The mortgage holder may continue to foreclose

Consider an owner of real estate that is encumbered by a mortgage who loses their primary source of income. As a result, the owner is unable to make installment payments called for in the mortgage. Negotiations with the mortgage holder to restructure the payment schedule in a pre-foreclosure workout are futile. The owner does not cure the default and the mortgage holder records a Notice of Default (NOD).

On receipt of the NOD, the owner tenders some of the delinquent payments referenced in the notice. However, the owner does not tender all delinquent installments and foreclosure charges required to reinstate the loan and rescind the NOD.

The mortgage holder accepts the owner’s partial payments. Immediately after receipt, the mortgage holder sends the owner a letter notifying them:

  • the mortgage is still in default;
  • the amount needed to cure the default and bring the mortgage current; and
  • the property remains in foreclosure, since the owner’s partial payments were insufficient to reinstate the loan.

The owner is also informed the foreclosure will continue until the mortgage is brought current or the property is sold at a trustee’s sale. Ultimately, a trustee’s sale is set by recording and posting a Notice of Trustee’s Sale (NOTS).

The owner challenges the validity of the NOTS, claiming the mortgage holder waived its right to complete the foreclosure by accepting the partial payment on the mortgage after recording the NOD.

The mortgage holder claims the foreclosure may proceed to the trustee’s sale since the owner paid only part of the amount noticed as delinquent in the NOD, and thus the mortgage remained in default at all times after the NOD was recorded.

Can the mortgage holder proceed with the foreclosure sale after accepting partial payments of the delinquent amount noticed in the NOD?

Yes! By accepting partial payments after recording an NOD and then promptly making a written demand on the owner for the additional amounts required to reinstate the mortgage, the mortgage holder does not waive its right to complete the foreclosure process by its conduct. Only the owner’s (or a junior mortgage holder’s) payment in full of the delinquent amounts and foreclosure charges owed to the mortgage holder will reinstate the mortgage. Thus, the mortgage holder is not required to rescind the NOD until all amounts noticed in the NOD are paid in full to reinstate the mortgage. [M.E. Hersch v. Citizens Savings and Loan Association (1983) 146 CA3d 1002]

Non-waiver clause provides authorization

A non-waiver clause in the mortgage holder’s mortgage authorizes the mortgage holder to accept partial payments without waiving its right to foreclose since the note and trust deed have not been brought current and a delinquency remains [See first tuesday Form 450 §3.2]

Thus, when a mortgage holder accepts a partial payment while the property is in foreclosure, to clarify its right to continue with foreclosure it needs to immediately notify the owner:

  • the payment received does not reinstate the mortgage, the owner still remains in default and the property is subject to foreclosure;
  • the dollar amount necessary to reinstate the mortgage and rescind the NOD; and
  • confirmation the mortgage holder retains the right to complete foreclosure on the property if the amount remaining to be paid to cure the default is not tendered prior to the expiration of the reinstatement period. [Hunt v. Smyth (1972) 25 CA3d 807]

If the conduct of the mortgage holder leads the owner to believe the default has been cured, which might occur if the mortgage holder fails to notify the owner the amount tendered is insufficient to bring the mortgage current, the mortgage holder is barred from continuing with the foreclosure. [Altman v. McCollum (1951) 107 CA2d Supp. 847]

Additionally, when the trust deed contains an assignment of rents provision and the trust deed is in default, the mortgage holder is entitled to collect rents from the landlord or the tenants. Rents collected by the mortgage holder are then applied toward the amounts called for in the NOD to cure the default. The mortgage holder may continue with foreclosure on the real estate until the default is paid in full.

Partial payment on an incurable default

A mortgage holder accepting regular installment payments from an owner after declaring a default which cannot be cured by a reinstatement of the mortgage — a call for full payoff — waives its right to foreclose based on that default.

For example, consider a buyer who acquires property which is subject to a mortgage containing a due-on-sale clause. The buyer tenders the regularly scheduled mortgage payments directly to the mortgage holder but does not obtain the mortgage holder’s waiver of the due-on clause by formally assuming the mortgage.

The mortgage holder, on later learning of the change in ownership, proposes a mortgage assumption agreement which would modify the terms of the mortgage in exchange for waiving its right to call the mortgage. The buyer rejects the mortgage holder’s offer. However, the buyer continues to make the regularly scheduled payments to the mortgage holder as called for in the note. The mortgage holder continues to accept the buyer’s payments without qualification.

A year later, the mortgage holder sends the buyer a letter calling the mortgage and stating their further acceptance of mortgage payments will not constitute a waiver of the call. The buyer fails to pay the mortgage in full following the call, thus prompting the mortgage holder to initiate foreclosure on the buyer’s property.

Here, the mortgage holder failed to promptly enforce its rights under the due-on-sale clause when it first learned of the transfer of ownership. The mortgage holder did not call the mortgage for a long period after it had knowledge of the change in ownership. Throughout the period during which it had knowledge of the transfer, it accepted regular mortgage payments from the buyer without first entering into a non-waiver agreement, also known as a reservation of rights agreement.

Thus, the mortgage holder, by its conduct with the buyer, waived its right to enforce its due-on-sale clause on that transfer to the buyer by calling the mortgage. [Rubin v. Los Angeles Federal Savings and Loan Association (1984) 159 CA3d 292]

The mortgage holder’s remedy for a violation of the due-on clause in a trust deed is limited to calling the mortgage. After making the call, the mortgage holder may attempt to negotiate a restructuring of the mortgage with the buyer if it so chooses.

However, the mortgage holder may not accept payments after the call has been made (without first entering into a reservation of rights agreement). A mortgage which has been called under a due-on clause cannot be reinstated after the call unless the mortgage holder permits it, since the call leaves but one payment due in the form of a final/balloon payment.

Take the money and credit the mortgage

Some mortgage holders return partial payments tendered by an owner in default. However, mortgage holders are entitled to take the money and credit it to the amounts due. Still, some mortgage holders are under the mistaken belief that acceptance of the payment will bar them from completing their foreclosure on the property.

Mortgage holders may always accept payments tendered by the owner when the owner has the right to reinstate the mortgage, unless the owner imposes a condition upon the tender with an endorsement on the checks regarding a disputed amount.

In an attempt to evade the mortgage holder’s foreclosure rights, property owners occasionally place conditions on the check they tender, stating the amount of the check is intended to fully cure the default or constitutes a rescission of the NOD. When this occurs, the mortgage holder is not required to accept the owner’s conditional tender. [Calif. Civil Code §1494]

The mortgage holder can return the conditional tender and inform the buyer that only a full payment of the amount due will cure the default and terminate the mortgage holder’s right to proceed with the foreclosure on the real estate.

Conflicting endorsement

Consider an owner of real estate who enters into a service contract employing a broker to obtain a lower property assessment on their property for the current and prior tax year.

The owner agrees to pay the broker a percentage of the tax savings received as payment for the services rendered. However, the owner believes they will only owe a percentage on one tax year’s savings.

The broker obtains reduced assessments for the current and prior year. The owner pays for the broker’s services based on the tax savings for only one year and writes an endorsement on the back of the check which states, “payment in full for all services.”

The broker cashes the check without deleting the owner’s endorsement. The broker promptly sends a letter to the owner stating the dollar amount of the check does not fully pay for all services performed and makes a claim on the owner for the remaining unpaid amount.

The owner claims the broker is barred from collecting any further amounts for their services since the check was deposited with “payment in full” printed on it.

The broker claims the acceptance of the check promptly followed by their notice to the owner that the amount was insufficient does not constitute payment in full.

Here, the broker’s claim for the full payment of services is allowed since the broker promptly communicated with the owner that acceptance of the check did not constitute payment in full. [In re Van Buren Plaza, LLC. (1996) 200 BR 384]

A mortgage holder might be improperly motivated to refuse to accept any partial payment from an owner until the mortgage is brought current, in an effort to trigger additional monthly late charges—a source of low-cost revenue. Further, a mortgage holder can only collect one late fee per late payment, and can’t charge late fees on late fees. [12 CFR §1026.36(c)(B)(iii)(2)]

Additionally, if a borrower makes partial payments that add up to the amount of a full monthly payment, the mortgage holder needs to accept the combined payments as a monthly payment. [12 CFR §1026.36(c)(1)(ii)]