Articles Posted in Mortgage

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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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The Fair Debt Collection Practices Act (FDCPA) was enacted by Congress with the intent to police the coercive, unrestrained activities of third party debt collectors as distinct from debt servicers. It provides a number of claims and remedies for California debtors. I recently wrote about the decision in which a Bank forgot they agreed to a loan modification and proceeded to foreclose. The Court found that the bank could be in violation of the Equal Credit Opportunity Act requirements for adverse actions by lenders. In that same decision of the federal Court of Appeals, 9th Circuit, the court considered whether Wells Fargo was a debt collector for purposes of the FDCPA.

Debt collections attorney.jpgIn Schlegel v. Wells Fargo Bank NA, the borrowers took out a $157,000 loan in 2009 secured by their home. The loan and deed of trust were assigned to Wells Fargo. Trouble ensued, and the lawsuit was filed, also alleging violation of the Fair Debt Collection Practices Act. The issues for the court was whether or not the bank was a “debt collector.” Under the FDCPA, a “debt collector” is “[1] any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or [2] who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 U.S.C. § 1692a(6)

The court found that this defendant is not a debt collector under the FDCPA, but a creditor. This distinction is important because the FDCPA applies to debt collectors, but not to creditors.

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Loan modifications for California homeowners has become less a rarity in recent times. A loan modification is an enforceable contract between the borrower and lender, and as long as the borrower performs, they will be able to keep the property. However, now as before, lenders lose track of the status of their relationships with their borrowers, and may not realize that a mortgage has been modified. Recently, the federal Court of Appeals, 9th Circuit, found that a lender who forgot they modified a loan, and began foreclosure proceedings, could be in violation of the Equal Credit Opportunity Act requirements for adverse actions by lenders.

sacramento real estate attorney ECOA.jpgIn Schlegel v. Wells Fargo Bank NA, the borrowers took out a $157,000 loan in 2009 secured by their home. The loan and deed of trust were assigned to Wells Fargo. There was trouble, they went into default, and filed bankruptcy. Wells Fargo proposed a loan modification which extended the maturity date for the loan, and retained the same interest rate. The bankruptcy court approved the modification, and a bankruptcy discharge was granted. Wells Fargo quickly sent the borrowers a default notice, saying that the loan was in default for failure to make payments – the letter did not take into account the loan modification. The borrowers contacted Wells Fargo, who told them not to worry. The borrowers continued to make payments as per the loan modification. Of course, Wells Fargo continued to claim they were in default and accelerated the loan, and then claimed that there was no modification. The borrowers filed this lawsuit.

One of the claims in the suit was a violation of the federal Equal Credit Opportunity Act. The ECOA which makes it illegal “for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction…” Applicable in this case, each applicant against whom adverse action is taken is entitled to a statement of reasons for such action from the creditor.”Each applicant against whom adverse action is taken shall be entitled to a statement of reasons for such action from the creditor.” § 15 USC 1691(d)(2). ECOA defines an “adverse action” as a:

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Promissory estoppel is a legal argument and cause of action raised when one party makes a promise for which they do not receive any compensation, which the other party relies on in changing their position, such as a promise to modify a mortgage loan. If the promissor had received some consideration, for example ten dollars, then there may be an enforceable contract. However, the promissor in our situation gets nothing in return, but the promise is still enforceable. Sacramento and Yolo business and real estate attorneys argue promissory estoppel as a consideration substitute used when it is required to prevent injustice.

The elements required to show promissory estoppel are (1) a promise, (2) the promisor should reasonably expect the promise to induce action or forbearance on the part of the promisee or a third person, (3) the promise induces action or forbearance by the promisee or a third person (which we refer to as detrimental reliance), and (4) injustice can be avoided only by enforcement of the promise. In a recent California state court decision, lender to a buyer promises involving a trial plan agreement resulted in the court allowing the promissory estoppel claim to proceed.

Sacramento real estate attorney mortgage.jpgIn West v. JPMorgan Chase Bank N.A., West was in default on her Washington Mutual loan. In 2009 Washington Mutual told her that she had approved for a trial plan agreement. The approval letter stated: The approval letter stated: “Since you have told us you’re committed to pursuing a stay-in-home option, you have been approved for a Trial Plan Agreement. If you comply with all the terms of this Agreement, we’ll consider a permanent workout solution for your loan once the Trial Plan has been completed.” West made the required trial payments and Chase (which by now had taken over WAMU) confirmed that it had received her request for a permanent loan modification. Chase then denied the loan modification. They said they would provide her with the net present value calculations; she requested them, and said asked for a recalculation using updated information. Chase never provided the calculations. In a conference Chase allegedly promised West that she could resubmit her updated financial data, and that there was no foreclosure sale scheduled. Suddenly the property was sold at a trustee sale.

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A cross-collateralized loan is one in which a cross-collateral deed of trust which secures more than one note. The deed of trust is recorded only against property A, but may also secure notes that are otherwise secured by other properties. If the note originally secured by property C goes into default, the property A deed of trust is in default. The lender can foreclose A, B, and C. Anyone faced with a cross collateralized loan should consult with a Sacramento and El Dorado real estate attorney. In a recent case the owner of property A seemed to not understand how cross-collateralized deeds of trust worked in relation to a subordination agreement, or at least tried to convince the court that they worked differently.

Sacramento real estate lawyer (2).jpgIn R. E. Loans, LLC v. Investors Warranty of America, Inc., a winery owned Jack’s Ranch, a property in San Luis Obispo County. The ranch secured a number of loans including a third deed of trust held by RE for $6.5 million dollars. The winery refinanced the loan, paying off the first and second. It paid the third $3.5 million on its loan in exchange for the RE agreeing to subordinate its loan to a new loan from Transamerica for over $4 million dollars. However, the new Transamerica Deed of Trust also secured that debt PLUS two other notes, totaling $21 million. The notes were “cross-defaulted,” (or “cross-collateralized”) meaning that a default under one note was a default under all three. The deed of trust referenced the loan agreement which said it secured the $4 million dollar debt plus other notes, and that they were cross-collateralized.

A Notice of Default was recorded, saying that the amount to cure the debt was over $26 million, and the obligation secured is a note for $4 million. (Huh?) The trustee held the sale, and the property was sold. The lender credit bid at the auction, and got title to the property. RE filed a lawsuit.

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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.

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California law has had a persistent rule that, when it comes to real estate loans, a lender does not own a borrower any duties beyond those expressed in the loan agreement, except those imposed due to special circumstances. Courts rarely find those special circumstances, and hold lenders and buyers to routine, arms-length transactions. Last year I discussed a lender who told the borrower to skip a payment. In a recent decision in Northern California, where there were ongoing disputes between the borrower and lender, and the lender made numerous representations that they would likely agree to a loan modification, a duty may have been created that could make the lender liable for its negligence. The court referenced the recent changes in law at both the state and federal level to protect homeowners (even though these rules did not apply in this case) indicate a policy to protect real estate borrowers from their lender’s negligence. Lenders and borrowers concerned with the question of lender’s duties and negligence should consult with a Sacramento and Yolo real estate loan attorney.

Sacramento real estate loan attorney.jpgIn Scott Call Jolley v. Chase Home Finance, Inc., the loan was for over $2 million to renovate a property in Tiburon, and was essentially a construction loan. The loan was originally with Washington Mutual, which went into FDIC receivership and acquired by Chase. Jolley said that WaMu lost the loan documents, which held up construction financing for 8 months, and then they ad significant disputes with disbursements. WaMu agreed to a loan modification, and was later taken over by Chase. Jolley defaulted, claiming that it was due to WaMu’s breaches of contract and negligence.

Jolley claimed that Chase’s agent, on many occasions, encouraged him to complete construction because there was a “high probability” that Chase would modify the loan to avoid foreclosure. As a result, the plaintiff spent another $100,000 to complete construction. Chase denied the modification.

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California home buyers often get both a first loan and a second, usually a home equity line of credit, or “HELOC.” Generally, when a second loan is made by a different party, not as a part of the purchase, when the first forecloses, the value of the junior’s security has been wiped out (the 2nd becomes a “sold out junior”). The one form of action rule then does not prevent a lawsuit for the debt on the second. However, when the same lender makes both the 1st and 2nd loans, it is more complicated, and owners in this situation should consult with a Sacramento & Yolo real estate lawyer. There are three typical scenarios that cover possible personal liability for the second, if the first is foreclosed.

2nd deed of trust.JPG1. Original lender holds both first & second, forecloses on first.

➔There is no liability for the second, as it was a purchase money loan.

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