Articles Posted in Mortgage

Receivers have recently been in the Sacramento news concerning the status of the Senator Hotel, a situation where the loan was in default and the lender had a receiver appointed.. With distressed properties at record levels, an increasing number of Lenders are turning to receivership to help salvage troubled properties.

The appointed receiver is an officer of the court and is accountable to the judge. A receiver’s primary duty is to secure the property, prevent waste, and collect rents. In general, the receiver is required to follow the court’s order, which may include specific authority to manage the property, collect rents, and provide monthly accountings. In some instances, the court may grant the receiver authority to enter into leases and position the property for sale. Once appointed, the receiver takes custody of the property, changing locks, securing operating accounts, and retrieving property-related documents from the borrower. The receiver itemizes personal property of the borrower, notify tenants the change in control, transfer of utility bills, place property insurance, hire a third-party management company, maintain or entering into new service contracts with vendors, and other issues concerning the property’s overall operation and security. The receiver must act quickly so that the borrower does not harm the property.

This blog addresses only California state law, and not US Bankruptcy law, which has its own procedure. In California, appointment is made under Code of Civil Procedure section 564. The two most common lawsuits in which a receivers are appointed under section 564 are:

In a recent court decision homeowners in Los Angeles were foreclosed. The foreclosing lender then filed an eviction action (unlawful detainer); the former owners stipulated the eviction judgment. The Homeowners filed suit for wrongful foreclosure.

The claim was that a Notice of Default was recorded on behalf of ‘Option One’ as beneficiary, but there was no substitution showing that Option One was the new beneficiary of record, and the foreclosure was conducted on behalf a trustee for which there was no substitution recorded.

The court dismissed the homeowners lawsuit. The court found that no substitution showing Option One as the new beneficiary of record with the statutory authority to designate a substituted trustee. The beneficiary of record remained Home Loans USA, Inc., the original beneficiary and lender to plaintiff in her refinance transaction. But even so, the eviction judgment which the homeowners stipulated to was res judicata as to plaintiffs’ claims in this action which all arise from the alleged invalidity of the foreclosure sale- they essentially agreed that it was already determined that there were no defects in the foreclosure, and that the lender had good title with which to evict them. “Res Judicata” means that the issue was already determined by a court.

Stated Income Loans allowed borrowers to merely state their income, without a thorough investigation by the lender. They allowed borrowers to lie about their incomes, so they became known as liar loans. The loose underwriting, where the lenders really did not care what the truth was, were a badge of the housing boom. They lead to toxic loans, or worthless junk, as the CEO of Countrywide described them in emails.

There are a couple of ways the liars can get caught. One is by applying for a loan modification. Then they submit information as to their true income, which is investigated. This is becoming a way the lenders can get at a borrower in bankruptcy. Anyone with a stated income loan who wants to talk to their lender may need to consult with a real estate attorney. Another, more insidious way to get caught, is when the IRS sends an attractive female undercover agent to befriend you to get you to talk while she is wearing a wire. That is what happened to a man now doing a 21 month sentence for mortgage fraud.

The undercover agent asked Charlie Engle about his investments. He said he had been speculating in real estate during the bubble and that “I had a couple of good liar loans out there, you know, which my mortgage broker didn’t mind writing down, you know, that I was making four hundred thousand grand a year when he knew I wasn’t.”

A California business borrower went into default on their loan. They worked out a loan modification with the Lender; According to the Borrower, the Lender told the Borrower that the agreement would be to forebear collection for two years and would include as additional security only two orchards, and not the Borrower’s residence or the truck yard. However, the written agreement actually delayed collection for only 6 months, and required that the Borrower pledge additional collateral which included the residence and truck yard.

After a default the Borrower brought the loan current and sued for fraud based on the misrepresentations regarding the loan modification. The Lender relied on the Parole Evidence Rule, which prohibits the Court from considering any evidence outside the terms of the written agreement.

The Court of Appeals found for the Borrower, holding that the Lender’s alleged oral misrepresentations of the terms contained in a written agreement, made at the time of execution of the agreement, fell within the fraud exception to the parol evidence rule, since the alleged misrepresentations related to the content of the physical document. The frud exception allows evidence outside the terms of the contract to be admitted to show fraud.

Reverse Mortgages, or Home Equity Conversion Mortgages, Are now subject to a policy in which, if the surviving spouse is not on the loan and title documents, they are required to pay off the full balance of loan in order to stay in the house. Otherwise, they face foreclosure.

Reverse Mortgages allow owners aged 62 or older with a large amount of equity to pull cash from their home. The loan does not need to be repaid until they no longer use the property as their principal residence, such as after death, or sale of the house. There is a requirement that the borrower be advised by a HUD approved counselor, though there are doubts as to their independence, and consulting an elder law or real estate attorney is advisable. If the owner or their estate sells the property for less then the balance due, the owner does not owe the balance-it is a non-recourse loan.

The policy change, which HUD claims is only a filed suit against HUD, claiming the agency changed the rules without following federal law. But it is not clear that they changed the rules. Non-recourse protection only applies to the borrower, because only the borrower could be liable for the loan. The presumption is that on the death of the borrower, the estate will sell the house. If the sale price does not cover the loan balance, FHA insurance kicks in. If it sells for more than the balance, the estate keeps the difference for the heirs. But the surviving spouse is not a buyer in this case. The real problem is in the poor counseling of the borrower before closing, and the unfortunate truth that many borrowers did not understand the ramifications of the reverse mortgage. There is a requirement that the borrower be advised by a HUD approved counselor, though there are doubts as to their independence, and consulting an elder law or real estate lawyer is advisable.

The Mortgage Electronic Registration System (MERS) is a private corporation that tracks the ownership interests and servicing rights in mortgage loans. The system was developed so that holders of loans did not have to record assignments every time they were transferred. It saved the industry money and created an impenetrable wall so that the public could not learn who actually owned, or claimed to own, a mortgage.

A homeowner in San Diego went into default, and the foreclosure process began. The owner sued, claiming that whomever owned the loan did not authorize MERS to commence with the foreclosure. The defendants argued that the deed of trust authorized MERS to exercise the power of sale and institute foreclosure proceedings.

The court of appeals upheld the right of MERS, as nominee, to conduct a non-judicial foreclosure. It found that allowing suit to determine if a nominee had a right to proceed with the foreclosure “would fundamentally undermine the nonjudicial nature of the process and introduce the possibility of lawsuits filed solely for the purpose of delaying valid foreclosures.”