Articles Posted in Mortgage

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It is a general rule of California real estate law that a forged deed is “void,” not merely voidable. Therefore it cannot convey title, even to a good faith purchaser. A good faith purchaser is one who has no knowledge or suspicion of a problem, and pays reasonable value for what they bought. This applies to a buyer at a foreclosure sale. In such a case the buyer, through no fault of their own, ends up with a legal problem and losing money, a good reason to consult an experienced Sacramento real estate attorney. In a recent decision out of Fresno, the buyer at a foreclosure sale not only lost out, but made their situation worse.

I2nd deed of trust foreclosure.JPGn La Jolla Group II v. Bruce (5th Dist. F061829; 211 CalApp 4th 461), the Baquiran’s owned their home for 16 years. In 2003 a notice of default & note of trustee’s sale were recorded for default on a second deed of trust secured by the residence. However, the Baquirans had no knowledge of a second deed of trust. The foreclosure sale occurred, and La Jolla Group bought the property at the trustee’s sale.

The Baquirans figured out that the second deed of trust was a forgery, and filed suit to quiet title to get the property back. They recorded a notice of action, or Lis Pendens, to provide notice of the suit so that any subsequent buyer of the property is subject to the results of the suit. It turns out that they refinanced in 1997 with broker Williams. Williams got them to sign some documents, which he later revised using whiteout and changing information provided on the document. He brokered some hard money loans, and revised the document so that it appeared to be a deed of trust to one of his hard money lenders. It was this lender who foreclosed.

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california anti deficiency 580b.jpg With rates at an all time low, many in California are rushing to refinance their real property mortgage loans. Often, borrowers are not aware that they may expose themselves to personal liability if they refinance the loan they originally used to buy their residence.

California has a number of statutes that protect borrowers from personal liability (deficiency judgments) for the loan balance remaining after a foreclosure trustee’s sale. If the property is the borrower’s home, there is protection for the loan used to buy the property. Recent legislation provides for protection in a short sale. Also, if the lender who made the original purchase money loan refinanced the loan, there is protection. With enactment of SB 1069, beginning January 1, 2013, ANY lender who provides a refinance of the purchase money loan will also be prevented from obtaining a deficiency judgment against the borrower. Each borrower’s situation is different, and anyone in a default situation should consult an experienced Sacramento real estate lawyer to determine their risk of personal liability.

California refinance loan liability.jpgThe change makes sense in light of the historic purpose of Civil Procedure section 580b. In the event of a depression of land values, it is to prevent aggravating the downturn that would result if defaulting purchasers lost the land plus had personal liability. It is based on the premise that the lender is in the best position to determine the true value of the security for its loan, which is the property. If the lender overvalues the property, the lender should bear the risk of not obtaining the balance of the loan value in a foreclosure sale.

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For tax purposes, housing debt that is forgiven or written off is treated the same as income. The difference between the short sale price, or price at a trustee’s sale, and the loan balance may be forgiven debt. It can be considered income, which is reported by the lender on form 1099-C. The Mortgage Debt Forgiveness Act, which applies if the debt was forgiven in years 2007 through 2012. This requires that the debt was incurred to buy or substantially improve the taxpayer’s principal residence. This includes a refinance loan, to the extent that the principal balance of the old mortgage would have qualified. Taxpayers concerned with whether their forgiven debt qualifies should consult with an experienced Sacramento and El Dorado real estate attorney.

california short sale.jpgThe Mortgage Debt Forgiveness Act requires that the debt was incurred to buy or substantially improve the taxpayer’s principal residence. This includes a refinance loan, to the extent that the principal balance of the old mortgage would have qualified. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The amount of debt forgiven must be reported on your tax return. The act first extended such relief for three years, applying to debts discharged in calendar year 2007 through 2009; with the Emergency Economic Stabilization Act of 2008, this tax relief was extended another three years, covering debts discharged through calendar year 2012.

short sale.jpgThe forgiven debt may also be excluded from your income if:

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When it comes to recording liens against California real estate, we follow the ‘first in time, first in right’ rule. (Civil § 2897) If your lien, or deed of trust, is recorded before mine, then yours is superior. If you foreclose, and I do not pay you off, my deed of trust is wiped out, and I am left with an unsecured debt. However, there are exceptions, one of them being equitable subordination, which applies where equity and fairness require a different result. Equitable subordination is a concept used to correct equitable wrongs in the strict priority of liens on real property. If fairness requires, a first lien can be subordinated, or reduced below, a second lien, swapping their positions. (Civ. Code, §§ 2876, 2903, 2904.) A recent decision saved a $3.2 million dollar mortgage from being subordinate because the title company did not pick up the prior recorded deed.

deed of trust recorded.jpg In JP Morgan Chase v. Banc of America Practice Solutions, the Siems applied to JP Morgan to refinance the 1st & 2nd loans against their Newport Beach house, for a loan of $3.2 million. Meanwhile Mr. Siems medical corporation got a $2 million dollar loan from Banc of America, primarily secured by the property of his medical practice. However, the Siems also personally guaranteed the business loan, and Banc recorded a deed of trust against the same house. Banc knew about the original 1st & 2nd, and expected its loan to be in third position.

Here’s the timing:

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I commonly hear from clients that they were told by their loan servicer that they would not be considered for a loan modification because they were current on payments. They were either told, or it was implied, that they needed to miss a payment in order to be considered for a loan modification. I never advise a client to skip a payment, as that is their own decision- once it happens, the foreclosure freight train starts downhill and does not stop. Anyone thinking of skipping should consult with an experienced Sacramento and Yolo real estate lawyer to be advised as the full range of options & risks. A recent decision out of Southern California involved a borrower who said she was told to skip a payment, which created a triable issue as to whether the lender induced her to miss a payment, wrongfully placing her loan in default. But that’s not all- there was evidence that her loan documents had forged signatures.

lender foreclosure.jpg In Ragland v. U.S. Bank, the homeowner refinanced through Downey Savings in 2002. (Downey was later taken over by the FDIC, who turned over the loans to US Bank.) She got an adjustable, but claims she thought she was getting a fixed rate. One month later she told the lender that her signature had been forged on the estimated closing statement, escrow instructions, and statement of assets and liabilities. The forgery was confirmed by a handwriting expert.

By 2008 the rate had adjusted up to 7%. She spoke with a lender rep who said they would work with her to modify the loan, and told her not to make the April payment because the worse that would happen is that she would have a late fee. On the last day to make the April payment, she called the lender again, and was told that if there was anything forged, she would not owe anything. They put the loan in “legal” and told her they could not collect while the investigation continued. Later she was told they could not do a modification during the investigation.

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My last post was about a California loan modification, where the borrower signed the modification documents and returned them to the lender, but the lender foreclosed anyway. The court decided that the there was a binding contract once the borrower signed and returned the modification agreement, even though the lender said it did not happen until after the lender returned a copy signed by them. This is a good result, as otherwise the borrower would be in limbo, making payments, while wondering why they lender did not send back the documents. Finding that a contract was created helped the borrower another way- in her claim for wrongful foreclosure.

WRONGFUL FORECLOSURE.jpgIt is a general rule in California law that a lawsuit to set aside a trustee’s sale for irregularities in sale notice or procedure should be accompanied by an offer to pay the full amount of the debt for which the property was security. This is known as the tender rule. I think that the tender may be made on filing the lawsuit, but some courts may differ.

However, in our case, there is no claim of irregularities in sale notice or procedure. The claim is that the lender offered a modification, the borrower accepted, and they had a deal. The court noted that the power of sale, which gives the trustee the right to foreclose, is a creature of contract, not statute. If, after a default, the borrower and lender enter into an agreement to cure the default and reinstate the loan, no contractual basis remains for exercising the power of sale. Thus, under the terms of the modification agreement, there was no default, but they foreclosed anyway. The borrower had made a claim for wrongful foreclosure, and there was no need to allege tender of the balance of the loan.

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It is a given under California law that a seller financing a purchase money loan in the sale of real estate may not get a deficiency judgment against the borrower, but is only entitled to foreclose the property. CCP section 580b provides that, when the buyer purchases property, if buyer gives the seller a note for all or some of the price, “no deficiency judgment shall lie.”

anti deficiency 580b.jpgIn Weinstein v. Rocha, the plaintiffs bought a multi-unit property in L.A. They obtained primary financing of $820,000 from a lender, who held a first deed of trust, and the defendant / seller financed the balance with a loan secured by a second deed of trust. The buyer discovered that there were multiple housing code violations that were not disclosed. They sued the seller for failure to disclose.

The parties reached settlement, and entered a settlement agreement that reduced the balance of the debt buyer owed seller, but provided that if the buyer defaulted, the seller could accelerate the loan and demand payment of the original amount in full. If buyer did not immediately pay the balance, the seller could foreclose their second deed of trust.

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California has a number of statutory provisions that provide borrowers with protection from deficiency judgments- personal liability for the loan balance remaining after a foreclosure sale. There is protection if the seller takes back the note, or, in the case of a standard third party loan, if it is a residence, there is protection for the loan used to buy the property. Recent legislation provides for protection in a short sale. Also, if the lender who made the original purchase money loan refinanced the loan, there is protection. With enactment of SB 1069, beginning January 1, 2013, any lender who provides a refinance of the purchase money loan will also be prevented from obtaining a deficiency judgment against the borrower. Each borrower’s situation is different, and anyone in a default situation should consult an experienced Sacramento and Yolo real estate lawyer to determine their risk of personal liability.

california antideficiency and refinance loan.jpgThe change makes sense in light of the historic purpose of Civil Procedure section 580b. In the event of a depression of land values, it is to prevent aggravating the downturn that would result if defaulting purchasers lost the land PLUS had personal liability. It is based on the premise that the lender is in the best position to determine the true value of the security for its loan, which is the property. If the lender overvalues the property, the lender should bear the risk of not obtaining the balance of the loan value in a foreclosure sale.

But why should this be different in the case of a refinance of the original loan? This has been a problem for borrowers the past few years, as many people refinanced with different lenders. The new refinance lender should be in as good a position as the original to determine the value of the property. In fact, it has been lenders’ willingness to overvalue property that had contributed to price inflation.

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commercial foreclosure.jpg Title companies often prepare complicated documents, such as deeds of trust, grant deeds, an promissory notes to accommodate closing escrows, which results in their fees. There can be mistakes that vary in seriousness, and sometimes the only solution is to have the Court order a document re-formed. A recent decision points out the problems that can arise when a property was sold for $7.2 million dollars, and the seller did not have an experienced Sacramento and Placer real estate attorney review their documents.

In Park v American Title, park sold a Fresno property for $7.2 million. Park took back a second deed of trust securing a purchase money note in the amount of $2.45 million. First American Title (FAT) was the escrow holder for the transaction. The buyer defaulted, and in September 2006 Park told FAT to prepare a notice of default. Three months later, when the Notice of Sale should have been recorded, the Title Company told Park that they had made a mistake preparing the deed of trust. The deed of trust named the individual buyers as trustors, while the grant deed conveyed the property to the buyer’s corporation. But FAT thought they could still conduct the foreclosure sale, set for February 23, 2006.

Fifteen days before the sale, FAT declared that it could not conduct the sale, and the deed of trust would have to be reformed. This is a process by which a party files a lawsuit to obtain a court order reforming, or revising and correcting, the problem document. The title company had to get the corporation named os trustors in the deed of trust. This took time, after which the owners filed bankruptcy, resulting in a delay of one and ½ years for the foreclosure sale in April 2008. There were no bidders by then (did the real estate market change between 2006 & 2008?) And park got the property back. Park sued FAT.

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Several years ago I had written about how to determine whether or not your California real estate loan is a non-recourse loan, and if you lost the property, through foreclosure, would you have personal liability for the remainder of the debt. I did not discuss two other important considerations, even if you have a recourse loan- whether the lender will conduct a trustee’s sale rather than a judicial foreclosure, and whether or not the particular loan is a first or second loan. Homeowners and investors who have questions about their liability for their loans should consult with an experienced Sacramento and Yolo real estate attorney.

non recourse foreclosure.jpgA. Is the lender likely to conduct a trustee’s sale?

There are two ways to foreclose on real estate in California:

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