California Real Estate Finance Bond, McKenzie, Fesler & Boone Ninth Edition. Chapter 11 Foreclosures and Other Lending Problems. Objectives. After completing this chapter, you should be able to: Explain the major provisions outlined in a typical promissory note and deed of trust.
Foreclosures and Other Lending Problems
After completing this chapter, you should be able to:
Explain the major provisions outlined in a typical promissory note and deed of trust.
Outline the steps in a foreclosure procedure.
Demonstrate why lenders in California prefer trust deeds over mortgages as security for their loans.
List five ways a borrower and lender can minimize the possibility of a default and foreclosure.
Discuss how private and government mortgage insurance has reduced the lender’s risk in granting real estate loans.
Calculate the mechanics of insurance coverage under PMI for 90 percent loans.
Describe the controversial practice known as redlining.
Explain the role of the Community Reinvestment Act (CRA).
Collateral Provisions of Deeds of Trust
Default and Foreclosure
Minimizing Loan Defaults
Other Lending Problems
Maintenance of the property
Property taxes and other liens
Assignment of rents
If borrower defaults, lender can lease and apply to loan
Allowed by power of sale clause in trust deed
Notice of Default (three months before sale)
Send to trustor within 10 days
Could reinstate by paying all back debts and resuming payments (right of reinstatement up to 5 days before sale)
Notice of sale (two weeks before sale)
Post on property 20 days before
Highest bidder (except for trustee)
Cash or equivalent
Surplus funds given to trustor (former owner)
No right of redemption
Judicial Sale (foreclose as mortgage not trust deed)
Right of reinstatement
Debtor has one year right of redemption (pay off all debt) if deficiency exists
If sale is not sufficient to pay loan, former owner still owes
California’s Anti-deficiency Law is the exception
Except for FHA and DVA
Deed in Lieu of Foreclosure
Or quitclaim deed from borrower to lender
No deficiency claim
Voluntary conveyance from borrower to lender
Any of these look bad on the credit report
Impound accounts (aka escrow account or loan trust fund)
Moratorium on payments
Waiver of principal payments
Deferring of interest
Prior prepayments now used
Change in loan terms
Increase of debt
Reduction of interest
Reduction of principal
Mortgage Guaranty Insurance
Cost borne by borrower
Through MIP or MMI
Takes over property
Sells either refurbished or “as is”
Or HUD takes over loan
Pays lender up to insurance level
Subrogates against borrower
Three months to cure deficiency
California Veterans Farm and Home Purchase Act Assistance
Life and disability insurance for borrowers
Private Mortgage Insurance (Discussed in Chapter 5)
Automatic payment plans
Consumer protection laws and regulations
Truth in Lending (aka Consumer Credit Protection Act
Full disclosure of all borrowing charges
Cover major home components
Walls, roof & foundation
Usually one year
Max rate is 10% or
5% above Federal Reserve discount rate
Not applied to seller carrybacks
Refuse loans in high risk areas
Community Reinvestment Act
Lenders must disclose lending data