This article discusses a carryback seller’s use of recorded requests for notice to protect his security interest in real estate in the event of a delinquency or foreclose under a senior trust deed.

Protection of the last resort

 

A seller who carries back a note and trust deed secured by the property sold generally holds a trust deed lien which is junior to a pre-existing trust deed lien held by a lender, called a senior trust deed holder.

 

The carryback seller holding a second trust deed, like an equity lender or long-term tenant, needs to protect himself against the foreseeable risk of the loss of his interest in the property due to a delinquency and foreclosure by the senior trust deed holder. A foreclosure sale of the property by the senior trust deed holder would eliminate the carryback seller’s trust deed lien on the property, called exhaustion of the security.

 

Two procedures exist for the carryback seller or private lender whose note is secured by a junior trust deed, to receive notice from the senior trust deed holder regarding defaults and foreclosure proceedings on the senior trust deed:

 

·     Request for Notice of Default (NOD) — notice will be sent to the carryback seller or private lender within 10 business days after a senior lienholder initiates foreclosure by recording an NOD; and

 

·     Request for Notice of Delinquency (NODq) — notice will be sent to the carryback seller or private lender within 15 calendar days after four consecutive months of unpaid and delinquent monthly installments on the senior trust deed note.

 

Anyone, whether or not they hold an interest in the property, such as the carryback seller, private lender or tenant of the property, may record a request to receive a copy of any NOD which is later recorded under the trust deed identified in the request. The request does not require the consent of the property owner (or anyone else) and may be recorded at any time.

 

Conversely, the carryback seller or private lender must first obtain the consent of the buyer or owner of the property in order to process a Request for NODq. Consent is best obtained by including a provision in the purchase agreement or loan agreement entered into with the buyer or owner, or on a later modification of a note. [See first tuesday Forms 150 §8.3 and 426 §7.6]

 

The buyer or owner consents to the NODq and the release of information by signing the request form. The request form is then recorded and a copy served on the senior lender through escrow. [See Form 412 accompanying this chapter]

 

The senior trust deed holder will only release delinquency information to the seller or private lender if the request form is signed by the buyer or owner who originated or assumed the loan.

 

Use of the request for an NODq is only available to persons with an ownership interest (tenant or co-owner) or security interest in the property. [Calif. Civil Code §2924e(b)]

 

The NOD Request for a mailing

 

Anyone may record a Request for Notice of Default (NOD). A recorded Request for NOD must identify:

 

·     the person requesting a copy of the NOD, called the requestor, by name and address; and

 

·     the trust deed on which a copy of the NOD commencing foreclosure is requested.

 

To be valid, the Request for NOD only needs to be recorded in the county where the property is located. No service of the request on the lender is required.

 

To initiate foreclosure by a trustee’s sale, the trustee, on instructions from the trust deed holder, records the NOD. The NOD states the nature of an owner’s money default, and what can be done (if anything) to bring the loan current, called reinstatement.

 

Within 10 business days following the recording of the NOD, the trustee must mail two copies of the NOD to each person who recorded a request for notice: one by registered or certified mail, the other by first-class mail. [CC §§2924b(b)(1), (e)]

 

When a Request for NOD is not recorded, a carryback seller or private lender whose trust deed is junior to a trust deed on which an NOD has been recorded will still be sent two copies of the NOD within one month after the NOD is recorded; one by certified or registered mail, the other by first-class mail. [CC §2924b(c)]

 

By recording the Request for NOD, the junior lienholder is given an additional 20 days after receiving the NOD to either reinstate (bring current) the delinquent loan or redeem (pay off) the property, if the owner does not.

 

However, the trustee’s sending a copy of the NOD, which is the minimum attempt required to effect service, and the requestor’s receiving a copy of the NOD are entirely different events.

 

Receiving an NOD on an address change

 

Foreclosure trustees mail a copy of the recorded notice of default (NOD) to the last address of record, or the present address of the property owner or junior lienholders if it is actually known to the beneficiary or trustee. [CC §2924b(b)]

 

For example, a Request for NOD is recorded by a carryback seller to reflect a change of address from the address given in his recorded junior trust deed. The request calls for a copy of any NOD recorded under the senior trust deed identified in the request form to be sent to the carryback seller at the address of his place of business. [See first tuesday Form 450 §11]

 

The carryback seller has another change of address, but this time he fails to record another Request for NOD. The buyer’s loan payments to the senior lender become delinquent and he fails to bring the loan current.

 

The trustee records an NOD. A copy of the NOD is mailed to the carryback seller at his new address which was known and provided by the lender. The buyer cures the default during the reinstatement period.

 

Later, the buyer again becomes delinquent on his loan payments. An NOD and Election to Sell is again recorded on instructions from the same beneficiary, but by his use of a different, substitute trustee.

 

However, the lender does not provide the substitute trustee with the carryback seller’s current address. The substitute trustee sends the NOD and Election to Sell, and later the notice of trustee’s sales (NOTS), to the carryback seller’s old address which was the last address of record. The notices are returned to the trustee by the postal service as undeliverable, and thus are never sent to the carryback seller at his new address.

 

The carryback seller learns of the NOD and the NOTS during the five business days preceding the date scheduled for the trustee’s sale, after expiration of the reinstatement period. The carryback seller seeks to have the substitute trustee rescind the NOD and cancel the trustees’s sale, claiming the failure to send him notice of the NOD and NOTS at his address known to the lender invalidates the foreclosure process.

 

Did the lender properly follow statutory mailing requirements?

 

No, the lender did not follow the statutory mailing requirements since it did not provide the substitute trustee with the carryback seller’s current address. However, the substitute trustee did follow the statutory mailing requirements since he sent notification to the carryback seller at his last address of record. When a beneficiary initiating foreclosure knows an interested party’s current address (by correspondence with that address), the beneficiary must ensure the substitute trustee mails the notice to that address.

 

If the trustee’s sale does occur, money losses can be recovered by the junior lienholder from the beneficiary for failure to instruct the substitute trustee to mail the notice to the current address of the junior lienholder as known to the beneficiary. [I.E. Associates v. Safeco Title Insurance Company (1985) 39 C3d 281]

 

Documents of record often have outdated or incorrect addresses. However, foreclosure trustees themselves are not required to engage in further efforts to investigate unrecorded information to see if the notice is mailed to the most current address for the person entitled to notice. In an effort to protect all interested parties, the trustee should inquire into the beneficiary’s knowledge of the current address of parties known to hold interests in the property.

 

Whenever an owner, carryback seller or tenant has a change of address, good practice requires a new Request for NOD to be recorded. When a new Request for NOD is recorded, the trustee foreclosing must send notices to the mailing address given in the new request for notice.

NODq protection against lender delay

 

A recorded Request for Notice of Default (NOD) containing a current address assures a carryback seller he will be sent notice of the commencement of a trustee’s foreclosure sale within 10 days after the NOD is recorded.

 

However, by the time a senior trust deed lender records an NOD, the loan is often several months in arrears. The amount needed to be advanced by the carryback seller to reinstate the loan may be economically infeasible after a long-standing, continuing default. Delays may occur before an NOD is recorded when lenders are overwhelmed with defaults during recessionary periods. These delays occasionally last a year or more.

 

Unable or unwilling to reinstate a hugely delinquent first trust deed, the carryback seller loses his second trust deed lien due to the senior lender’s foreclosure on the property since it is wiped out, called exhaustion of the security.

 

The Request for Notice of Delinquency (NODq) assures the junior lienholder, who in this scenario is the carryback seller, that he will be notified when a delinquency in installments has existed for no more than four months and 15 days. [CC §2924e(c)]

 

Good brokerage practice when negotiating a carryback note or a private money loan, secured by a second trust deed, includes the buyer’s or owner’s consent to use a Request for Notice form which includes both the NOD and NODq requests. [See Form 412 accompanying this chapter]

 

Record and serve a Request for NODq

 

A Request for Notice of Delinquency (NODq) may be recorded and served on a senior lender, if agreed to by a buyer or owner, when the secured property is:

 

·     a one-to-four unit residential property; or

 

·     any other type of real estate, but the senior lender need not respond by giving notice if his original loan was greater than $300,000. [CC §2924e(a)]

 

A Request for NODq must include the name and address of a carryback seller or private lender as the requestor, his security interest in the property as the beneficiary of a trust deed, and identification of the senior trust deed loan.

 

The buyer or owner must consent to the Request for NODq by signing it as the trustor before the lender is required to comply with the request. The consent to the Request for NODq should be bargained for as part of the terms negotiated for the carryback note or loan origination. [See first tuesday Forms 150 § 8.3 and 426 §7.6]

 

The written consent of the buyer or owner can be either in a separate document, such as the Request for Notice form, or included with the request in the body of the carryback trust deed. The latter is a complicated alternative since a copy of the trust deed containing the request must then be served on the senior lender. [CC §2924e(a)]

 

The properly prepared Request for NODq is served on the lender, together with a $40 fee, by regular mail addressed to the lender at the address where loan payments are received.

 

For example, if the carryback seller is secured by a third trust deed, the first and the second trust deed holders are each entitled to $40 on their receipt of the Request for NODq.

 

The Request for NODq is prepared, recorded and served on the lender by escrow under instructions from the buyer and the carryback seller. In the case of a loan escrow, the instructions are from the owner and the private lender. All costs to prepare and record the notice are paid by the buyer or owner.

 

The Request for NODq is valid for five years from the date it is mailed to the lender or recorded, whichever event occurs last. [CC §2924e(b)]

 

Prior to the five-year expiration of the Request for NODq, it may be renewed for five additional years by recording and mailing the senior lender a copy of the original Request for NODq, together with a written statement of renewal and a fee of $15. A renewal of the request may be sent no sooner than six months before the expiration date of the five-year period for the original request. [CC §2924e(b)]

 

Prompted by a Request for NODq from the carryback seller or private lender, the senior lender will send them a notice by regular mail within 15 days following a four month delinquency in the payments of any monies due the lender which remains unpaid. The notice will include the status of the delinquency and the amount required to cure it. [CC §2924e(c)]

 

Other operational lender risks

 

The Request for NODq scheme, with its four month and 15 day delay before delivery of the notice of any delinquency, provides only limited protection. The carryback seller and private lender must still maintain sufficient money reserves for multiple reasons, including:

 

·     to cover future costs and advances required to reinstate the first trust deed on a default by the owner; and

 

·     to carry the payments on the first trust deed (and any delinquent taxes and insurance premiums) until the carryback seller or private lender can complete a foreclosure or pre-foreclosure workout with the owner.

 

An additional and more fundamental protection for the carryback seller who is subordinated by a senior trust deed lien is to consider the use of an all-inclusive note and trust deed (AITD). As holder of an AITD, the carryback seller, not the buyer, is responsible for the payments on the first trust deed, provided the buyer pays the carryback seller on the AITD. [See first tuesday Forms 421, 442, 443 and 450]

 

When an AITD is used, the need for information on delinquencies in underlying, wrapped loans is reversed between the buyer and the seller. It is now the buyer who needs to make the Request for Notice as the requestor. Without making the Request for Notice, the buyer will not receive early notice of a default on the first trust deed if the seller fails to meet his obligations under the AITD to make timely payments on the wrapped loan. The same consideration for an NODq must be given to a tenant’s interest under a lease with the owner.