Articles Posted in Mortgage

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“Equitable subordination” is used to correct equitable wrongs in the priority of liens on real property. If fairness requires, a first lien or deed of trust can be subordinated, or reduced in priority below, a second lien, swapping their positions. (Civ. Code, §§ 2876, 2903, 2904. A lengthy description by the Supreme Court is copied below). When, through fraud or mistake, a party finds that his lien does not have the priority he bargained for, they should consult with a Sacramento real estate attorney to discuss equitable subordination. Such a lawsuit may result in the judge reclassifying the respective liens to make them fair. In a recent decision the court granted equitable subordination on behalf of two deeds of trust where there was both broker fraud (in forging signatures) and escrow negligence in failing to carry out instructions and reconvey a deed of trust.

Sacramento equitable subordination of loan.jpgIn Elbert Branscomb v. JPMorgan Chase Bank N.A., Navjot owned property on Canal Street in San Rafael. He had three loans; 1st, from Washington Mutual Bank; 2nd with MMB; and 3rd, a $500,000 loan from plaintiff Branscomb. All were secured by deeds of trust. However, Banscomb’s 3rd DOT only indicated that I the loan was for $100,000, due to the broker’s negligence. Navjot refinanced with WaMu, and Modified the MMU loan. Conditions of both were that the lenders were to keep their respective first & second positions. When the escrow officer asked Branscomb’s broker for a payoff of the third, he replied that it was zero, and signed a request for reconveyance. (Yikes, it was $500,000! This broker was bad news. He was also found to have forged his client’s signature on a number of documents. He had done this before, but Branscomb continued to work with him. They deserved each other.) Compounding the broker’s error, the escrow officer was negligent in not reconveying the Third deed of trust. When the first & second refinances recorded, Branscomb moved to 1st, and the other two dropped to 2nd & 3rd. This lawsuit for equitable subordination resulted.

Knowledge of the Plaintiff’s Lien Did Not Prevent Subordination

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A Deed of Trust in California can be used to secure contract obligations other payment of money. Usually, the primary obligation secured is the repayment of the loan. There are ancillary duties usually set out in the deed of trust, such as keeping the property in good repair, maintaining insurance, etc. However, in some cases the other obligations may be a primary secured obligation. Enforcement, by judicial foreclosure or nonjudicial trustee’s sale, essentially provides a dollars remedy through a foreclosure sale. Thus, the obligation being secured must be capable of liquidation (i.e. determining a specific monetary value) before enforcement. The contract may include a liquidated damages provision, which specifies how to calculate that monetary value. Whether a liquidated damages clause is enforceable is not always clear, and interested parties may want to consult with a Sacramento real estate and business attorney for clarification. Otherwise, without liquidated damages, determining the amount of damages would likely require a judicial foreclosure, in which monetary damages will be determined.

yolo and sacramento real estate attorney.jpgA dilemma arises when the property owner pays off the loan, but has not yet completed full performance of other obligations secured by the deed of trust. Usually, on paying off the loan, the borrower wants the lender to record a reconveyance of the deed of trust, effectively removing the ‘lien’ from the record. However, courts have found that reconveyance was not required. Such was the case in Dieckmeyer v. Redevelopment Agency of the City of Huntington Beach, where the plaintiff bought a condo through an affordable housing program. The program included restrictions on household incomes, and on future buyers. The deed of trust securing the purchase loan stated that it secured repayment of the note, future advances or obligations of the borrower, and…

“[p]erformance of each and every obligation, covenant, promise or agreement of Trustor contained herein in the Loan Agreement between Beneficiary and Trustor … and in that certain Affordable Housing Agreement [the CC & R’s] currently recorded on the property….”

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The Marketable Record Title Act (MRTA, Civil Code section 882.02+) was enacted so that ‘ancient mortgages’ would not last forever. Prior to the act, lost or forgotten mortgages and deeds of trust would continue to be a cloud on title. The MRTA became law in 1982 to put an outside limit on the number of years that the power of sale in a deed of trust may be executed. The MRTA provides that if the “evidence of indebtedness” recorded with the county recorder contains a reference to the maturity date of the secured debt, the right to foreclose by private trustee’s sale will expire 10 years after maturity. If no date of maturity is provided, the limit is 60 years after recordation of the deed of trust. The trustee’s deed must be recorded before the time is up. The limit to conduct a judicial foreclosure, however, is much different. Civil Code section 2911 provides that a lien is extinguished by the lapse of time within which, under the provisions of the Code of Civil Procedure, an action can be brought upon the principal obligation. Generally, this means four years after maturity or breach of a written note.

marketable title attorney.jpgThe beneficiary can extend the time by recording a “notice of intent to preserve interests” prior to the expiration of the prescribed time period. If this notice is timely recorded, the period is extended until 10 years after the notice is recorded. Civil Code section 880.310(a), 880.020(a)(3). If one has a concern about the limitations of their deed of trust, they should consult a Sacramento and Yolo county real estate attorney.

Prior to a 2006 amendment, the statute required the maturity date be “ascertainable from the record…”. This resulted in an issue which had been raised several times, and courts have had varying opinions about, namely, what happens if a Notice of Default is recorded? One decision found that this triggered the 10 year statute. Another court has said it did not. A third decision, from the Third District Court of Appeal (which includes the greater Sacramento area), found that it did not trigger the 10 year statute. The statute was amended in 2006 to resolve this issue, essentially providing that a Notice of Default does NOT trigger the limit. The discussion which follows concerns the 3rd District decision, and why interpreting the older language to allow the NOD to trigger the limit would be preposterous.

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A Loan Guaranty is a promise by the guarantor to pay the debt of another. In commercial real estate loans they are commonly used to provide additional security to the lender. Such loans are often given to new entities without a financial history, and the lender wants a person (with assets) on the hook for the debt if the entity fails. Last week I discussed a decision where the guarantor excluded a house from liability on the guaranty, but when he sold the home, the cash proceeds could be grabbed by the creditor. This article concerns the scenario in which the guarantor can escape liability, if the it turns out that they signed what courts consider a “sham guaranty.” This could arise due to deliberate action by the lender, insufficient investigation by the lender, or inartfully worded guaranty language. Parties concerned about what exactly their guaranty covers should consult with a Sacramento real estate attorney.

sacramento loan guaranty attorney 1.jpgCivil Code section 2787 provides that a “guarantor is one who promises to answer for the debt, default, or miscarriage of another…” What has become known as a sham guaranty is one where the guarantor is found to be the same as the borrower. The clearest case is where an individual signs a promissory note promising to pay the debt. The lender requires the same individual to sign a guaranty for the same debt, waiving many defenses. For example, there are statutory anti-deficiency protections for real estate borrowers, prohibiting the lender from collecting from the borrower. These protections are not extended to guarantors, and loan guaranties usually have waivers of all these defenses. In the sham guaranty the lender may think that by having the same borrower guaranty the loan allows for a deficiency judgment against the borrower as guarantor. Or, it may be used in hopes that the borrower/guarantor does not understand, and truly expects to be personally liable for the debt.

The sham guaranty defense extends to partnerships. In a general partnership, where each partner is already liable for debts of the partnership, their guaranty of partnership debt would be a sham. For Limited Partnerships, the same could apply to the general partner. River Bank America v. Diller is instructive, in a case where the principals of the corporate general partner signed the guaranty. The Bank wanted the borrower to form a limited partnership to be the borrower. A new entity was formed to be the general partner. The lender always considered the individuals as the primarily obligors, and had them guaranty the loan. The lender did not investigate the financial health of the new entity created to be general partner. The court found that, had the individuals themselves been the general partners, and had they attempted to guarantee the debt, there is no question such guaranty would have been a sham. Instead, the general partner of the primary obligor is a corporation which the individuals fully owned and controlled. However, the court found that this was a distinction without a difference. (The court was influenced also by evidence of the lender’s intent to subvert the antideficiency protection.

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The California Legislature enacted, and then revised, Code of Civil Procedure section 580e in response to the collapse of the housing market. As reported elsewhere, 580e now prohibits deficiencies whenever a short sale is approved by a lender on a residential property. Prior to that, it was common for lenders to claim the borrower owed the balance of the loan not paid off in the short sale. However, a decision this summer, applying the law as it existed prior to 580e, held that 580b prohibited collection of a deficiency after a short sale. The decision ignores some language in 580b, but now provides an argument for deficiency protection in short sales prior to the effective date of 580e.

****NOTE*** Since this was written, The justices of The California Supreme Court, at their weekly conference in San Francisco Wednesday Nov 22, voted 6-0 to grant review of this decision, thus it is not a final decision.

deficiency judgment attorney.jpgIn Carol Coker v. JP Morgan Chase Bank, N.A., Coker owed $452,000 purchase money debt for her property in San Diego. She stopped paying the loan, and a notice of default was recorded. She negotiated a short sale, which Chase Bank approved subject to several conditions. The important one here is that the amount of the sale proceeds paid to Chase Bank was for the release of Chase Bank’s security interest only, and Coker was still responsible for any deficiency balance remaining on the loan after application of the proceeds received by Chase Bank. This was typical of the requirements seen by Sacramento Real Estate attorneys a few years ago; sometimes, the lender would require the seller/borrower to sign a new promissory note. The sale closed, and Chase Bank sicced a collection agency on Coker, demanding $116,686. Coker filed this lawsuit for declaratory relief, seeking a ruling from the court that 580b and 580e prohibited Chase Bank from collecting a deficiency based on this loan. 580e did not apply retroactively, so the court dismissed that claim. On appeal, however, the court found that 580b did apply to prohibit the deficiency.

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Acceleration clauses are standard in loans secured by California real estate. The clause provides that on the happening of a listed event, the lender (or beneficiary) may call the entire loan balance due and payable immediately. The events stated are usually a) if the borrower (trustor) defaults on any provision of the loan, b) if the property is sold or otherwise transferred, and sometimes c) if the property is otherwise encumbered (most likely by taking out another loan). If the note or contract language provides for it, acceleration could also require payment of any prepayment penalty. If there is no contract provision allowing for acceleration, the lender is stuck – if the borrower defaults in one or two payments, the lender could only foreclose on those delinquent payments Lenders and borrowers concerned about acceleration, and how it is triggered, should consult with an experienced Sacramento real estate attorney.

Acceleration clause el dorado real estate attorney.jpgSome Contract defaults that may trigger acceleration

The typical default is where the borrower does not make an installment payment. Also common are failure to pay taxes, or property assessment, or HOA fees; failure to pay property insurance premiums, or allowing an insurance policy to lapse; or, failing to pay an obligation which is senior to the subject deed of trust.

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Since the start of the HAMP program, servicers have been providing trial plans while leaving the door open to claim that there has not been a modification. As described by Diane Thompson in “Foreclosure Modifications” (86 Wash. L.Rev. 755) servicers recover all their costs after a foreclosure) and receive fees beforehand – the incentive is to stretch out the delinquency without a modification or foreclosure. Courts have slowly been acknowledging the unfairness of this system, in which the property is eventually foreclosed. One decision was based on enforcement of contract based on an offer and acceptance ; another on grounds of promissory estoppel. In a recent decision, the servicer claimed that, as there was no modification agreement signed by the servicer, the owner’s claim is barred by the statute of frauds. The court said no -the doctrine of equitable estoppel barred the defendant from raising this defense, as it would constitute fraud.

Sacramento real estate attorney1.jpg In Angelica Chavez v. Indymac Mortgage Services, Chavez had a $380,000 refinance loan secured by a deed of trust. She got behind and began loan modification talks with Indymac. They offered her a “Home Affordable Modification Trial Period Plan (Step One of Two-Step Documentation Process)” (the Trial Period Plan) under HAMP. The Trial Period Plan required her to make three monthly payments.

The Trial Plan Language

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California residential borrowers, in trouble on their mortgage, know the lengthy frustrating process for seeking a loan modification. Some have told me that they believe it is a con game, where they get the borrower to make more payments under a trial program, with no intent to modify the loan -get some more cash, then foreclose. I recently wrote about the West v Wells Fargo decision where a California Court found that, due to promissory estoppel, Wells Fargo could not tell the homeowner that they would get a modification if they followed the rules, but then not offering the modification after the borrow did everything required. Recently, in Corvello v. Wells Fargo Bank the Court of Appeals for the Ninth Circuit, governing all federal courts in California, addressed the issue. Where the loan modification was conditional on Wells Fargo returning a signed copy of the agreement, and the borrower did everything required, the Ninth Circuit held that the lender was obligated to offer the modification – otherwise, injustice would result.

Yolo real  estate attorney.jpgIn Corvello v. Wells Fargo Bank, the court framed the issue: whether the bank was contractually required to offer the plaintiff a permanent loan modification after they complied with the requirements of a trial period plan (“TPP”). The answer was yes. The court first reviewed the federal programs resulting from TARP to assist homeowners. It noted that Wells Fargo, and others, signed “Servicer Participation Agreements” with the U.S. Treasury. It entitled the lenders to incentive payments for loan modifications, and requires them to follow Treasury guidelines.

The Treasury Regulations require the following steps;

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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.