Here is the fifth post in our series drawing on appraisal concepts from our unpublished BPO course content. This series showcases the fundamentals for understanding real estate aspects which shape the value of a parcel for a user.
A DRE licensee uses various value analyses of title conditions to develop a Broker Price Opinion (BPO) to be handed to a client. Here, we define interests in real estate and transfer of rights in real estate.
Why this article matters to your practice: Real estate pricing maxed out in early 2022, ending a very long half-cycle following mid-2009. During this period, buyers and tenants chased the rising price of property rights, primarily possession by a household or business. Meanwhile, concern for property evaluation was dropped from price-setting conversations.
That has changed. Rational judgment by buyers and tenants is returning – gone is their fear of missing out (FOMO). Caution has become part of pricing decisions made to retain or acquire possession. And with these decisions, so have brokerage services, and the necessity for comparable market analysis (CMA) – part of a professionally produced BPO, aka Appraisal.
A trust deed trustee holds no interest in a parcel
A trustee, named or appointed under a trust deed, is given authority by trust deed provisions to reconvey the trust deed from title or conduct a foreclosure sale of the parcel described in the trust deed when receiving such a request from the beneficiary.
A trust deed is a security device used by mortgage lenders and carryback sellers to create a monetary lien on title to the described parcel of real estate. Thus, the trustee is functionally non-existent until the beneficiary elects to reconvey or foreclose its security interest in the parcel. Importantly, a trustee on a trust deed holds no interest in the real estate.
Any person other than the owner of the parcel described in the trust deed may serve as trustee on a trust deed. The beneficiary of the trust deed may be the trustee, be they a lender or carryback seller, individual or entity. [More v. Calkins (1892) 95 C 435]
The trustee when performing an activity is regarded as a common agent. Thus, when the trustee is called on by the beneficiary to carry out its duty to reconvey or foreclose, the trustee acts impartially. A trust deed lien does not create a trust relationship; the trust arrangement fabricated in a trust deed is purely fictitious.
The duty owed, to both the lender and the parcel owner, is to strictly administer the statutory foreclosure scheme. [Kerivan v. Title Insurance and Trust Company (1983) 147 CA3d 225]
The beneficiary is a lienholder
The trust deed beneficiary, such as a lender or carryback seller, holds a security interest in the parcel of real estate described in the recorded trust deed. The security interest provided by a trust deed allows the beneficiary to enforce the owner’s performance of provisions in the trust deed. Enforcement is foreclosure to collect the monetary obligation evidenced by the note which is referenced in the trust deed by its dollar amount and date.
The beneficiary, like the trustee, receives no ownership interest in the parcel, just lien rights. Since no ownership rights are conveyed to anyone by the trust deed, the owner as trustor under the trust deed retains all the ownership interest they hold in the parcel. The beneficiary holds a security interest as a lien encumbering all the trustor’s ownership rights in the described parcel.
Further, the beneficiary under a trust deed has authority to instruct the trustee to sell the parcel encumbered by the trust deed lien on behalf of the beneficiary. Further, the trustee has authority from both the trustor — owner —and the beneficiary —lienholder — under the power-of-sale provision in the trust deed to sell the parcel at public auction. The trustee holds a foreclosure sale in compliance with the statutory scheme when instructed by the beneficiary. [Prob C §§16000, 16420(a)(1)]
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Mortgage liens on real estate
A claim or lien on a parcel of real estate is an encumbrance on the ownership interests in the parcel. All encumbrances in public records affecting a parcel’s title are disclosed in a preliminary title report (prelim) issued by a title insurance company.
Encumbrances set out in a prelim are recorded and affect ownership rights and include:
- general and special taxes;
- assessments and bonds;
- covenants, conditions and restrictions (CC&Rs);
- easements;
- rights of way;
- monetary liens; and
- real estate interests held by others. [CC §1113, 1114]
On review of the prelim, the escrow officer handling a closing for a transaction informs the owner of defects or encumbrances on title which interfere with closing, unless removed.
A real estate interest less than the entire fee title may be encumbered, such as:
- a fractional co-ownership;
- leasehold interest;
- life estate in the parcel;
- collateral assignments of an existing trust deed;
- equitable ownership rights under land sales contracts; and
- purchase rights under options to buy.
For example, a tenant with the right to occupy conveyed by a long-term leasehold agreement may encumber their leasehold interest with a trust deed lien, even though some other person is the fee owner of the real estate. The fee ownership is not affected by the lien on the tenant’s leasehold interest. [CC §§783, 1091, 2947]
The trust deed lien created by the owner of a fractional interest in a parcel of real estate attaches only to the owner’s interest in the parcel. It does not attach to the interests of any co-owners. [Caito v. United California Bank (1978) 20 C3d 694]
A trust deed lien ceases to exist when its purpose as a security device ends. Thus, once the beneficiary (lender or carryback seller) receives full satisfaction of the debt evidenced in the note referenced in a trust deed, any further monetary claim by the beneficiary of a trust deed is invalid.
Removing the trust deed from title to the parcel on termination of the debt relationship between the owner and the lender is accomplished in one of three ways:
- a reconveyance on full repayment executed by the trustee; [See RPI Form 472]
- a deed-in-lieu of foreclosure by mutual agreement between the owner and the beneficiary; [See RPI Form 406] or
- foreclosure by issuance of a trustee’s deed or sheriff’s deed. [See RPI Form 475]
Occasionally, a debt secured by a trust deed lien on a parcel is fully satisfied, but a reconveyance is not recorded to officially clear title of the lien. After 75 days from payoff, the title insurer may record a release of obligation under deed of trust to clear title without further instructions from anyone. [CC §2941(b)(3)]
Further, title companies may write over a known encumbrance when issuing a policy. To do so, the title policy simply does not except the lien from coverage. Thus, the insured owner is covered for any claim made due to the known encumbrance since the policy did not except it from coverage.
Title companies usually demand an indemnity agreement from the person responsible for eliminating the encumbrance the title policy did not except from coverage. This encumbrance typically takes the form of a money lien, such as a mechanic’s lien, money judgment or blanket encumbrance. As indemnified, the title company recovers from a third-party guarantor when a claim by an insured policy holder is later paid due to the encumbrance.
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Mortgage assumptions when rates are rising
In the decades of steadily declining mortgage rates, mortgage holders abandoned the use of the due-on clause buried in boilerplate provisions within all trust deeds held by lenders or carryback sellers.
As mortgage rates cyclically trend downward, mortgage holders have no financial incentive to recast mortgages or call and re-lend the funds at a lower rate. In tandem but with different motivation, buyers are not interested in taking over the seller’s mortgage when the note rate exceeds rates on new originations. But this trend ended in 2012.
Enforcement, on the occurrence of an event triggering the due-on clause, permits the beneficiary to:
- call the mortgage, demanding the full amount remaining on the debt as due and payable, also known as acceleration; or
- recast the mortgage, demanding a modification of the mortgage’s terms as a condition for the mortgage holder’s consent to a transfer, called a waiver by consent.
When decades of declining mortgage rates return – a half cycle of interest rate movement which last began in 1982 and ended in 2012 – mortgage holders usually permit mortgage assumptions at the existing note rate, unless the holder has a need for cash to maintain solvency.
Conversely, in times of steadily rising rates – as from 1950 to 1980, and again now underway beginning in 2013 – mortgage holders seize on any event which triggers the due-on clause to achieve an increase in interest yield on their portfolio. The congressional intent for this privilege is to shift any bailout of mortgage holders directly onto the public to maintain the solvency of government-insured lenders, a consumer expense.
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To hunt down the occurrence of an event triggering a call, mortgage holders employ title companies to advise them on recorded activity affecting title to properties encumbered by a mortgage they hold.
Once the due-on clause is triggered by a sale, lease or further encumbrance (or death) by a parcel owner, the mortgage holder typically calls the mortgage due and payable, to begin negotiations to increase the lender’s earnings. The call usually results in a modification of the mortgage note interest rate — and payments — at current market rates, when current rates are higher than the mortgage note rate. In turn, the mortgage holder waives their right to call the mortgage, an activity called a formal assumption.
Thus, an owner of real estate encumbered by a trust deed finds that exercising their right to sell, lease or equity-finance their property becomes increasingly difficult as interest rates rise, since mortgage holders are there to pounce. This tends to imprison owners in their property, unable to sell and relocate without accepting a lower price driven down by rising mortgage rates. Or worse, the home develops a negative equity at the price a prudent buyer will pay — fair market value (FMV).
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Misuse of a grant deed as a mortgage-in-fact
The use of a grant deed passes all ownership rights in title to the described parcel, when handed to the grantee or recorded by the grantor. [See RPI Form 404]
Occasionally, a grant deed is erroneously used to convey title to a parcel with the intent to provide the lender with security for the repayment of a monetary debt while the owner remains in possession and pays all ownership expenses. Here, a grant deed transfers no rights of ownership — in spite of the deeds wording of conveyance.
This improper use of a grant deed to create a security interest in real estate for a lender, also known as collateral, causes the grant deed to be recharacterized as a mortgage-in-fact. The result is the grant deed only imposes a lien on the described parcel in favor of the lender, exactly the exclusive purpose of a trust deed.
However, a trustee’s foreclosure is not available to the holder of a mortgage-in-fact grant deed. On the owner’s default for money owed, the remedy for the lender is a judicial foreclosure sale under the lien rights of a mortgage-in-fact grant deed situation.
Brokers and their agents arranging mortgages use a trust deed as the security device to attach the debt as a lien on real estate. Using a grant deed as a security device to impose a lien on a parcel is improper practice.
