Articles Posted in foreclosure

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A deed in lieu of foreclosure is occasionally used as an alternative to a foreclosure sale. The borrower merely deeds the property back to the lender “in lieu of foreclosure.” The lender does not have to go through the time and expense of a foreclosure, and the borrower/owner gets the process over with more quickly. However, there is some risk for the lender in this situation. Title conveyed by a trustee’s deed after a foreclosure sale relates back in time to the date on which the deed of trust was executed. The trustee’s deed therefore passes the title held by the trustor (the borrower; remember the ‘trustor’ is ‘poor’) as of that earlier time, rather than the title that the trustor held on the date of the foreclosure sale. Liens that attached after the deed of trust was recorded are ‘sold out’ or eliminated. However, a deed in lieu of foreclosure (as opposed to a foreclosure deed) passes title to the transferee subject to all existing liens. Whether concerned about deeds in lieu or lien priority in general, it is best to consult with a Sacramento real estate lawyer. Hopefully, you can avoid the problem recently faced by a lender when the trial judge didn’t follow the law regarding merger. They had to get the court of appeals to set things right.

Sacramento merger attorney.jpgIn Decon Group, Inc. v. Prudential Mortgage Capital Company LLC, the owner of a commercial property had a mortgage with Prudential. They hired Decon to renovate the property, but did not pay the bills, so Decon recorded a mechanic’s lien for $437,000, and filed suit to foreclose the lien. The owner was in default on the loan, so the lender took back a deed in lieu of foreclosure from the owner. The lender then conducted a trustee’s sale, and took title to the property. In the action to foreclose the mechanic’s lien, the judge ruled that, on taking back the deed of lieu, the two interests, as beneficiary under the deed of trust and as grantee under the deed in lieu merged, destroying the senior lien. Thus, the junior mechanic’s lien was not eliminated by the foreclosure. The court ordered that the property be sold at auction. The lender appealed.

The court of appeal reversed the lower court, finding that no merger had occurred. It first noted that, under ordinary circumstances, where the holder of a mortgage acquires the estate of the mortgagor (debtor), the mortgage interest is merged in the fee and the mortgage is extinguished…. But this rule is never applied where there is an intervening lien on the property, and where there is no evidence of an express intention to extinguish the first mortgage and hold subject only to the second.

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The security first rule is one of the numerous anti-deficiency protects provided to borrowers under California law. “Security first” means that a creditor must first exhaust all real property security through judicial process in the “one form of action” authorized by Code of Civil Procedure section 726–that is, a judicial foreclosure. The rule is violated if the lender attempts to obtain a personal judgment against the debtor before first exhausting all the real property in a judicial foreclosure lawsuit. This can be a serious penalty in the case of commercial properties, and lenders and borrowers should consult with a real estate attorney to be sure of their options. If the creditor violates the security first rule, it loses its chance to get a deficiency judgment, which holds the borrower personally liable for the balance of the debt above the value of the property.

If the borrower raises the security first rule as an affirmative defense, there are four ways the case may proceed:

1. The lender may amend the judicial foreclosure to include the omitted security;

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When the same debt is secured by liens on both real property and personal property, the lender has options as to how they are allowed to enforce their security interest. They can enforce against the real property under real property law, against personal property under the Commercial Code, or both. There are specifics under both areas of law which must be observed, or the lender may lose their security, and a party in this situation may want to consult with a business and real estate attorney. Otherwise, they may run into the problem faced by a lender recently when they failed to adequately describe the personal property in the deed of trust. The Court of Appeals found that the deed of trust did not successfully describe personal property as additional security, and thus any further recourse for the lender would be contrary to the purpose of the antideficiency laws.

mixed collateral attorney sm.jpgIn Thoryk v. San Diego Gas and Electric Company, the owner of an avocado ranch in San Diego County wanted to subdivide it into two-acre homesites. The owner borrowed $1 and ½ million from Highland for this purpose. There was a wildfire which did extensive damage to the property, and the project stopped. Highland foreclosed and obtained title to the property. The owner believed that San Diego Gas and Electric was at fault and sued for damages. Highland joined the suit, claiming that its deed of trust was secured by more than just the property, and extended to any of the owner’s recovery of damages caused to the property; i.e. it was also secured by personal property. Highland argued that it was entitled to a judicially imposed lien under the terms of its deed of trust and related note.

The owner argued that he was protected by the antideficiency laws, which prohibits collecting money from the owner after a trustee’s sale. However, where there are liens established upon both personal and real property in the subject transaction, a foreclosing lienholder using the power of sale may continue to pursue remedies against the former property owner/borrower. The creditor is not seeking a personal judgment for the unpaid balance of a loan, but instead seeks to enforce additional security secondarily liable for the principal loan.

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A creditor who is awarded a money judgment in California must still collect the money that they are owed. The two most common steps they take are to garnish wages (if possible) and to record an ‘abstract of judgment’ in any county where the debtor owns real estate. The abstract then creates a lien against the property. If the owner seeks to sell, or refinance, the judgment must be paid off to clear title. The judgment creditor could also foreclose the judgment lien, if there is sufficient equity in the property.

However, what if a senior lien forecloses? In a decision out of Costa Mesa, the judgment creditor was disappointed to learn that recording the abstract was not enough. As explained below, the foreclosing trustee was not required to search the record for abstracts. The creditor is required to also record a request for notice under Civil Code section 2924b(a). However, that does not work if a notice of default had been already recorded – in that case the creditor must monitor the foreclosure, and make a demand on the trustee immediately after the sale, before surplus funds have been distributed. Unsure creditors should consult with a Yolo and Sacramento real estate attorney.

Yolo real estate attorney 3.jpg In Banc of America Leasing & Capital, LLC v. 3 Arch Trustee Services, the creditor obtained a judgment against the real property owner. It recorded an abstract of judgment. Unfortunately for the creditor, the notice of default and notice of sale had already been recorded. The sale occurred, and, the borrower having equity in the property, there was a surplus of almost $115,000 left after paying the senior lien. The trustee paid this money to former owner, who also had the judgment against him. He made out ok.

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California real estate law applies the first in time, first in right rule to recorded mortgages and deeds of trust. The lien recorded first, (senior) has priority to any recorded later. The result is that if the senior lender forecloses, the security of the second (junior) is wiped out. That means that the junior merely has a promissory note to enforce against the debtor, and no lien to foreclose. The lien is relied on by the lender as security, meaning that the best chance to get paid back the debt is to foreclose. After the senior forecloses, the junior can only file a lawsuit against the borrower, who may not have assets beyond the real estate that was foreclosed upon. There is an exception to the rule – if the senior modifies their loan enough that it significantly changes the risk to the junior that the senior loan may not be repaid, the senior may lose priority, and they swap places – the junior, or second, lienholder, may move into first place. Parties modifying a senior loan may should consult with a California real estate lawyer to determine whether this is a problem in their situation. In a 1998 decision the third district court of appeals explains the ground rules, and the junior lienholder was disappointed because the senior loan was not modified severely enough.

junior lienholder real estate law.jpgIn Thomas P. Friery et al. v. Sutter Buttes Savings Bank (61 CalApp 4th 869), Friery owned commercial property in Yuba City subject to a loan held by Sutter Buttes Savings Bank the first, or senior loan). She sold the property to Herminito and Eloisa Briones, and took back a note secured by a deed of trust (the 2nd, or junior lien). The sale triggered the “due on sale” provision of the senior loan, which allowed Sutter Buttes Savings Bank to call the entire loan balance as due. The Bank and the Briones entered a workout agreement, which allowed the Briones to assume the loan, and modified terms of the original promissory note. The maturity date was advanced five months, and the Briones were required to pledge two additional properties as security. Friery did not know about the modification.

The Briones defaulted, the Bank began foreclosure, and Friery brought this lawsuit, claiming that the modification agreement so increased the likelihood of Brione’s default as to amount to a substantial impairment of their security interest. They argued that the Bank owed a duty to refrain from making such a modification.

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In the typical California home loan foreclosure, The first loan forecloses, and the second loan against the property loses its security. The question then becomes whether or not the borrower will be personally liable for the debt on the second loan. If it was a purchase money loan, the borrower probably is not liable; if a refinance, then they probably are liable. With the wave of foreclosures that has hit California, there are a large number of unsecured 2nd loans out there. A Texas company, Heritage Pacific, has spent millions buying up large pools of 2nds at low cost, amassing an inventory of at least 40,000 second-mortgage notes. Heritage Pacific claims that it focuses on borrowers who committed fraud in applying for their loans. In a recent case out of Richmond, the borrower may well have committed fraud, but Heritage Pacific was surprised when the court said they could not sue for fraud, because they were not assigned the fraud claims along with the promissory notes.

sacramento 2nd deed of trust attorney.jpgIn Heritage Pacific Financial v. Monroy, the borrowers’s son was having trouble with his mortgage, so his mother bought his house in 2006 for $450,000. She financed the purchase with a 100% loan consisting of a first and a second. In the loan application Monroy claimed she made $9,200 a month as a house cleaner. She also signed a declaration that she did not have a family or business relationship with the seller of the property. That looks pretty bad. She defaulted, and the property was foreclosed in August 2008.

Heritage Pacific Financial filed suit, claiming Monroy committed fraud in connection with her loan application. The trial court found that, while Heritage had shown evidence that the promissory note and related contract rights had been assigned to it, it could not claim that the original lender’s fraud claims had been assigned. On appeal, Heritage claimed that the assignment of tort claims was implied by the following language in the agreement between Heritage and the original lender:

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It is widely understood that in California, when it comes to owner-occupied homes, if the seller carries back a loan, taking a deed of trust to secure the purchase price, if the buyer defaults on the loan the seller may not obtain a deficiency judgment. The seller is limited to foreclosing the deed of trust and getting the house back. In a recent situation the buyer obtained their primary loan from a commercial lender (Washington Mutual) and did not want the seller to also have a deed of trust against the property, so the seller recorded the deed of trust later. The seller could not then claim that they did not make a purchase money loan.

Sacramento mortgage foreclosure attorney.jpg In James Enloe v. Casey Lee Kelso, Enloe sold their house to Kelso for $1.9 million. The sellers got a purchase money loan from Washington Mutual for around $1.8 million and change, and the seller was going to carry back a loan for the balance of about 5% of the purchase price. But Washington Mutual did not want a another deed of trust recorded behind its own. The facts are not clear in the opinion, but it may be that Washington Mutual wanted the buyer to have cash in the deal- like a five percent down payment. If the Seller’s deed of trust was to record in escrow, the Washington Mutual loan would not close. So, the crafty buyer and seller came up with a scheme (to defraud the lender?) In which the deed of trust would record after the sale escrow closed.

Prior to close of escrow, the buyer signed a note secured by a deed of trust in favor of the seller for the 5%. The seller gave the buyer a personal check for that amount. Because escrow would not accept a personal check, the check was marked void. Escrow then closed. Again, the court decision does not indicate if the buyer came up with more cash (to the tune of over $90,000) to cover the five percent difference, but the money came from somewhere. On the same day escrow closed, the Seller gave the buyer a check for 5% amount. A few days later the Seller recorded their deed of trust.

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California deeds of trust, which secure debt on real property, involves three parties. First, is the Trustor, who borrowed the money. Second is the Beneficiary, who lent the money. Third is the Trustee, whom sort of holds title to the property for the benefit of the beneficiary, and has the power of sale. If the debtor fails to pay the loan, the beneficiary/lender may instruct the trustee to begin the foreclosure process, resulting in a trustee’s sale, at which the lender may make a credit bid. The purpose of this arrangement is to give the lender a quick and easy way to deal with a defaulting borrower. Sometimes there are errors in the process, major and minor, and parties involved may want to consult a Sacramento real estate and foreclosure attorney to clarify their rights. As a disappointed buyer at a trustee sale learned recently, courts distinguish between the type and timing of errors made by the parties, in occasionally allowing the trustee to set aside a sale they made, and allow them to start over.

Yolo foreclosure attorney.jpg In David Biancalana v. T.D. Service Company, Biancalana was the successful buyer at a trustee sale for a property in Watsonville. The problem arose because the trustee made a mistake on the credit bid. Civil Code section 2924h requires that bidders at a trustee sale must bring cash, but that the beneficiary (lender) can make a “credit bid’; they can make a bid up to the total amount due, including the trustee’s fees and expenses, without bring any cash to the sale. Here, the beneficiary told the trustee that the total debt, or its credit bid, was $$219,105. However, T.D., the trustee, told its auctioneer that the total debt was only $21,894.17. The day before the sale Biancalana contacted the trustee and confirmed that the debt was only $21,894; at the sale, the auctioneer verified that this was the opening bid, so Biancalana won the auction with a bid of only $22,000- jackpot!

However, two days later, before delivering the sale deed, the trustee contacted the buyer and said sorry, we made a mistake. The buyer sued. The court first noted that, when a trustee’s sale deed is delivered, and it has the statutory recitals, then a conclusive presumption arises that the sale is good. However, here, there was no deed. If there is a defect is the process identified before the deed, the trustee may abort the sale and start over if there is “gross inadequacy of price coupled with even slight unfairness or irregularity…” Here, there was gross inadequacy of price. The mistaken opening bid was less that 10% of the actual debt.

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Many California real property owners have challenged lenders foreclosure proceedings based on state and federal laws enacted the past few years to help homeowners during the real estate collapse.. In most cases, the courts have found that the laws do not create new, enforceable rights, with a few exceptions. Mis-interpretation of requirements placed on lenders, through statutes and language of the deed of trust could be perilous, and interested parties should consult with an experienced Sacramento & Yolo real estate attorney. A recent decision out of Alameda County presents one such case, where the deed of trust required the lender to follow HUD servicing guidelines.

Foreclosure sacramento attorney.jpgIn Pfeifer v. Countrywide Homes, a mother and son obtained a $607,000 loan that was purchased by Countrywide. The mother was incompetent, and the son was her court appointed guardian ad litem. It was an FHA guaranteed loan. The standard FHA form Deed of Trust stated, in paragraph 9, which sets forth the “grounds for acceleration of debt.” It states:

“[l]ender may, except as limited by regulations issued by the Secretary, in the case of payment defaults, require immediate payment in full of all sums secured by this Security Instrument… that the “[l]ender shall, if permitted by applicable law … and with the prior approval of the Secretary, require immediate payment in full of all sums secured by this Security Instrument ….” In subdivision (d), under the heading of “Regulations of HUD Secretary,” the agreement reads as follows: “In many circumstances regulations issued by the Secretary will limit Lender’s rights, in the case of payment defaults, to require immediate payment in full and foreclose if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary.”

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A deed of trust represents security for the loan. It has several parties- a) the trustor, who is the borrower and owner of record for the real property that is security for the loan; b) the beneficiary, who is the lender whose debt is secured by the deed of trust; and c) the trustee, who holds bare legal title only for the purpose of conveying it in the event of a foreclosure. The deed of trust contains a “power of sale,” giving the trustee the ability to foreclose. Once the deed of trust is created and recorded, if there is a default, the beneficiary routinely changes who the trustee is by recording a “substitution of trustee,” putting a new trustee in the job. Homeowners in this situation should consult with a Sacramento and Yolo real estate attorney to determine their rights. In a recent case, the borrower- homeowner who lost their property to foreclosure realized that the original deed of trust did not name a trustee, and sued to set aside the foreclosure sale. The court said no.

deed of trust attorney sacramento.jpgIn Shuster vs. BAC Home Loans Servicing LP (formerly known as Countrywide Loan Servicing) Shuster borrowed $670,000 to buy a house in Simi Valley. Mortgage Electronic Registration Systems, Inc. (MERS) was named beneficiary; but there was no trustee named in the document. Shuster ended up in default, MERS recorded a Substitution of Trustee, and the new trustee foreclosed. Shuster brought this action.

Shuster argued that, with no trustee, there was no one to receive the conveyance of bare legal title. This transforms the deed of trust into a standard mortgage. Under California law, a mortgage that is not standard deed of trust (with a power of sale) may only be foreclosed by judicial foreclosure – filing a lawsuit for foreclosure and obtaining a court order.