Palo Alto real estate attorney Julia Wei providing commentary and insight into trends in California real estate law and lending law, mortgages and foreclosures.
In the recent case of Tarlesson v. Broadway Foreclosure Investments, LLC (May 17, 2010), the California Court of Appeal upheld a debtor's homestead exemption despite the fact that she had deeded away the property at one point because it was deeded back to her.
It appears that the creditor attempted to have a judicial foreclosure or otherwise levy debtor's residence. Debtor claimed a $150k exemption in the home (pursuant to California Code of Civil Procedure 704.740 and Article XX, section 1.5 of the California Constitution) and creditor objected on the grounds that Debtor had not owned the property continuously.
The Court upheld earlier precedent that since the debtor had continuously resided at the property, that was a sufficient equitable interest to claim a homestead exemption.
Additionally, the creditor argued that debtor should have only been entitled to $50k for her exemption, but the debtor gave evidence (a declaration) that she was single, over age 55, and earned less than $15k/yr to qualify her to a larger homestead exemption.
What is interesting about this case is that although the court looked at the "equitable" interest that debtor had in the property, there was no discussion of whether she had unclean hands or engaged in otherwise inequitable conduct in deeding her property back and forth.
Many private money (or "hard" money) lenders enjoyed the consistency of borrower payments during the economic boom. The recession has put a real squeeze on borrowers and many are now defaulting on their loans. While some may be angling for a "strategic default," many borrowers who wish to keep their home or their business will file a bankruptcy petition and seek the protection of the automatic stay to halt their creditors from foreclosing.
What does the Automatic Stay mean? Exactly what it sounds like, it stays all creditor acts until or unless the bankruptcy court grants the creditor relief from the automatic stay.
How does a creditor seek "relief from the automatic stay"? In the traditional loan secured by real estate, the creditor can allege that they are not adequately protected by a sufficient equity cushion or that the debtor does not need the property as part of their reorganization (Section 362). Often this requires an appraisal of the collateral to determine just what the equity cushion is.
Does the Debtor/Borrower have to make payments to the lender even during their bankruptcy? Depends. Again, this goes back to whether or not the Debtor is trying to reorganize their debt and their bankruptcy plan. In a Chapter 13 ("Wageearner") filing, the debtor is obligated to make post-petition payments. Alternatively, creditors can seek "adequate protection" payments in the alternative to terminating the automatic stay.
What if my loan is underwater? Beware the CRAMDOWN or LIENSTRIPPING. Here in Santa Clara county, there has a been a flurry of lienstripping where underwater junior liens are "stripped" -- but that is a topic for another day.
When a judgment creditor has gone all the way to verdict, has obtained the Judgment, the first thing the Judgment creditor does is record an Abstract of Judgment in the counties where the creditor thinks or knows that the debtor owns real estate.
For example if the judgment creditor is the prevailing party in a litigation Santa Clara County, and the debtor owns real property in Santa Clara County, then that is the logical place to record the Abstract.
A judgment is an unsecured obligation. Once an abstract of judgment is recorded in the county where the debtor owns property, then it attaches to the debtor's asset and actually becomes a secured lien.
This means the judgment creditor would be treated differently in bankruptcy, as a secured creditor as opposed to an unsecured creditor and is generally paid more in a reorganization. Secured obligations are also not discharged by the bankruptcy.
However, now the judgment creditor must do more than just record the Abstract of Judgment, under a recent California Appellate court ruling, the creditor must also record a Request for Notice. [BANC OF AMERICA LEASING & CAPITAL, LLC, Plaintiff and Respondent, v. 3 ARCH TRUSTEE SERVICES, INC., Defendant and Appellant. (2009) 180 Cal. App. 4th 1090; 103 Cal. Rptr. 3d 397]
Let me explain:
Say you have a judgment against Joe Smith. He owns a house in Palo Alto or Mountain View. You record your abstract of judgment for $50k in Santa Clara County. You request a title search or property profile from your buddy in customer service at the title company to verify that your abstract is showing up in the title search. Turns out Mr. Smith has a big loan from Wells Fargo for $600k and another home equity line of credit in the amount of $100k from Chase bank. Your judgment goes behind those two mortgage trust deeds.
Smith defaults on his loan. Wells Fargo starts the foreclosure and records a Notice of Default, they order their Trustee's Sale Guarantee and your abstract does NOT show up as someone Wells Fargo must notify. They do not notify you and they conduct the sale. There are many bidders, the final bid is $785k, which would have been enough to pay all mortgages off and satisfy your judgment lien. Except--you were not notified of the sale, you did not get notified of a surplus and you did not submit a claim for the overbid amounts. Debtor Smith has his homestead exemption and receives the $85k.
What went wrong? Why weren't you notified of the foreclosure sale and overbid? Answer - because the Trustee is only required to notify other mortgage holders and those who record a Request for Special Notice. That means judgment creditors, tax lien claimants, mechanic's lien claimants, easement holders and lessees are not protected.
The Court concluded that the Trustee did not have any obligation to further search public records or do anything more than was required under the California Civil Code Section 2924 et seq. The fact pattern of the case had a lot to do with timing, since in the BofA case, the creditor actually recorded his Abstract of judgment just one month before the sale had been conducted, so they were not included in the Trustee's Sale Guaranty and the Trustee did not get an update before sending out the notice of surplus claims.
When should it be recorded? Technically, the Code allows the creditor to record it anytime after the lien and anytime before the Notice of Default. That means, do it the same time that you record your Abstract and just ask the recorder to make the Notice second.
EVERYONE'S FAVORITE TOPIC - more on CALIFORNIA'S ANTI-DEFICIENCY LAWS
This week’s reader Dhillon writes: “To my understanding,
under 580(d), if a junior lender uses non-judicial means to foreclose on the
property, then he or she is barred from seeking a deficiency judgment (please
correct me if this is wrong).
Now, suppose a homeowner obtained a non-recourse/purchase
money loan from BANK X. Subsequently, the homeowner obtained a HELOC, also from
Bank X. Next, the homeowner fails to make his payments on both loans. BANK X
uses non-judicial means to sell the property at auction for defaulting on the
non-recourse loan/purchase money.
Normally (at least I think), when you have a senior and
junior lender, they are not the same party. In that situation, it would be
unfair to bar the junior lender (promissory note) from seeking a deficiency
judgment after the senior lender chooses to use non-judicial means to foreclose
the property since he had no choice in the matter.
Also, 580(d) would be of no moment because the junior lender
did not foreclose on the property, the trigger to 580(d). However, here, the
junior and senior lender are the same party. BANK X triggered 580(b) when it
foreclosed on the property on the basis of a default on the purchase money loan
through non-judicial means. I think that much is clear.
580(d) reads: No judgment shall be rendered for any
deficiency upon a note secured by a deed of trust or mortgage upon real
property or an estate for years therein hereafter executed in any case in which
the real property or estate for years therein has been sold by the mortgagee or
trustee under power of sale contained in the mortgage or deed of trust.
Now,
did BANK X also trigger 580(d) with respect to the HELOC, barring any
deficiency judgment on the second deed of trust, since, tracking the language of
580(d), it, BANK X, the trustee or mortgagee, sold the real property securing
its loan through non-judicial means?"
Dear Dhillon – this is a common fact pattern because with
real estate prices being so high in Santa
ClaraCounty, most purchasers did have to take
a 2nd loan to buy the property (“purchase-money” or “piggyback” second) or the
properties appreciated so steeply that many homeowners took out a Home Equity
Line of Credit (HELOC) to remodel.
Let me rephrase your question because what it sounds like
you are asking is, “If the 1st and the 2nd lender are the same bank, can that
lender still go after you on the 2nd loan if the 1st forecloses?”
Essentially, does that “junior” lender retain its “sold-out
junior lienholder” status if it the same bank?
Normally, when thinking about 580(d), you are correct, it is
usually 2 different lenders.As I
addressed in last week’s Mailbag with Julia entry, there is no “sale” on the
2nd loan and so the lender is still free to sell the note to a debt collection
agency.
When the same
lender has both loans against the same property and attempts
to enforce the junior loan, the California
Court of Appeals has said the Bank is NOT a sold-out junior and cannot
pursue the borrower under the Note.
Tthe California
Court of Appeals addressed this fact pattern in Simon v. Superior Court [4
Cal.App.4th 63, 5 Cal.Rptr.2d 428 Cal.App. 1 Dist.,1992.]The actual lender there was Bank of America
who held both the first and the second loans against the borrower’s property.The Simons apparently defaulted on their
$1.575M worth of loans so BofA foreclosed (non-judicial sale) under the power
of sale in the senior deed of trust.The bank then sued the borrowers on the junior note.
The Court shot Bank of America down and said:“…we hold that, where a creditor makes two
successive loans secured by separate deeds of trust on the same real property
and forecloses under its senior deed of trust's power of sale, thereby
eliminating the security for its junior deed of trust, section 580d of the Code
of Civil Procedure bars recovery of any “deficiency” balance due on the
obligation the junior deed of trust secured.”
The Court went on further to explain the rationale:“As the holder of both the first and second
liens, Bank was fully able to protect its secured position. It was not required
to protect its junior lien from its own foreclosure of the senior lien by the
investment of additional funds. Its position of dual lienholder eliminated any
possibility that Bank, after foreclosure and sale of the liened property under
its first lien, might end up with no interest in the secured property, the
principal rationale of the court's decision in Roseleaf. (59 Cal.2d at p. 41,
27 Cal.Rptr. 873, 378 P.2d 97.)”So
there you have it.Same lender? No
deficiency arises from the bank’s own actions.
Here’s the twist – what happens if Chase or Wamu has the 2nd
and later the bank who had the first acquires the 2nd through a merger or sale?
Should the same rule apply? I would argue yes because the bank who acquires the
2nd still has the power to decide how they want to handle the foreclosure
aspect.What about the reverse? 2
simultaneous loans go on with the same lender but the lender sells one later
and now 2 different lenders hold the notes? Think in that circumstance, then
one lender cannot control what the other is doing and clearly, if the new 1st
forecloses, there is a strong argument that the 2nd is a genuine sold-out
junior lienholder.Other legal minds and
real estate attorneys may disagree and argue that in choosing the split the
loan into two parts, rather than making one large loan, the lender assumed the
risk of becoming barred by 580(d) and their sale does not “morph” that loan.
The case of Martinez v. Wells Fargo Bank started in San Francisco over an $800 underwriting fee that the lender charged the borrowers.
The borrowers tried (unsuccessfully) to argue that the fee was an "overcharge" and violated Section 8(b) of RESPA and California's Unfair Competition Law.
The lower court shot it down and yesterday the Ninth Circuit shot it down as well. First, that section of the Real Estate Settlement and Procedures Act prohibits fee splitting or charges for services not actually rendered. It does not restrict how much the bank or title company can charge for that service if it actually rendered.
Secondly, the bank is governed by Federal law, and state law (like California's UCL) would only kick in if there was no conflict or existing federal law that addressed the issue. Apparently the OCC does have regs that address the issue and therefore, no state law interference can disrupt the federal banking system (first year law students here are all nodding because they know where this is coming from!).
What the ruling left open is lenders who are not banks. Ie, private money lenders like your grandparents who make a loan from their pension plan...if they or their agents charge for their services, is there still a potential UCL claim lurking?
Martinez v. Wells Fargo Home Mortgage, Inc., No. 07-17277 (March 9, 2010) 9th Circ.
When I started this blog, it was an added service for my clients, butI find that I am getting constant phone calls and emails from people who are not my clients.To be clear, I work with lenders (private money investors, mortgage pools) and do not engage in borrower or debtor work.99% of these calls and emails I receive are from borrowers who want free legal advice.I don't work like that, but I do believe in giving time and general knowledge to my community.I thought the best way to deal with this was to just start posting some of the fact patterns and my responses.
It's not intended to be legal advice, but I hope it is sufficient general education for people who have an interest.Remember -
I am not your attorney, you are not my client and no attorney-client relationship has been formed by this general discussion.
Today's question (with details removed) from Reader R.B. -
"I have a 80/20 loan on a foreclose primary residence home in California effective 2009. The first loan did a 1099c which charged off $$$k and can be excluded from as an income per Califnornia Debt forgiveness law and second loan that did NOT do a 1099 and instead tranferred the account to a collection agency with the outstanding balance of $$$k. Since its a primary residence, am i still covered by the anti-deficiency law or Federal Debt Morgage Act 2007 that will exclude me for being responsible for the 83k debt deficiency? Since they are not issuing a 1099, how will this affect my 2009 taxes and what's the best way to take care of this?"
Ok, RB - lots of wrong assumptions in this message that I am not sure even where to begin to correct. Obviously I do not have all the facts of your situation either and cannot provide a meaningful analysis.Also, I do not give tax advice, and you need a tax specialist for that.
That said, you should understand that if you have two loans, you have two lenders who could have foreclosed.If one lender foreclosed, so only one lender was “paid” by the foreclosure sale. That lender used the power of sale in the Deed of Trust (one of the two loan documents, listen to my DirtLaw Primer Podcast series for more explanation of your loan documents.) If the “sale price” at that foreclosure sale did not satisfy the loan amount, the law is still that the lender is deemed fully paid, and the deficiency is what you may receive a 1099 for.
However, the other lender is not paid and is still owed money.And, now there is no collateral for that bank to foreclose on. They are what we call a “sold-out second” or “sold-out junior lienholder.” Accordingly, that unpaid lender can sell the Promissory Note to a debt collection company.The collection agency can continue to pursue the debt on the unpaid loan.
There is no "deficiency" in this circumstance for the 2nd lender. There must be an actual sale to create the deficiency. Since the property was only sold once here, only that lender conducting the sale ended up with a deficiency between the value of the collateral and the amount of their loan. The 2nd lender ("sold-out junior lienholder") had no sale and no deficiency and therefore the borrower has no anti-deficiency defense or protection as to the sold-out second lender.
You should contact your local county bar association and ask for the Lawyer Referral Service for a
bankruptcy attorney or other real estate attorney to answer your questions.
Other assumptions – do not assume that the California tax rules and the Federal tax rules on mortage debt forgiveness relief are the same.They are not and the California FTB explains this here:
Christopher Diener of Orange County had already been suspended by the California State bar last year:
"In addition, CHRISTOPHER L. DIENER [#187890] of Irvine, principal attorney for Home Relief Services LLC, was placed on inactive status Oct. 9. Attorney General Jerry Brown sued Diener last summer and accused him of telling homeowners he and his company would act as sole agent and negotiators and directed the homeowners to stop contacting their lender. None of the known victims received a loan modification with the company’s assistance."
That was juicy enough but apparently, the Orange County D.A. was on top of things because then last month I read in the Orange County Register:
"County prosecutors arrested today two Ladera Ranch men – and issued a warrant for a third – accusing them of defrauding more than 400 homeowners in an alleged $1.25 million loan modification scam.Christopher Lee Diener, 42, Terrence Green Sr. 43, and Stefano Joseph Marrero, 40, are each charged with a felony count of conspiracy and 97 felony grand theft counts, according to the Orange County District Attorney’s office.
Diener and Green were taken into custody this morning, and are each being held on $1.5 million bail. They will be arraigned Tuesday. A $1.5 million warrant has been issued for Marrero.
The business partners are accused of getting upfront fees from homeowners, and falsely promising they can get them loans with cheaper payments in less than 90 days and offering a 100 percent money-back guarantee, prosecutors said.
Their businesses were run under the names of Home Relief Services LLC; U.S. Loan Mod Processing, HRS Communications, The Diener Law Firm and Diener Law Group, prosecutors said."
Well, according to the Daily Journal, his bail has been lowered now to $650k, and will stay in custody longer in part due to traffic tickets! Seriously...this man is charged with defrauding homeowners of more than $1M, and the thing keeping him in jail is get this--too many traffic tickets. It's like that expression, "you're more likely to be bitten by a mosquito than a rattlesnake."
This case caught my attention. Given the re-finance frenzy of mortgages in California and the surging real estate values here before the subprime meltdown, it's not a surprising fact pattern:
Borrower refinances her California condo three times, and on the 3rd one, Chase Manhattan bank neglects to record its deed of trust. Now all Chase has is an unsecured loan based on the promissory note. This is bad for Chase (bad for any bank or lender!).
In the meantime, Borrower files a petition for Chapter 13 bankruptcy, and lists the unsecured lien to Chase in her bankruptcy schedules- theoretically good for Chase.
The borrower's bankruptcy gets dismissed and she files again, this time a Chapter 7 (or what we fondly refer to as a Chapter "20"), and again lists her loan to Chase on her bankruptcy schedules. Chase sues to quiet title and wins on the theory of equitable subrogation and that the previous bankruptcy gave constructive notice. The Chapter 7 trustee takes it up on appeal and wins at the Bankruptcy Appellate Panel level.
Chase then appeals that BAP decision and the Ninth Circuit concludes: Bankruptcy Trustee wins, the strong arm powers to avoid any transfer characterize the trustee as if the trustee is a bona fide purchaser for value which trumps Chase's unrecorded security interest. [11 U.S.C. Section 544]
The 9th Circuit did not give the "equitable subrogation" theory any weight because it reasoned that you cannot do equity and defeat a bona fide purchaser with legal title.
[9th Cir. Opinion - In the matter of Jill c. Deuel, Debtor, Chase Manhattan Bank v. Harold S. Taxel, Trustee] 2010 DJDAR 1531, January 29, 2010.]
EPISODE 2 –
UNDERSTANDING YOUR MORTGAGE LOAN DISCLOSURES
Hello and Welcome to Episode 02 of the Dirtlaw Blog’s
Primer Series.
Today’s subject is “UNDERSTANDING YOUR MORTGAGE LOAN DISCLOSURES”
and I am your host, Julia Wei, real estate and lending law attorney in Palo Alto, California
and editor of The DirtLaw Blog.
Both Federal and California
state laws require lenders to disclose certain information to borrowers about
their mortgage loan.
These disclosures are to educate the borrower and also to
allow the borrower to comparison shop.FHA and VA loans demand additional disclosures which will not be covered
in this episode. Most of the disclosures listed must be presented to the borrower
within three business days of the loan application.
The main Federal disclosures that I want to go over are
the Good Faith Estimate and the Truth-in-Lending Statement:
* Good Faith
Estimate of Closing Costs (“GFE”) – Under RESPA, the lender must provide a GFE to
the borrower.As of January 1, 2010, the
HUD issued a new version of the GFE in an effort to help borrowers save money
on the cost of their loans.The GFE is an “estimate” and itemizes settlement
charges and loan terms.These charges usually
include the broker’s commission, processing fees, points, title fees, recording
fees.The borrower should receive this
in advance of the loan, during the “shopping” process.While the broker usually provides one to the
borrower during the application process, the lender will often issue a new one
that is more accurate than what the broker provided to the borrower.The GFE will also provide the expiration
timeframe for the loan and borrower should inquire about locking in the rate.At close of escrow, the borrower and seller
receive a HUD-1 form, which lists the actual amounts that are paid.
*
Truth-in-Lending (T-I-L) Statement – The TIL Statement lists the annual
percentage rate (APR), and looks hugely expensive because it calculates the
total of all interest and prepaid items over the life of the loan.This statement will also tell the borrower if
there is a prepayment penalty, the payment schedule of the loan, and any late
payment charges.
The whole point of these two statements is to allow the
borrower to compare the costs associated with working one particular lender or
broker versus their competitors.The
reality however is that not all loan products are identical, and even armed
with these documents, it can be hard to price out the true cost of the loan.
The TIL statement has special legal significance because
errors in that statement that exceed the allowed tolerance give the borrower an
extended 3 year right of rescission.TILA rescission of mortgage loans is a pretty hot topic, and I have to
save it for another podcast.
In addition to those two main Federal disclosures, the California
Department of Real Estate has its own version of the Mortgage Loan Disclosure
Statement which is available in English, Chinese, Korean, Spanish, Tagalog, and
Vietnamese.Brokers who previously used
the combined Mortgage Loan Disclosure Statement/Good Faith Estimate form, RE
883, must now provide two separate
disclosure forms to borrowers when arranging federally related mortgage
loans. The RE 883 Mortgage Loan Disclosure Statement and the new Good Faith
Estimate required by HUD will together meet the disclosure requirements of the
Real Estate Settlement and Procedures Act (RESPA) and the California real estate law. The disclosure
forms must be provided to the borrower within 3 days of receipt of a loan
application.
The DRE also offers this form for what it refers to as
“non-traditional” loans, which is intended to deal with disclosing costs
associated with adjustable rate products or interest-only loans.
Though I only discussed 3 disclosures above which I think
of as the “shopping” comparison disclosure, the stack the borrower signs at
close of escrow will also have other things such as the:
Equal Credit Opportunity
Act (ECOA) Statement
HUD Handbook on Buying Your Home:
issued by the U.S. Department of Housing and Urban Development
Consumer Handbook on Adjustable
Rate Mortgages - If the loan being applied for has an adjustable rate, this
booklet must be given along with a form to be signed by the borrower stating
that it was received.
Mortgage Transfer Disclosure Statement
Thank you for listening and this concludes Episode 2 of
the DirtLaw Blog’s Primer Series podcast.
DISCLAIMER:
The information presented in this podcast is for informational purposes only,
and should not be construed as legal advice. There is no intent to create an
attorney-client privilege or relationship by posting of the podcast, accessing
information from, or receiving information from this podcast.
The
information contained on this podcast is not confidential, and is not intended
to be a solicitation.
The
speakers and host of this podcast are from California,
practice law only in California
and accordingly the content of this podcast is not a reflection of legal
developments elsewhere in the nation.
Dear Clients, Readers and now Listeners - Happy New Year! I am pleased to introduce The DirtLaw Blog's Primer Podcast Series. It is intended to provide the basics to help the listener better understand mortgage lending topics.
Hello and Welcome to Episode 01 of the Dirtlaw Blog’s Primer Series.
Today’s subject is “UNDERSTANDING YOUR LOAN DOCUMENTS” and I am your host, Julia Wei, real estate attorney in Palo Alto, California and editor of The DirtLaw Blog.
For any Californian either buying a home or investing in a trust deed, it is critical to understand the two major components of your loan documents.
The primary document is the Promissory Note.This is the “debt” instrument.It is essentially an IOU wherein the borrower agrees to repay the lender the money he or she borrowed to purchase the property.Occasionally it is also called “Loan Agreement” or just “Agreement” when part of a Home Equity Line of Credit.
A promissory note by itself is merely a contract.It is memorializing promises between two parties to perform something.If you are the borrower and you fail to honor the contract, it is a breach of the contract. If the bank or lender only has a promissory note with the borrower, it is an unsecured loan and in order to enforce the debt instrument, the bank or lender would have to sue the borrower for breach of contract.
That can be a messy and time-consuming process for the bank, which is why banks also have the borrower execute a Deed of Trust. Other states have “mortgages” but technically, California is a Deed of Trust state so I will be using the term Deed of Trust more frequently.
The Deed of Trust is a document that is usually publicly recorded and secures the performance of the obligation under the Promissory Note.It is the “security instrument.”
The Promissory Note is a 2-party agreement, it involves only the lender and the borrower.However, the Deed of Trust is a 3-party agreement.The borrower is the “trustor”, the lender is the “beneficiary” and those two parties have designated a “Trustee”.
The Deed of Trust contains the power of sale and is the basis for what is known as the non-judicial foreclosure sale.
The Deed of Trust is really a transfer of title from the borrower/Trustor to the Trustee for the benefit of the lender/Beneficiary.“If I, the borrower do not pay my obligations under the Promissory Note, I have given title to the Trustee such that the lender/beneficiary can notify the Trustee that they may sell my house (which is also the collateral) to satisfy the debt.”
When the obligations under the Promissory Note have been satisfied, then the Deed of Trust can be reconveyed, with a Deed of Reconveyance which rescinds the power of sale from that Deed of Trust and the borrower owns the property free and clear of that Deed of Trust.
The Promissory Note and the Deed of Trust are just two documents, and hardly seems to account for that big stack of papers that borrowers must sign at the title company’s office to close escrow.
That is because both state and federal law require multiple disclosures that must be provided as well to the borrower.These disclosures will be the topic for Episode 2 of the Dirtlaw Blog’s Primer Series – “Reading Your Loan Disclosures”
Thank you for listening and this concludes the podcast.
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