienholders

The junior lienholder can stop foreclosure and cure the trustor's deficiency by making the trustor's payments.

Prepayment penalties

The justification for prepayment penalties is that prepayment means an interest loss for the lender until the money has been placed in a new loan, as well as the expense of placing a new loan. The prepayment fee must be reasonable, based on when the loan was made. An unreasonably high prepayment penalty could be considered an unreasonable restraint on alienation and would not be collectible.

obligatory advances

The payments under construction loans are known as obligatory advances because the lender is obligated to make the payments

foreclosure auction

The property is sold at a public sale conducted by the county sheriff. The mortgagee can bid the amount of the mortgage lien. Other bidders have to bid cash. Because a foreclosure sale would wipe out all liens junior to the foreclosing mortgage, a junior lienholder who wanted to protect his interest would have to bid against the foreclosing mortgagee.

Amortized note

The regular payments for a fully amortized installment loan pay off the entire principal as well as the interest during the loan term. A partially amortized note would have payments based on an amortization schedule, but it would have to be paid in full at a date before the end of the amortization schedule (balloon payment).

land contract risks

The risk of loss in a land contract sale is with the buyer, even though the seller retains the legal title. Without the written permission of the buyer, a seller under a land contract cannot encumber the property in an amount exceeding the amount owed on the contract. The seller must apply payments received from thebuyer to the encumbrances so that the encumbrances will be paid up when the purchaser has finished paying.

Notice of sale

The trustor can stop the sale up to five business days before the sale by curing any deficiency and paying costs. Notice of sale must be published once a week (3 times) for 20 days and not more than 7 days apart.

Usury rate and real estate brokers

The usury rate also does not apply to loans made or arranged by real estate brokers. The broker is exempt from usury restrictions, even though a loan made by a brokeris outside the scope of activity requiring a real estate license (Civil Code Section1916.1).

usury rate and cash loans

The usury rate applies to cash loans or forbearance (agreements granting additional time after a loan is due).

strict foreclosure

Under common law, the mortgagee received the property without a sale upon the mortgagor's default. This so-called strict foreclosure is not permitted in California.

Usury interest rate

Usury is charging a rate of interest greater than allowed by law. The rate of interest individuals (not exempt from usury limitations) can charge for loans to purchase, construct, or improve real estate cannot exceed 10 percent, or 5 percent greater than the rate designated by the Federal Reserve Bank of San Francisco to member banks for advances as of the 25th day of the month preceding the loan.

Subordination agreements

When a seller agrees to subordinate seller interests, the purchaser can put a later loan on the property that has priority over the seller's lien.

Seller financing disclosure

When the seller provides carryback financing for a sale involving one to four residential units, the arranger of credit (broker) must comply with special disclosure requirements set forth in Civil Code Sections 29562967.

Mortgages and Trust Deeds

While a promissory note is the evidence of the debt, a security device, such as a mortgage or a trust deed, provides security for the note. Mortgages and trust deeds hypothecate, or pledge, the property (the borrower keeps possession but gives a security interest).

NEGOTIABLE INSTRUMENTS

While not money, negotiable instruments are freely transferable and are used in lieu of money. They are either promises to pay (notes) or orders to another to pay (drafts).

Three-month notification of default

Within 10 days of recording the notice of default, a copy must be sent by registered mail to all people who recorded a request for notice, and at least 20 days before sale the person authorized to make the sale must send, by registered mail, a copy of the notice (often called special notice) of the time and place of sale to all those who recorded requests for notification.

A lender would accept a deed in lieu of foreclosure if the mortgage or trust deed contained a(n)

antimerger clause.

Often installment notes provide that the entire balance shall be due at a date before the note's being fully amortized. Such a lump sum payment is called a(n)

balloon payment

Since recording costs are charged per page, lenders record a ___________ one-page document that includes all special provisions.

fictitious trust deed

Trust account reserves kept by the lender for advance payments made by the borrower for property taxes and insurance are referred to as

impounds

Which of the following is considered a "real defense" against a holder in due course?

incapacity.

Installment notes

installment notes provide that the entire balance will be due at a date before the note's being fully amortized. Such notes are called partially amortized notes, and the large payment is known as a balloon payment.

The mortgagor can stop the foreclosure anytime before the sale date by

paying past delinquencies plus costs and fees.

The purpose of the Mortgage Foreclosure Consultants Act is to

prevent unscrupulous mortgage foreclosure consultants from taking advantage of property owners in default.

In the event the trustor defaults on trust deed obligations, foreclosure is made by

private sale.

With a mortgage or trust deed, which of the following serves as evidence of the debt?

promissory note

Which of the following is a former advantage of land contracts over trust deeds?

quicker foreclosure

Due-on-sale clause Also known as an alienation clause

the due-on-sale clause calls for the note to be paid in full upon sale of the property. (It accelerates the payments.)

A promissory note is

the evidence of the debt

The final payment of a construction loan is usually not made until

the mechanic's lien period has expired.

A borrower cannot waive their anti-deficiency-judgment protection in advance or at the time of the loan or loan renewal when the buyer is likely to be under the coercion of the lender.

true

Prepayment penalties are not allowed on FHA-insured or VA-guaranteed loans.

true

When using a trust deed, naked legal title would be held by a

trustee

Charging a rate of interest greater than allowed by law is referred to as ____________.

usury

With a real property sales contract, possession and equitable title is held by the

vendee

Trustee's sales, like mortgage sales,

wipe out all junior encumbrances.