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California Real Estate Finance

Fesler & Brady10th Edition

Chapter 11Foreclosures 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.

– 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).

Outline

• Collateral Provisions of Deeds of Trust• Default and Foreclosure• Minimizing Loan Defaults• Other Lending Problems

Collateral Provisions of Deeds of Trust

• Maintenance of the property• Hazard insurance

– Fire– Windstorm

• Property taxes and other liens• Assignment of rents

– If borrower defaults, lender can lease and apply to loan

Default and Foreclosure(Slide 1 of 3)

• Trustee’s Sale– 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– Final sale

• Highest bidder (except for trustee)– Cash or equivalent

• Surplus funds given to trustor (former owner)– No right of redemption

Default and Foreclosure (Slide 2 of 3)

• Judicial Sale (foreclose as mortgage not trust deed)– Procedure

• Serve complaint• Trial held• Judgment entered• Right of reinstatement

– Sale• Highest bidder• Debtor has one year right of redemption (pay off all debt) if

deficiency exists– Deficiency judgments

• 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

Default and Foreclosure (Slide 3 of 3)

• 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

Minimizing Loan Defaults (Slide 1 of 3)

• Impound accounts (aka escrow account or loan trust fund)– Property taxes– Insurance

• Forbearance– Moratorium on payments

• Waiver of principal payments• Deferring of interest• Partial payments• Prior prepayments now used

– Recasting• Change in loan terms

– Extended term– Increase of debt– Reduction of interest– Reduction of principal

Minimizing Loan Defaults (Slide 2 of 3)

• Mortgage Guaranty Insurance– Cost borne by borrower

• Through MIP or MMI– Government insured– FHA

• Indemnifies lender • Takes over property• Sells either refurbished or “as is”• Or HUD takes over loan

– DVA• Pays lender up to insurance level• Subrogates against borrower

– FHLMC• 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)

Minimizing Loan Defaults (Slide 3 of 3)

• Automatic payment plans• Consumer protection laws and regulations

– Truth in Lending (aka Consumer Credit Protection Act

• Full disclosure of all borrowing charges– Home Warranties

• Cover major home components– Plumbing– Electrical– HVAC– Walls, roof & foundation

• Usually one year

Other Lending Problems(Slide 1 of 3)

• Usury– Max rate is 10% or– 5% above Federal Reserve discount rate– Not applied to seller carrybacks

• Redlining– Refuse loans in high risk areas– Illegal– Community Reinvestment Act

• Lenders must disclose lending data

Other Lending Problems(Slide 2 of 3)

• Community Reinvestment Act (CRA) and The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)– Lenders report on

• Race• Gender• Income• Census tract

– Grades each institution• Home Mortgage Disclosure Act (HDMA)

– Annual report of applications and loans granted

Other Lending Problems(Slide 3 of 3)

• Short Sales– Upside down– The Mortgage Debt Forgiveness Act of 2007

• Retroactive for sales from January 2007• Debt forgiveness for <$2M for personal

residence• Effective through 2012

– Eliminated 100% financing and other high LTV loans

Web Help

• www.hud.gov • www.freddiemac.com • www.ftc.gov • www.mbaa.org • www.mortgagemag.com

Questions and Comments?