Last week I discussed the use of the all-inclusive or wrap deed of trust. First, some definitions. The Seller owns property and pays the underlying note secured by the underlying deed of trust. The Buyer is the person who commits to pay the overriding note to the Seller secured by the All-Inclusive Deed of trust. The underlying note is the existing note that is wrapped by the Buyer’s new note and deed of trust. And the “AITD” is All-Inclusive security instrument.
Given that both parties play a significant role in the life of the transaction, there are many considerations to negotiate.
There may be restrictions on Right of the Seller to refinance the underlying note.
What is the obligation of the Seller older to pay the underlying note in the event of acceleration of the underlying note due to: a. borrower’s default, b. acceleration because of the transfer?
Should the Buyer pay to a collection agent to make sure the underlying note gets paid?
Once the Seller’s equity is paid off, does he continue to collect the spread (the difference between the interest on the underlying note and the Buyer’s note) or is his note deemed paid?
The Buyer should be able to pay the underlying note directly if the seller does not, and the Buyer can deduct these payments from the next installments of the AITD.
If the Buyer defaults and Seller advances money to pay the underlying note, should the seller be able to add the payments (or the costs related to a non-payment default) to the balance of the all -inclusive note? The seller is entitled to interest on their cash advances.
Any default under the terms underlying note, other then for non-payment, should also be a default of the overriding note that the Buyer can enforce.
The manner of declaring default and conducting a foreclosure should be outlined in the AITD, to ensure support from title companies.
If the underlying note contains a prepayment penalty, the AITD, should have at least the same. Regardless, if the Buyer prepays the Seller’s equity, so that only the balance of the underlying note remains, the Seller loses their interest override. If the Seller wants to maintain the yield, they will need a prepayment penalty in the AITD.
When the unpaid balance on the AITD is the same as the principal balance due on the underlying note, will the Buyer be entitled to a reconveyance of the AITD?
The AITD needs to mirror or better the terms in the underlying note:
due on sale (acceleration) provisions;
timing of payment and amount of late charges ;
prepayment restrictions and penalties;
tax and insurance impounds;
insurance requirements and premiums;
leasing, condemnation, repair, and construction rights.
The real estate industry works in cycles and this author believes the wraparound mortgage will soon be new again. Given their complexity, it is necessary to consult an experienced Sacramento Real Estate Attorney to ensure the documents are drafted with sufficient protection for your interests.