This article reviews the time periods for curing delinquencies on a real estate loan and when the loan must be paid in full.
Recession-induced defaults
A government declared recession (two quarters of declining gross domestic product) has become a period commencing roughly 24 to 36 months into a regime of a continuous incremental rise in short-term rates orchestrated by the Federal Reserve (Fed). August of 2004 (and of 1988 and 1999) saw the planting of the first seeds of one such possible recession when the Fed started the continuous periodic bidding up of short-term rates. Thus, the Fed deliberately engineered a pace of slower growth for the economy; a deceleration of economic activity — the sales of real estate.
The rise in short-term rates until they exceed the long-term rates is designed to reduce the long-term growth of price inflation in, among other things, real estate assets. In a word, the real estate boom was over as of August 2005, commencing a recognition of the plight of those who acquired real estate during the boom and were now unable to unload it for the price they paid.
Flipping property within six months of purchase and seeking a profit based solely on an inflating market had run its course, a sort of nation-wide Ponzi scheme fed primarily by home builders and Wall Street bankers. The process will occur again following the next real estate boom — most likely in the period of 2015 to 2020. The boom will be a repeat of the boomer acquisitions in the mid-1980’s, but this time fueled by the X generation’s household formations and the retirement of the boomers in condos they purchase.
Editor’s note — The first tuesday online journal contains a section on the economic trends of real estate. The journal can be viewed at journal.firsttuesday.us.
As a recession takes its toll on real estate prices, the attitudes of sellers, brokers and their agents, lenders and the media (for merely reporting the adverse economic and financial condition of the market) turn decidedly gloomy. Further, the general public (for lack of a high school education on economic principals) has a generally pessimistic view of the market place, a prevailing anti-market bias.
This anti-market bias only hastens and deepens the recession’s effect on real estate prices. During real estate recessions, sellers nearly panic as their efforts to find a buyer consume ever more months, lenders seize up in an aversion to all risk (nothing short of paranoia) and brokers and agents (especially those new to the business) look for work in other fields of endeavor in droves — 40% or more of sales agents holding licenses in 2007 will actually let their licenses expire.
Popular thought, expressed in a variety of ways, is that real estate will never be as good again, that it cannot recover to match the action of the boom-time days, and that the market has gone permanently south, allowing no right-minded person to be fool enough to venture into the quagmire.
As always, permanence is never the case, and investors, by their tolerance for risk, as well as well-educated individuals who are informed on economic principles, do not view real estate as does the ill-informed herd.
A stretch by the seller too far
It is also a time when sellers experimentally talk of lease- option sales and land sale contracts in an occasionally self- destructive effort to do everything possible to eliminate the long- standing entry barriers for buyers that cripple an owner’s sales efforts. Specifically, owners openly collaborate with buyers to avoid brokers, escrow, title insurance, lender involvement and disclosures, such as inspections, city occupancy compliance, pest control, property conditions, natural hazards, due-on-sale clauses, and property reassessment. The list of gatekeeper obstructions to be complete goes on. All this to attract buyers.
It is not that the investor wants any part of these short-sighted but well-intended sales devices to encourage him to buy; he is paying cash or its equivalent. But it is into this environment he will step to make offers, at or near the bottom of the recession, when volume and prices neutralize, just before or as the sales volume starts to consistently increase.
Another set of conditions serving to fine tune the time for submission of a purchase offer are the specific circumstances surrounding a foreclosure to which some sellers are subjected. Timing of the foreclosure process is mechanical; foreclosure for the seller is a ticking clock counting down for a detonation event: the foreclosure sale.
Meanwhile, the investor, in a bit more talented approach and certainly with a less gloomy outlook, is tracking those owners who are victims of the public’s overreaction to the real estate bust. At the same time, investors see that property prices have been dragged down below the historical trend line of market values. This condition is aggravated by ever more property being placed on the market than sellers should sell or brokers should list to maintain a stable real estate market. Also adding to adverse sales conditions is the fact buyers will not return in sufficient numbers to increase prices until it is socially acceptable, part of the anti-market bias problem.
With monthly inventories of homes for sale stacked up at 10 to 13 per buyer per month, brokers seem totally unaware that excessive listing only exacerbates already depressed prices and declining sales volume, a supply and demand issue not overlooked by foreclosure investors and other scavengers of real estate.
The culmination of these events creates a profitable environment for risk tolerant buyers; some acting for the short term, all benefitting in the long term. At some point during the decline in sales volume and sales prices, roughly 24 to 36 months after the start of a methodical decline in short-term rates, the pace of the decline will have slowed. Soon, prices and sales volume neutralize, dropping no further and becoming stable.
Gradually, more buyers gain confidence and begin to buy real estate in greater numbers. As the volume of sales picks up, sellers realize the prices they have been receiving are too low. Twelve to 15 months into a clear trend of increasing sales volume, the prices of comparable properties start to increase. Thus, the germination of yet another real estate boom takes root.
The time for offers
In this matrix of recessionary market activity, the an equity-purchase (EP) investor looking at sellers-in-foreclosure will locate profitable acquisitions and make offers.
The timing for the submission of offers is set by two conditions:
- current sales volume in the real estate market; and
- foreclosure circumstances of the seller.
As fewer buyers compete to pocket real estate during a recession, the EP investor’s time for making offers requires he wait until the vacuum created by the dearth of buyers creates a window for his easy entry as a cash buyer. At that moment, cash is recognized as king of the transaction.
It is time to submit an offer when the investor locates a property in foreclosure during the period of price stabilization at the bottom of the recessionary period and the property has an equity sizable enough to justify an offer for a few thousand dollars.
The foreclosure circumstances unique to each property in foreclosure during this window period control the proper moment to submit an offer on that property.
Timing for submitting an offer to purchase property in foreclosure conveniently breaks down into three phases:
- the period of foreclosure ending before the trustee’s auction sale is held;
- the trustee’s auction sale itself; and
- the real estate owned (REO) status of the property immediately after the trustee’s sale when it is acquired by the lender.
The period following the recording of an NOD before the trustee’s sale provides little opportunity for an investor when the loan amount exceeds the property’s value. Thus, the property has no equity for the investor to buy. The opportunity that does then exist is a generally troublesome short sale effort. Lenders are not emotionally capable of taking a loss while they still hold a note and trust deed.
By waiting until the trustee’s sale to bid and acquire a property, an investor is better able to acquire the property at the right price. Of course, he will need to pay cash to buy the property when title is held by the lender.
Especially juicy are foreclosures on first trust deed loans that have a loan-to-value ratio of 60% to 70% of value and are over-encumbered with second trust deeds, abstracts of judgment and tax liens.
The foreclosure sale of the first trust deed works to wipe out the junior lienholders who encumber the property with lien amounts exceeding its value. Thus, to acquire the property for a cash bid in the amount of the first, the trustee’s sale eliminates all junior lienholders and leases. The trustee’s deed clears from title all liens, except for property taxes, any Mello-Roos-type improvement district bonds and trust deed loans senior to the foreclosed trust deed.
For those properties in foreclosure with a principal loan amount exceeding the value of the property and where the owner lacks the ability or time to negotiate a short pay with the lender, the trustee’s sale provides little opportunity for the investor to bid in the property at the right price. Lenders typically bid in the property for all amounts due, called a full credit bid, including principal, accrued interest, prepayment penalties, late charges and foreclosure costs.
The lender who takes title to the real estate at the trustee’s sale puts the investor tracking the property at the third stage — the time to submit a purchase agreement offer to the lender.
Hopefully, the investor has conducted some due diligence investigation into the condition and merits of the property and is ready to submit an offer to the lender immediately following the trustee’s sale. A delay in submitting an offer will likely find the property’s management already assigned to the lender’s REO department. Money will then be spent clearing out occupants, cleaning up the property and eliminating deferred maintenance. Without offers to consider, they soon list the property with MLS-type brokers at full retail prices.
Unlike acquiring property at a trustee’s sale, a purchase from the seller-in-foreclosure or the lender as an REO will be escrowed, disclosures will be made and, most importantly, a policy of title insurance will cover defects in title (like strange liens with priority) that would not be covered on a trustee’s sale.
Editor’s note — Information about recorded NODs and scheduled trustees’ sales in
Nullifying the call during foreclosure
The lender holding a trust deed and note, called the beneficiary, may call the entire principal balance of the note (and any amounts advanced under the trust deed) due and immediately payable on any default in the terms of either the note or trust deed. Trust deeds contain a boilerplate provision called an acceleration clause that authorizes the lender to call the loan on a default.
Another provision in the trust deed, called the power-of-sale provision, authorizes the beneficiary to instruct the trustee appointed under the trust deed to initiate a non-judicial trustee’s foreclosure to sell the property described in the trust deed.
As a result of the tandem effect of the power-of-sale provision and the acceleration clause, the trustee’s recording of a Notice of Default (NOD) both initiates the trustee’s foreclosure procedures and causes all sums due on the note and trust deed to become immediately due and payable without further notice.
Consider a homeowner who has defaulted on the payment of principal and interest due on the note and property taxes due under the trust deed. An NOD has been recorded, commencing foreclosure to enforce payment of all sums owed under the note and trust deed.
An investor submits a purchase agreement offer, which the homeowner accepts. The terms include the transfer of ownership to the investor subject to the existing note and trust deed that is in foreclosure. The owner will pay all delinquencies and foreclosure charges at the close of escrow from equity purchase funds received from the investor.
Escrow is opened and a request for a beneficiary statement is sent to the beneficiary holding the note and trust deed by escrow. The beneficiary is a private party who has commenced foreclosures before on this trust deed and cancelled the NOD when the homeowner paid all the foreclosure costs and brought the delinquent payments and late charges current.
The beneficiary responds to the request for a beneficiary statement by sending a payoff demand, not a beneficiary statement. The beneficiary claims he is enforcing the acceleration clause in the trust deed and will only accept payment in full now that the NOD has been recorded, establishing the call.
The NOD states the amount of the delinquencies, past, present and future (as it must). Thus, escrow is able to determine the amount due to cure the defaults stated in the NOD. The trustee is contacted and the total of the foreclosure fees and charges incurred by the date scheduled for close of escrow are determined.
Between the information in the NOD and the stage of the foreclosure proceeding, escrow can determine the amount due to cure the defaults and pay foreclosure costs. The investor deposits closing funds on escrow’s call for funds. Escrow is closed and the delinquencies and foreclosure costs are forwarded to the trustee, payable to the beneficiary, a tender of the homeowner’s proceeds of the sale to cure the defaults.
The beneficiary rejects the tender, claiming the entire amount of his note is due as agreed in the trust deed. Further, the beneficiary claims the due-on clause in the trust deed has been triggered by the buyer’s failure to obtain the beneficiary’s consent to the sale and now requires a full payoff of the note.
Can the escrow, by tendering only the amount of the delinquencies and foreclosure costs necessary to cure the defaults, cause the note and trust deed to be brought current, and reinstate the trust deed as though a default had never occurred?
Yes! After the NOD has been recorded and prior to five-business- days before the trustee’s sale, the owner (or any junior lienholder or buyer) of any real estate encumbered by a trust deed lien that is in foreclosure can terminate the foreclosure proceedings by either:
- paying the delinquent amounts due on the note and trust deed as described in the NOD and foreclosure charges, called reinstatement [Calif. Civil Code §2924c]; or
- paying the entire amount due on the note and trust deed, plus foreclosure charges, called redemption. [CC §2903]
Since the violation of the due-on clause based on the unconsented-to transfer to the investor triggered a call which is not stated in the NOD, the due-on call cannot be enforced under this NOD. Another NOD must be recorded when the call has not been paid.
Note defaults and reinstatement
A trust deed on which a foreclosure has been initiated is considered reinstated when the beneficiary receives:
- all amounts referenced as delinquent in the notice of default (NOD), including principal, interest, taxes, insurance, assessments and advances;
- installments that become due and remain unpaid after the recording of the NOD, and any future advances made by the beneficiary after the recording of the NOD to pay taxes, senior liens, assessments, insurance premiums and to eliminate any other impairment of the security; and
- costs and expenses incurred by the lender to enforce the trust deed, including trustees fee’s or attorney fees. [CC §2924c(a)(1)]
After an NOD is recorded, an owner or any junior lienholder of real estate can bring current any monetary or curable default stated in the NOD at any time prior to five business days before the trustee’s sale, called the reinstatement period. If the sale is postponed, the reinstatement period is extended, ending the day before the five business days prior to the postponed sale date. [CC §2924c(e)]
Up until the time the NOD is recorded by a trustee, the tender of all delinquencies must be accepted by the beneficiary.
After recording the NOD, the lender’s trustee must allow three months (not 90 days) to pass before advertising and posting notice of the date of the trustee’s sale. [CC §2924]
The lender’s trustee must begin advertising and post a Notice of Trustees Sale (NOTS) at least 20 days before the date of the sale. The property can be sold by the trustee no sooner than the twenty-first day after advertising begins and the posting of notice occurs. [CC §2924f(b)]
The owner in foreclosure is not allowed to delay the trustee’s sale by requesting a postponement. [CC §2924g]
Thus, the owner, or junior lienholder, has a minimum of approximately 105 days to cure the default and reinstate the note and trust deed before foreclosure.
To determine the last day for reinstatement of the note and trust deed, consider a trustee’s sale that is scheduled for a Friday. Count back five business days beginning with the first business day prior to the scheduled Friday sale. Since weekends are not business days, the fifth day counting backward from the scheduled trustee’s sale is the previous Friday (if no holidays exist). Thus, the very last day to reinstate the loan is on the Thursday eight calendar days before the trustee’s sale.
The lender’s failure to identify or include the dollar amount of all known defaults in the NOD does not invalidate the NOTS for the defaults stated in the NOD. Further, the lender can enforce payment of any omitted defaults by recording another, separate NOD. [CC §2924]
On reinstatement of the note and trust deed, the NOD is rescinded by the trustee, removing the recorded default from the title of the property. [CC §2924c(a)(2)]
Additionally, any call is eliminated and the loan is returned to installment status when the note and trust deed have been reinstated. Upon reinstatement, the owner continues his ownership of the property as though the loan had never been in default.
Redemption
Failure to cure a default before the reinstatement period expires allows a trust deed holder to require the owner to redeem the property from the lien by:
- paying all sums due under the note and trust deed; and
- reimbursing the costs of foreclosure, prior to completion of the trustee’s sale.
The owner’s right of redemption exists until the moment the trustee completes the bidding and announces the property has been sold. Any owner, junior lienholder or other person with an interest in the property may satisfy the debt and redeem the property prior to the completion of the trustee’s sale. [CC §2903]
To redeem the property, the owner or junior lienholder is required to pay the principal and all interest charges accrued on the principal, permissible penalties, foreclosure costs and any future advances made by the foreclosing lender to protect his security interest in the property.
Unless all amounts due on the note and trust deed resulting from the owner’s default are paid in full during the redemption period, the owner will lose the property at the trustee’s foreclosure sale.
Lender remedies on a default
An owner’s default on a trust deed loan encumbering his property can arise under a provision in either the note or the trust deed. As always, a default on the note triggers a default on the trust deed. It is the default on a trust deed that permits a foreclosure.
When the owner fails to pay installments of principal and interest as they become due under the terms of the note, he is then in default on the note. Thus, a default also exists on the trust deed.
The owner’s default prompts the trust deed noteholder to immediately call the loan due under the acceleration clause in the note and trust deed by commencing foreclosure proceedings and recording a notice of default (NOD).
Additionally, when the owner fails to meet his obligations regarding the care, use and maintenance of the secured real estate, he is in default under the waste provision in the trust deed. The default on the trust deed exists even though the owner may be current on all payments and the note is not in default.
The owner’s failure to maintain the property or pay property taxes, hazard insurance premiums, assessments and amounts due on senior trust deed liens is considered a default on a trust deed.
When the owner defaults on the trust deed, the lender may simply record an NOD which initiates a trustee’s foreclosure sale and calls the note due.
A trust deed noteholder may advance funds to cure a default on the trust deed, such as the owner’s failure to pay hazard insurance premiums. The advance is then added to the debt owed by authority of the trust deed’s future advances provision. The trust deed noteholder may then demand the immediate repayment of the advance from the owner.
Let the grace period run before NOD
Consider a trust deed note held by a carryback seller that calls for installments to be paid by the first day of each month. A provision in the note imposes a charge when the monthly installments are not received within 10 days after the installment’s due date. No mention of a grace period for a late payment exists in the note.
The seller consistently receives installments within the 10-day period after the installments become due, but never by the due date itself. Eventually, the carryback seller gives the buyer reasonable advance notice (30 days) that the installment for the following month must be paid by the first day of the month, the payment’s actual due date. If it is not paid by the first, the seller advises the buyer he will begin foreclosure proceedings by recording a notice of default (NOD).
The following month, the buyer fails to deliver the installment by the first. The carryback seller records an NOD beginning foreclosure proceedings within the 10-day no-charge period.
The payment is received by the seller within 10 days after the due date.
The seller claims the monthly installment was delinquent since it was not paid by the first day of the month, thus placing the buyer in default on the second day of the month.
The buyer claims a default did not exist when the NOD was recorded since the NOD was recorded prior to incurring the agreed-to late charge.
Can the carryback seller begin foreclosure proceedings for the past-due monthly installment before the late charge is incurred?
No! The payment, while due, is not yet considered delinquent due to the existence of a late charge provision. Foreclosure proceedings may not be initiated for a past due payment during the period before a late charge is incurred. When a note provision imposes a late charge on the expiration of a specified time period without receipt of the amount due, this extended time for payment without penalty qualifies as a grace period.
Since a grace period exists, a foreclosure may not be initiated to enforce payment of the installment until after the grace period runs, when the payment becomes delinquent if unpaid. [Baypoint Mortgage Corporation v. Crest Premium Real Estate Investments Retirement Trust (1985) 168 CA3d 818]
Trust deed defaults and reinstatement
A property owner’s ability to reinstate a loan by curing a default under a trust deed provision relating to the property and its title, not the note, depends on the trust deed provision in default.
For example, an owner of real estate encumbered by a trust deed fails to pay property taxes. The trust deed lender records a notice of default (NOD), describing the delinquent property taxes as the owner’s default under the trust deed.
Can the property owner reinstate the loan and retain the property by eliminating the default?
Yes! The default is monetary, entitling the owner to reinstate the loan by simply paying the delinquent property taxes and the trustee’s fees and charges incurred in the foreclosure proceeding.
Also, monetary defaults on trust deed provisions, such as the owner’s failure to pay assessments, ground lease rent and hazard insurance premiums, may be cured and the loan reinstated on the owner’s tender of the full dollar amount of the default. [CC §2924c]
Defaults cured only by redemption
Some trust deed defaults do not allow an installment debt to continue since reinstatement of the note on those defaults is only available if voluntarily agreed to by a lender. Defaults triggering a call and requiring redemption of the property by a payoff of the entire debt include a breach of a due-on clause, a waste provision or a violation of law provision.
For example, consider real estate that is encumbered by a trust deed that requires the owner to maintain his property in good condition and repair.
The owner fails to repair the aging improvements on his property and allows the trees and lawn to die.
The trust deed lender becomes concerned since the owner’s activities causing waste on the property has decreased the value of his security, called impairment. Due to the owner’s failure to maintain the property in good condition (and thus the loan-to-value ratio due to a reduced property value), the lender records a notice of default (NOD) against the property.
Unlike a failure to maintain hazard insurance, here the owner cannot cure the default in the trust deed (waste) by tendering less than the entire remaining balance of the debt. Thus, the owner is unable to reinstate the loan.
In order to retain ownership of the property after the loan had been called because of waste, the owner must redeem the property by tendering full payment of all sums due, including foreclosure costs.
Alternatively, the trust deed gives the lender the authority to cure the waste and add that cost to the principal balance of the note, under the future advances clause.
However, when waste by the owner is committed in bad faith, the lender foreclosing by a trustee’s sale must consider an underbid in a dollar amount equal to the property’s reduced fair market value should the lender acquire the property at the trustee’s sale. With an underbid for an amount equal to the property’s fair market value, the lender can sue the owner to recover the reduction in the property value below the amount due, which was caused by the bad faith waste, even if the note is a nonrecourse debt. [Cornelison v. Kornbluth (1975) 15 C3d 590]
Foreclosure of CID assessment lien
When a condo owner fails to pay his assessment fees to a common interest development (CID), the association of the CID can initiate foreclosure procedures. However, the CID must first notify the owner that his condo will be sold at a trustee’s sale if the fees are not brought current or the late charges remain unpaid. [CC §1367.1(a)]
If the assessment fees and related charges are not paid within 30 days of the initial written notification, the association can then record a notice of delinquent assessment which contributes a trust deed lien on the owner’s condo. The association must send the owner a copy of the notice of delinquent assessment lien within ten calendar days of the recordation. [CC @1671367.1(d)]
After the notice of delinquent assessment is recorded, the owner has 30 days before the association can initiate foreclosure proceedings by recording an NOD. [CC §1367.1(g)]
The owner’s right to redeem the condo lasts beyond the trustee sale until 90 days after the trustee’s sale. Further, the notice of trustee’s sale (NOTS) must include a statement advertizing that the condo is being sold subject to the owner’s 90-day right of redemption following the sale. [CC §1367.4(c)(4)]
