Articles Posted in real estate loan

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Mortgage loan brokers have a duty to mitigate the risk of possible loan fraud in California. The extent that title insurance would do this is a topic for another day, but brokers routinely arrange for title insurance for their lenders. Another protection against fraud is to have signatures notarized; at least the person signing has proven their identity. In a perfect storm for one mortgage Broker, it was the notary committing the fraud, and the trial court judge would not let them submit evidence that they got title insurance to help protect the lender against such acts. The judge claimed that the collateral source rule required the evidence be kept out. With this evidence barred, the Lender hammered the jury with claims that the Broker was negligent and breached its fiduciary duty, and the jury agreed. The appellate court did not.

El dorado real estate lawyer.jpg In Bryan Chanda V. Federal Home Loans Corporation, Chanda was a money lender and Federal was a private mortgage broker. Barker was the office manager for the owner of a commercial building in El Centro. Barker was also a Notary Public. Barker contacted Federal requesting an equity loan of $165,000 on behalf of the owners of the building. Federal’s loan officer wanted to arrange to meet with the owners so that they could sign the note and deed of trust, but Barker said one of the owners was not available. But, she would be happy to take the documents and get their notarized signatures. Barker then forged the signatures, and notarized them. Sacramento real estate trial attorneys rarely see fraudulent notarizations, but when they do, the notary is usually long gone.

Six months later, Barker asked for a larger replacement loan of $480,000. She again forged and notarized the signatures. The property owners learned about the fraud (no indication whether or not Barker had skipped town yet), and sued everyone. A forged deed of trust is not effective (though they can win out over unclean hands). The lender cross-complained against everyone, including Federal for negligence and breach of fiduciary duty. All parties and claims settled, except the lender’s claims against the Broker.

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Anti deficiency legislation has been a mainstay of California real estate law for many years. It is a set of rules that prohibits, in certain instances, a creditor with real property security from pursuing a debtor in default directly for the debt. Many other states do not have the anti-deficiency protections built into California law. Because of this, if there is an out of state foreclosure, the lender could then sue in the other state for the balance due on the note, and then enter the judgment in California. A California borrower facing default on an out of state secured loan should consult with an experienced Sacramento real estate attorney to explore their risk in this situation. A decision from the First District Court of Appeal raises a technique that may point out a creative solution to help California residents in this situation to avoid personal liability for an out of state real estate loan.

anti deficiency out of state.jpgIn Kimbel J. Stuart v. Steven G. Lilves, the defendant, a Marin County resident, bought a house in Fort Collins, Colorado, signing a purchase money note for $18,000. There was a foreclosure of a senior lien – what this lien was is not clear, but it happened. The plaintiff then sued the defendant, in California State Court, for the unpaid amount due on the purchase money promissory note.

The California judge ruled in favor of defendant, finding that this was an action to collect a deficiency judgment, which was barred by Code of Civil Procedure section 580b.

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Acceleration clauses are standard in loans secured by California real estate. The clause provides that on the happening of a listed event, the lender (or beneficiary) may call the entire loan balance due and payable immediately. The events stated are usually a) if the borrower (trustor) defaults on any provision of the loan, b) if the property is sold or otherwise transferred, and sometimes c) if the property is otherwise encumbered (most likely by taking out another loan). If the note or contract language provides for it, acceleration could also require payment of any prepayment penalty. If there is no contract provision allowing for acceleration, the lender is stuck – if the borrower defaults in one or two payments, the lender could only foreclose on those delinquent payments Lenders and borrowers concerned about acceleration, and how it is triggered, should consult with an experienced Sacramento real estate attorney.

Acceleration clause el dorado real estate attorney.jpgSome Contract defaults that may trigger acceleration

The typical default is where the borrower does not make an installment payment. Also common are failure to pay taxes, or property assessment, or HOA fees; failure to pay property insurance premiums, or allowing an insurance policy to lapse; or, failing to pay an obligation which is senior to the subject deed of trust.

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Since the start of the HAMP program, servicers have been providing trial plans while leaving the door open to claim that there has not been a modification. As described by Diane Thompson in “Foreclosure Modifications” (86 Wash. L.Rev. 755) servicers recover all their costs after a foreclosure) and receive fees beforehand – the incentive is to stretch out the delinquency without a modification or foreclosure. Courts have slowly been acknowledging the unfairness of this system, in which the property is eventually foreclosed. One decision was based on enforcement of contract based on an offer and acceptance ; another on grounds of promissory estoppel. In a recent decision, the servicer claimed that, as there was no modification agreement signed by the servicer, the owner’s claim is barred by the statute of frauds. The court said no -the doctrine of equitable estoppel barred the defendant from raising this defense, as it would constitute fraud.

Sacramento real estate attorney1.jpg In Angelica Chavez v. Indymac Mortgage Services, Chavez had a $380,000 refinance loan secured by a deed of trust. She got behind and began loan modification talks with Indymac. They offered her a “Home Affordable Modification Trial Period Plan (Step One of Two-Step Documentation Process)” (the Trial Period Plan) under HAMP. The Trial Period Plan required her to make three monthly payments.

The Trial Plan Language

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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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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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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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Tender

California law requires a plaintiff asking the court to set aside a foreclosure to offer to pay the full debt (called a “tender”). The general rule is that a plaintiff may not challenge the propriety of a foreclosure sale without offering to repay what they borrowed. The idea is that if the plaintiff could not had redeemed the property if the sale procedure had not been defective, any of the irregularities in the sale did not result in damage to the plaintiff. There are exceptions to the tender requirement–

a) being fraudulently induced into taking the loan;

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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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In February I published a blog about a California court that would not take judicial notice of a document on a Federal Agency website. It dealt with the FDIC sale of Washington Mutual mortgage loan accounts to JP Morgan Chase. JPMorgan was conveyed all the assets, but none of the liabilities. That means that JPMorgan could foreclose, but the borrower could not make any claims against JP Morgan that they had against WaMu. In a recent court decision, a different court did take judicial notice of that same document on the website. The difference was due both the difference in the courts’ approaches, plus the borrowers’ attorneys’ arguments. A borrower or lender with questions about the different approaches should contact an experienced Sacramento real estate and business attorney, to be sure they do not get the same surprise.

sacramento real estate attorney judicial notice .jpg “Judicial notice” is the court’s recognition of the existence of a matter of law or fact without the necessity of formal proof. It can be described as a substitute for (formal) proof, a judicial shortcut, doing away with the formal necessity for evidence. Judicial notice is limited to matters which are indisputably true. A request for judicial notice can be defeated by showing the matter is reasonably subject to dispute. In California state court, Judicial Notice is limited by the evidence code, indicating matters which the court must take notice of, and matters which the court may take notice of. Federal Courts have a broader discretion as to what they may take judicial notice of.

In Michael D. Scott v. JPMorgan Chase Bank (2013 WL 1098436), the borrower had a $975,000 construction loan. Washington Mutual acquired the loan, was taken over by the FDIC, and JPMorgan acquired the loan, and foreclosed. Scott filed suit, making several claims against JPMorgan. JP Morgan claimed that it had not acquired WaMu’s liabilities along with the assets, and sought judicial notice of the Purchase and Assumption Agreement, as posted on the FDIC web site.

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