Summary:
When a Borrower defaults, it may be due to various reasons, including payment arrears, failure to refinance when the loan is due, some form of fraud, or material breaches of the loan documents’ covenants. Understanding these defaults and the foreclosure process is not only necessary but also paramount. It can have severe financial implications for both the Borrower and the mortgage broker/lender. This knowledge empowers you to navigate these situations with confidence and clarity.
Material breaches:
A material breach is a substantial violation of contractual obligations that significantly impacts the lender’s legal rights
Material breaches may include non-payment and violations of covenants, such as keeping property taxes and insurance coverage current, paying association dues on time, and performing usual and customary maintenance and upkeep.
https://www.lsd.law/define/material-breach
https://calkinslawfirm.com/material-vs-minor-breach-of-contract/
https://www.gannons.co.uk/insights/breach-of-financial-covenants-in-loan-agreements/
https://www.fredlaw.com/alert-demystifying-the-loan-agreement-a-guide-for-lenders
Foreclosure:
Foreclosure is the legal procedure by which a lender notifies the Borrower of the material breach, takes administrative actions as prescribed by the state laws, and takes back the collateral property in case of Borrower default.
Under one method, called non-judicial, the procedure requires the services of a third-party, independent trustee.
Under another method, judicial, the lender must file a lawsuit in the court system and tolerate all the whims of judges and government employees, primarily labor union members. For those of us with substantial experience, navigating the government system is frustrating and costly because our objectives are not consistently yielding fast results. Adhering to the law regarding the interpretation of loan documents is also challenging due to deviations from it.
The first method is faster.
Under ideal circumstances, provided that a Borrower does not file for bankruptcy to forestall foreclosure, the lender will foreclose, take possession of the property, actively manage it, and then resell it to recoup the capital investment.
Non-Judicial Foreclosure:
A non-judicial foreclosure is an administrative procedure handled outside the court system by a designated third-party foreclosure trustee.
In non-judicial foreclosure states, the foreclosure trustee is responsible for issuing the necessary notices to the defaulting party, including the Notice of Default and the Notice of Trustee Sale. The trustee will handle the foreclosure sale and arrange with a title company to issue a trustee’s sale guarantee. They also play a crucial role in overseeing the completion of the sale, ensuring that it is carried out without the need for court involvement. Once the trustee sale is completed, the creditors will gain title to the property, with a title company issuing a trustee sale guarantee, a form of title insurance.
https://selfhelp.courts.ca.gov/foreclosures/nonjudicial
https://www.nolo.com/legal-encyclopedia/how-foreclosure-works-30066-2.html
https://www.justia.com/foreclosure/judicial-vs-non-judicial-foreclosure/
https://www.alllaw.com/articles/nolo/foreclosure/nonjudicial-foreclosure.html
Foreclosure Trustees:
Foreclosure trustees, also referred to as agents, play a crucial role in foreclosure proceedings. Their role is not just significant, it’s vital. They are entrusted with acting on behalf of creditors (beneficiaries) of trust deeds and mortgages to complete foreclosure actions, making their actions impactful and their role in the process undeniable.
A foreclosure trustee assumes the role of an agent acting on behalf of creditors (beneficiaries) of trust deeds and mortgages to complete foreclosure proceedings. The critical difference lies in the process. If property payments are reinstated and the loan is brought up to date, the foreclosing creditor or the defaulting Borrower will pay the trustee a fee for services. States have different statutory foreclosure procedures and methods, with the primary distinction being between judicial and non-judicial foreclosure processes.
Judicial Foreclosure:
The process is more complex in judicial foreclosure states and can be fraught with delays and additional costs. Many actual property lenders refuse to make loans in judicial foreclosure states, underscoring the need for caution and thorough preparation.
The foreclosure process can be interpreted as a significant pain in the neck because it is lengthy and drawn out by a committee of public employees who seem to lack urgency and invite every Borrower's wiggle room available to forestall the inevitable.
https://www.investopedia.com/terms/j/judicial_foreclosure.asp
https://www.nolo.com/legal-encyclopedia/how-foreclosure-works-30066.html
Trustee sale guarantee (TSG):
In a non-judicial process, a title insurer provides a title insurance policy to the lender. The trustee’s sale guarantee (TSG) is not merely a formality; it’s a crucial legal notice that the property has been sold in accordance with the state’s applicable regulations, providing a clear record of the sale.
Loopholes available to borrowers to circumvent the system:
Regulations continuously create wiggle room, which feeds the court system and lawyers but damages property owners and trust deed investors.
A recent law signed by Governor Newsom in California, AB 3108, became an amendment of Section 4973 of the Financial Code. This law, which focuses on making loans to single-family owners of occupied properties, tightens accusations of fraud by a mortgage broker while simultaneously inviting borrowers and hungry lawyers to sue the lender and mortgage broker for fraud. The broker is subject to prosecution for violating the section and may be imprisoned in a county jail for up to one year, which could significantly impact the foreclosure process. It’s crucial to be aware of these legal changes to navigate the foreclosure process effectively.
Additionally, three other laws tighten the screws, making it extremely difficult to foreclose on single-family, one-to-four-family, and all residential income properties. Those bills, all now signed into law, are SBB 10799, A 130130, and AB 2. You will find articles about each on my website.
Suppose a Borrower defaults and wants to forestall losing their property. In that case, they are invited to file an ex parte application for court jurisdiction and make claims, including substantive disregard for the kitchen sink. Judges love this material and gobble up the stories, as most are ideologically driven and blatantly disregard the rule of law.
The effect is that there is a transfer from a statutory foreclosure procedure, called non-judicial, to a judicial process that becomes a lengthy and drawn-out litigation. The Borrower may stay on the property for one or two years without making any payments, and the lender/broker may be required to spend between $50,000 and $100,000. Of course, this is another example of the prevalent sense of entitlement today.
An excellent lawyer will be necessary to guide the accused party through the complex process of judicial foreclosure and the unexpected side effect of an accusation in an ex parte motion that the broker allegedly created fraud.