California Foreclosures 101: Strategies for Defaulted Loans

Nema Daghbandan:

Well, good morning everybody. This is Nema Daghbandan here with Geraci Law Firm. I'm also here with Melissa Martorella. We will be your fun webinar host for this new covid related webinar. For those that don't know who either of us are or what we do here I manage the firm's transactional practice. In a normal world we would be writing loan documents and we would be providing compliance advice nationwide and really understanding how to make loans all throughout the country and all the compliance associated with it. Here in California, which is where we are located, we'd also be providing California finance lenders and department of real estate brokers with compliance advice about reporting and all that good stuff. But we are not in a normal world, although it looks like we're starting to get our way over there. What we have been spending most of our time with in the past few weeks and expect for the next couple weeks here is really spending more of our time on forbearances, foreclosures, counseling through the firm and requests and all sorts of just new and novel things that people run into on a daily basis as every day presents its challenges. With me today, as well as Melissa Martorella.

She's a supervising attorney with our organization and she runs our dream team, as we call it here, which is just really providing exceptional legal services. And the documentation side of what we do here. Melissa also manages our actual foreclosure practice. So in addition to being a law firm, we are also a foreclosure trustee in the state of California, and Melissa manages our foreclosure practice for the law firm.

So jumping into what we will be doing today, I will continue to give this disclaimer throughout the webinar. But the first thing is that this webinar is being recorded. We will provide all of you with a copy of the recording as soon as it's done, as well as other interesting and important resource information that you will be able to use. In addition to this, there's also a q and a box. At the bottom of your screen, you should see three separate boxes. One will say q and a, one will say chat, and one will say raise hand. The one we want you to use today is the q and a box. At any time during the presentation, feel free to open up that q and a box, type in a question that comes to mind at the end of the presentation, we will answer all questions in the order in which they arrive.

So again, feel free to enter a question at any time. You will be able to enter it anonymously or you can provide your information if you so choose. But feel free to ask questions as we go along and we will have a q and a at the end to hopefully answer all of your questions as we get through this. So the agenda for today's webinar is up on your screen here. The first thing is that we're going to be providing you with the options. So right now there are a lot of potential requests for default or defaulting occurring and it's not always that you should foreclose and so we want to kind of provide you with options available to you to take into consideration when you get these requests or you otherwise have a defaulted loan. The second thing we'll be doing here today is we'll discuss what are the actual foreclosure restrictions that are in place.

This is a question that we get on a daily basis right now and still get a lot of confusion on it. Hopefully we will dispel any myths you have about whether you can actually file a notice of default, whether you can proceed to an auction, what is the state of foreclosure in the state of California. The third thing here is how to really manage these requests. What should you do when a borrower says they're going to default or you've got a defaulted loan? How has that changed from maybe the previous advice we would've given in January of this year, for example? Then we'll go into the process timelines and potential challenges you may face when you're foreclosing to give you a little bit of an idea of what to expect in a foreclosure process. And lastly, as we discussed as we'll have a q and a session available to you here as well.

Melissa Martorella:

Hi everyone. So to get started here, we're going to just kind of walk through some of the options that a lender has when a borrower defaults to help you decide what you should do in your particular loan default situation. We've had some other webinars in particular on forbearance agreements that really went into depth on those. So this'll just be a very basic overview to determine which of the following options make sense for you in your default. And note that there may be more options here as well, but these are kind of the most common. So just kind of running through here, we have forbearance agreements, modification agreements, deeds in lieu, and then foreclosure, and this would include both judicial foreclosures and non-judicial or trustee sale foreclosures. In addition, when you're doing those foreclosures depending on the option that you choose, you could also try for extraordinary relief including receivers, writs, or attachments.

We'll get more into depth on that when we get to that point of the webinar. So to kind of wrap up the first three options that you as a lender have when a borrower defaults before we dive into foreclosures, you know really want to think what you're trying to accomplish here. So to kind of break it apart between forbearances, modifications, and deeds in lieu, you should be really be thinking about what your goal is with this loan and what you and the borrower are trying to accomplish here and whether there is an agreement between the two of you that give you a path forward. So the first consideration is are you considering waiving any of your rights moving forward? So are you going to waive or defer monthly payments? Are you going to allow the maturity date to lapse while the borrower gets caught up or deals with selling a property that's taking some time to sell?

Are you waiving late charges or default interest? What are you doing to help the borrower through this time? If you're doing that, if you're waiving any sort of rights under the loan and also not proceeding with a foreclosure or other enforcement option, the agreement that you would want to draft is a forbearance agreement. And so as we've discussed on other webinars, which we'll make sure to link you to afterwards when we send our follow-up materials there are a lot of options with forbearance agreements and we'll kind of dive into those. Alternatively, if you're actually deciding to change the terms of the loan with your borrower, then you might actually want to modification agreement. So if you're going to increase the loan amount, change the interest rate, maybe you're going to add a property as security to the loan, or any other big change, adding a guarantor, then you'd actually really want a modification agreement.

You're doing more than just waving your rights under the loan. You're really changing the underlying terms. Sometimes the forbearance and modifications can be almost interchangeable. You could accomplish a lot of the same things under either a modification or forbearance. So especially in a complicated situation that you're trying to work out with your borrower, we strongly recommend that you reach out to counsel to kind of walk through the path you're trying to take to make sure that you're taking the best action for your loan. And then the last option that is pretty common that we are hearing right now are deeds in lieu of foreclosure. Basically, the borrower understands that it's a lost cause. He'll never get caught up on the loan and he is saying, you know what? I'm going to just wash my hands of this and walk away from the property. Here are the keys.

It's your problem now, and that's great in some situations, but there is a lot of complicated documentation that goes into that. It's not just signing a deed over. There are a lot of collateral agreements that would go into that, so definitely talk to your attorneys. Also we get this question commonly at the outset of a loan document transaction is can I build in a deed in lieu of foreclosure at the time of drafting loan documents? And the answer is no. You actually have to have an actual controversy or default with your borrower before you could actually proceed with a deed in lieu. So it's definitely something that it would happen down the line and not at the outset of your loan.

So what do you do if those three options don't work for you? So you can't do a forbearance because your error mod because the borrower's just not going to come to terms, the borrower doesn't want to deed over the property to you. What do you do? Generally foreclosure is your option here. Those other loss mitigation options aren't working and usually there's also some significant monetary default generally. Sometimes lenders will come to me and say, hey, borrower missed their June one payment and it's June 11th and the grace period has ended. Can I file an NOD? There is a monetary default there. I generally would like to see more than just one month payment and one day after a grace period before proceeding with the foreclosure. That said there are definitely options here but we can discuss those in depth as we get into the actual foreclosure process.

And then also you have two options here for foreclosure in California. You have judicial foreclosures and we also have trustee sales, which are the non-judicial foreclosures. The judicial foreclosures are obviously involving a court process. It's actual litigation with your borrower versus the trustee sale. Just deals with recording documents like notice of default, notice of sale, setting a sale date, and completing a public auction. It's definitely a more expedited process. So depending on your circumstances, you might decide to do one or the other. Again, especially if it is complicated, you may want to reach out to counsel to determine which option is best for you. Keep in mind for judicial foreclosures, if you want a deficiency judgment against a borrower and not your guarantor on the loan you might want to use a judicial foreclosure option rather than non-judicial because the non-judicial will eliminate that recourse against the borrower and you would only have it against the guarantor after that said, some deficiencies against a borrower may be impossible depending on the type of loan and other restrictions.

For example in California, if it is a purchase money loan, you would not be able to get recourse against the borrower or D deficiency judgment against the borrower. So there are definite restrictions here in place, so you'll want to work with counsel. And then finally, you're really able to do both of these at the same time too. So depending on the facts you might want to start the non-judicial process because it is faster but you might need to do non-judicial at the same time. Perhaps the type of property means that you want to get a receivership in place or take some other extraordinary action. You should really do that with a judicial foreclosure. So you do have that option to do both.

Nema Daghbandan:

So now we're going to talk a little bit about the restrictions in place. Again, this is probably a question I get on a daily basis right now back to answer the question, a question on it this morning about what are the legal prohibitions in place as to whether you could even proceed with a foreclosure action. So we'll go through some kind of the state of the law, particularly here in California. So the first thing is that the judicial Judicial council is now prohibiting foreclosure actions or specifically the filing of a judicial foreclosure action in the state of California. And that prohibition is in place for 90 days after the state of California lists its state of emergency through Governor Newsom something. So you could not proceed or start with a judicial foreclosure action and you could not complete a judicial foreclosure action in the state of California.

The second one is FHFA has stated, so if you have a federally related mortgage loan which the vast majority of the people in this call are not involved in consumer loan transactions, but if you have a consumer loan secured by the owner's primary residence and it's a federally related mortgage loan through fhfa, there is a moratorium on foreclosure for those loans for a 60 day period that started on March 17th and would end on May 19th unless they extend it further. However, the vast majority of you do not file judicial foreclosure actions and similarly are not involved with FHFA loans. So what about the vast majority of you here who are business purpose lenders that are securing loans by one to four family collateral? For those of you that are licensed by the Department of Business Oversight as a California finance lender, the DBO has kindly requested you not proceed with a foreclosure action if your borrower can demonstrate a substantial decrease in their household income due to covid 19 or out-of-pocket medical expenses caused by covid 19.

Again, this is a request from California Finance lenders license. It is not a moratorium to actually not proceed with a foreclosure action against any of your bars, and we'll go into our recommended practices here, but not a legal prohibition. So what's the takeaway here? So if you're a business purpose lender, the takeaway is that there is no current legal prohibition in the state of California with proceeding with a foreclosure action. You can and we do proceed with filing the notice of the default. We are filing them on a daily basis here. That's just the state of where we are at right now. That said there, this is currently the state of the law. Many other states actually prohibit the filing of a foreclosure action, the charging of default interest. There are lots of other states that currently prohibit the sanction. And on that note, there is pending legislation in the state of California to do exactly that.

So there is assembly bill 8 28. It is a fairly broad bill. It is also the one that if you've been reading the news lately, it's the same bill that is recommending a 25% reduction in rental rates across the market. So it's a pretty significant consumer protection bill. This bill is passed, at least in its current form as presented, would actually prohibit the county recorders from recording a notice of default, a notice of sale, a trustee's deed upon sale until the California lists its state of emergency and for a period of 15 days thereafter. So the bill is still in committee. It has not been voted on yet, it isn't still in committee as of April 8th, 2020 was its last action. So what does this mean for you that you are listening? If you are anticipating you are on the precipice of recording of notice of default, you should do so now because if this bill passes, that's your moratorium and the significance behind this is the recording of the notice of default starts a 90 day clock. And so if you can start your timing there, it will dramatically help you down the road so you're not waiting, waiting as it's uncertain as when the state of emergency will pass.

The key thing here to also remember is who does this apply to? So first question I'm sure many of you have is does this apply to business purpose loans? And the answer is yes. The state or the legislation in mind here makes no differentiation between consumer purpose loans or business purpose loans. What they do stay here is it's based on collateral types. So if the collateral is a one to four family residential property, that's where the prohibition applies, but there is no dialogue in here about whether it is a business or consumer loan. So it would apply to all one to four family properties if this bill passes in its current form.

So next thing here, we've been reiterating this statement kind of multiple times, which is what should you do? Right? The world has changed our traditional guidance. So we'll kind of give you kind of back in the day and back in the day now means February of 2020, but back in the day which now felt like five years ago we would advise our clients as a general rule in practice and we'd state that if a borrower failed to make two payments and the grace period associated with those two payments, we would state that's the appropriate time to file a notice as a fault. And so using it that as an example is let's say your borrower in a normal world had missed their April one payment, they had a 10 day grace period and they did not make the payment then either. Then May one comes around and similarly no payment comes in and May 10th, they still don't send the payments.

So now you've missed two payments and the grace periods associated with those payments. So our recommendation in a normal world would've been on May 11th, you are in the clear to proceed with the filing and recording of a notice default was our previous guidance. That guidance hasn't changed dramatically other than to state that if your borrower has a direct covid 19 related hardship, and we have forms that we'll provide after this for a form that you can provide to your borrowers to apply for a hardship and if there's a direct issue, so for example, they're renting this property and they're not obtaining rental income, they can demonstrate that that's true. They've lost their own household income, they can demonstrate some direct correlation to harm being caused and it's directly related to a short term crisis dealing with what's happening out there. If they are able to demonstrate this fact, then all recommended practice is to provide them temporary payment relief, 60 to 90 days of payment deferrals all those amounts tacked onto the maturity date for a bridge loan.

If it's a longer term loan such as a rental loan, our recommendation is a catch up period in the year 2021. So give them 12 months to catch up on missed payments in addition to their normal payments. And for loans that are coming to maturity is not an actual extension of the maturity date, but an agreement not to proceed with the recording of a notice of default based on the maturity date but effectively giving them a 60 to 90 day window in which they can continue to make payments to you during that time period. But you will not proceed with a notice of default simply by virtue of the fact that the maturity date is coming up because as you know, it will be very challenging to sell properties currently and that was the exit for many of these loans that challenge should get, should become easier over the next weeks and months it appears.

But for now simply letting the borrower know that you won't proceed with a foreclosure action for everyone else. So anyone that does not have a hardship or is not communicating to you or otherwise not responding to you, our recommendation particularly with now knowing that we've got potential prohibition coming down the road is to proceed with business as usual. So I would still use our general rule of thumb is have you missed two payments And the grace periods are that same guidance still makes sense for borrowers who have just gone dark or otherwise are don't merit a forbearance based on their hardship. So they don't really actually have a hardship, they just don't want to pay you.

Melissa Martorella:

So if you've determined that and you want to proceed with foreclosure we'll give you an overview now of that process in California and kind of what to expect as you're moving through a non-judicial foreclosure In the state of California big picture, it takes approximately four to five months to complete a foreclosure in California. It can theoretically be done and I think it's like 108 days or something like that. That said, it's very difficult to actually do that based on weekends, court dates when counties are actually conducting sales, when you gave notice, different things like that. So it's not a hard and fast four months and you're done. So I usually say four to five months assuming there are no delays, borrower doesn't file bankruptcy and you've done everything as timely as possible. And so what that process ends up looking like is first a demand letter then the notice of default, a notice of sale, and then the actual sale or the auction.

We'll walk through each one of these steps in detail. So first, the demand letter. This may or may not be necessary based on what your loan documents state. If the loan documents state, hey, you know can proceed lender with a notice of default without notifying your borrower, borrower has waived all notices of any default under the loan documents, you could theoretically proceed straight to the notice of default here. That said, we generally recommend even if that is provided in the loan documents, that you provide a demand letter to your borrower even if no notices required, it's just best practices. You make sure you're on the same page with the borrower, maybe something came up and they haven't been able to communicate with you and it's always good to give your borrower a little bit of grace to avoid a lot of grief later on in case they did have a legitimate reason for missing your payments.

It also sets the record straight for litigation. So it's a very clear document or letter that states, Hey borrower, we have this loan together, you are obligated to make payments here. You didn't do so please pay. And typically you'd give about a 10 day requirement where you can say, Hey, if you contact me and pay me current through whatever that 10 day period is good to go, your loans reinstated and we can move on. Otherwise, if you send the demand letter, borrower doesn't reach out to you to fix the problem under the loan documents then you can move with on to the next step which is the notice of default. But I would be very clear in your demand letter to lay out what exactly is the bar the default to the borrower and how they can cure that default, whether it's providing payment, maybe they transferred the property to a different party and you need to transfer it back whatever that is that they need to do. Maybe it's bringing insurance current. Make sure that's very clear in the demand letter so the borrower knows exactly what they need to do to get their loan performing again.

So then assuming that the borrower either ignores your demand letter or can't comply with the terms to cure the default you can move forward with your notice of default and start the non-judicial foreclosure process for all business purpose loans In California, you can proceed directly to the notice of default without any additional steps. If you have a consumer loan, there are a lot of different steps there are additional contacts you have to make before you can move to NOD. There's also requirement under RESPA about having missed 120 days of payments. So make sure that if you are trying to foreclose on a consumer loan that you are complying with relevant state and federal laws regarding how to foreclose. Otherwise, assuming most of you are doing business purpose loans you don't need to deal with these steps. You could proceed directly to the notice of default.

So again, after that demand letter is delivered and like we said ignored, you can record that notice of default. There has been a 90 day waiting period until you can record the notice of sale. So that's what NEMO was talking about earlier about why you should act now because if this legislation passes and they prohibit you from filing a notice of default, you're just going to delay even further the time that you can actually complete the foreclosure because we have this note, this built in 90 day waiting period before you can even set a sale date. So just keep that in mind that there is this time pressure that comes in and it's generally very helpful to just get the clock started. Also, this is generally the period when your borrowers will start reaching out to you to be like, oh, there's the lender's actually taking action here.

What do I have to do to clear up this default? And generally this is when you'll start negotiating forbearances modifications, refinances, whatever it is on for the loan. Another little helpful tip here is you, you'll want to record one notice of default for every deed of trust. So if you have two properties securing your loan on separate deeds of trust, you will want to do an n o nld on each of those properties. Otherwise you would've foreclosed under one and not the others. And we generally recommend even if you want to do one first and see what happens before foreclosing on the other, we generally recommend just starting that time period right away on both properties so that once it comes time to actually go for the sale, you have a little wiggle room to decide which property you want to go for first and strategize a little bit at that time.

Also, as we were talking about sometimes during this period while the loan is in default, borrower might decide, oh, I'm just going to start making monthly payments and the regular monthly payments under the loan. So you might receive, say the regular monthly payment amount was a thousand dollars, but now default interest is accruing, there's several missed payments, there's late charges, there's all the stuff going on under the loan. So in actuality, the borrower might owe you $30,000 at this point and you get a check in the mail for a thousand dollars saying, Hey, here's my June one payment. That's great. You can take that payment, you can apply it to that outstanding balance. However, we strongly recommend you then reach out to your borrower and you send a no waiver letter which basically says, Hey borrower, it's basically a modified demand letter that says, Hey borrower, thank you for your payment.

We will apply it to the outstanding balance however, you're in default under the loan for these reasons. Here's the current amount that you owe and it's still outstanding due to this, even though you've made this payment, we are still continuing with the default process. This is very common and happens quite a bit. And the reason you want to do this is you don't want the borrower to have any sort of argument down the line that you've, by accepting the payment and applying it to the balance that somehow cures the default or reinstates the loan. You want to make it very clear that you'll accept the payment, but the default is still outstanding.

So once that 90 day waiting period is up you can actually at this time finally move to the notice of sale. So you would record the notice of sale against the property and this document sets the actual auction date. It has to be at least 21 days from the date that the notice of sale is recorded due to that based on weekends, based on holidays, based on whenever the county actually completes sales. It may be more than 21 days, it's usually about a month afterwards but that will have the actual auction date in place. An issue right now that we are seeing with the notice of sale is that in order to actually go to the sale on that date, you have to comply with publication requirements and part of that is you have to post the notice of sale in a public place due to covid.

Right now there are issues with posting one, people aren't going to public places. They might be restricted or banned from going to the places where you would typically post a notice of sale. So whether that this part of the foreclosure process is even capable of happening happening at this time is unclear. And then also when you get to the actual sale, that does require a public auction and due to the restrictions on public gatherings right now, it may actually be impossible to do the actual trustee sale. So I believe NEMA will talk about that a little bit more in depth in just a moment.

Nema Daghbandan:

So you've recorded the notice of default, you've waited a 90 day period, you've recorded a notice of sale, and the notice of sale states the date of the auction. So that's where we're at. We're about four months into the process right now, and you are ready to actually sell the property at an auction. So the first thing for those of you who have gone through this before is you have worked with the proposal trustee and they've probably asked you questions such as what's the starting bid, what's the maximum bid amount, and what are your increments in which you'd like to bid? Unfortunately, I'm assuming for many of you, they also said nothing else or provided you no guidance. And this is a very, very significant decision for you to make because it has significant implications down the road, which we will discuss. So first is one, you should never be bidding your maximum amount.

So oftentimes when I am asked this question, the response I get back is, I have a hundred thousand dollars loan, let's start the bidding at a hundred thousand and end the bidding at a hundred thousand. This was an easy situation to answer. There are ramifications for that decision which are negative for you. So the first one is that you should, the one thing I want you to walk away with is that you should not start at your bid amount in 99% situations and we'll discuss which ones those are general recommendation. So if you're not supposed to start at 100%, what should you start at? So on a first position deed of trust, you are in senior secured. Our recommendation here is starting at 50% of your loan amount, that's a good starting point. The bid increments don't really matter all that much. That is effectively how quickly does this auction run up, right?

So what is the minimum amount the next person must increase? I usually scale this based on the actual amount of the loan. Give you an easy example. It's a hundred thousand dollars. I'm usually going to bid some around $10,000 in bid increments, but if it's a million dollars, I'm usually going to bid somewhere between 25 to $50,000 in bid increments just to make the auction process go a little bit faster, less important. The key here is to not start at your maximum amount. If I'm a junior position lean, it is much less of a concern in terms of the starting amount. You can start close to $0 effectively on a junior position loan. So you could start much lower and I will again explain why in a second here. From a mechanic's perspective if you are the lender going to foreclosure you do not need to bring any money to the table.

Everyone else. So at the foreclosure auction, they're a group of people, they all must bring a cashier check. Typically they make the cashier's check out to themselves because they plan on bidding on multiple properties and they endorse that cashier check over to the foreclosure trustee at the auction. So there's a person, there's an auctioneer there. He is validating that people actually have checks in their hand. They are valid purchasers of any particular asset that they are bidding on, and oftentimes that same auctioneer is provided instructions to bid on behalf of the lender. So I will use an easy example as I'm the lender, I have a $100,000 loan. I tell the auctioneer, start my opening bid at $50,000 on behalf of the lender, you are to bid an increments of $10,000 and you are to end this bidding process at my loan amount of $100,000.

And so the auctioneer would start the auction. They had started at $50,000. If Melissa was there bidding away at the auction and she screams $60,000, the auctioneer would automatically increase my bid as the lender to $70,000 because of its additional $10,000 bid increment and so on and so forth until no one else bids and it reverts back to the lender. So let's use that example of we're now at $70,000 and the highest bidder is the lender, and Melissa decides she does not want to outbid me at that point and no one else is willing to outbid me. At that point, the property reverts back to me the beneficiary at $70,000. Conversely, Melissa loves this property. She comes in and she bids $110,000 because she really wants it. I have ended my bid, my maximum bid at a hundred thousand dollars and she has now taken the she now she now gets the deed to the property and it goes to her at $110,000 and in the next slide I will talk to you about what happens with that $10,000, but that's the process of how an auction works.

There are things to take into consideration. So one is we've already talked about a little bit before is what if you have multiple deeds of trust for multiple properties? How do you deal with bidding strategy? There's the simple answer to that. There is a lot of strategy, which is the most valuable property, which is the one that you want theoretically the most as the lender, which is the one that's most important to your borrower. It is a game of chess ultimately to determine how much you should be bidding because if you think about the example I gave is, let's say there are two different properties. It's a $100,000 loan and you start the first auction at $50,000 and no one is willing to comment and purchase that first property of $50,000. What happens in that scenario is that first property reverts back to you as the lender at $50,000, meaning you've just effectively reduced your loan amount by $50,000 on that same day.

So when you go to auction number two on the next day for the second property, you are now old only a hundred, only $50,000, and so you could only bid up to $50,000 on day two. And so you'll want to have a strategy in mind about the value of the properties how desirable they are, and what is your overall goal throughout this auction process. Some lenders say, I drove by this property and I want nothing to do with it. I'd like to offload this property at all costs. There's a strategy behind it. Some lenders saying is this property is really the jewel of these three properties. If I ended up with one, I want this one. So we can definitely help craft a strategy and you should think about this as a strategy, not as some haphazard approach. The last thing that we discussed here is that auctions currently to a great degree are not occurring.

So right now there are a variety of opinions for foreclosure trustees about whether you should proceed with a foreclosure auction in the state of California. Our advice and opinions so far has been to not permit the auction to occur. And why is that? So right now there is still a prohibition in the state of California for 10 or more parties to congregate. And so what this came to a head in early March when the state initially issued its lockdown order and a auction was occurring, there were more than 10 participants there. The sheriff immediately came in and broke up the auction. And so the requirement for a sale to be valid is that it must be held at a fair and public auction. If it's not held at a fair and public auction, the borrower can lately can later try to avoid the sales. And so it is your, while some of you and your auction years may be working with you and your foreclosure trustees might say, no problem, go ahead.

They're only doing this to a great degree because you as a lender are indemnifying the foreclosure trustee as most foreclosure trustees are indemnified by their lenders. And so it's not their liability, it is your liability and it is your sale being unwound. And so while the foreclosure trustee might say, no problem, go ahead, it's not their problem. If you choose to go ahead, it's your problem if you choose to go ahead and which is why we are very cautious when advising clients right now about proceeding with an actual foreclosure option. It appears like the state of California is easing its restrictions whether that's in two weeks or in three weeks or what that looks like, we'll find out. But our current recommendations to not proceed with the actual auction yet we suspect in the next month or two that will change. But for now, we are not recommending to proceed with an actual auction

Melissa Martorella:

And at this moment for all of our current foreclosures, we're currently postponing sales until right now the week of May 18th. And then when that date gets closer, we'll decide whether we can actually proceed at that time or if we should push up even further out.

Nema Daghbandan:

So the next thing here is we've talked about it a little bit in the last slide, which is what happens if someone outbid the maximum bid at auction and in fact bid more than the loan amount? So your loan amount was a hundred thousand dollars all in and someone came in and bid $110,000. What happens with the $10,000? So there is a surplus process built into a California civil code and the surplus process basically states that you have to provide notices to all parties who have a right to this money or a potential right to this money. So effectively junior lien holders, any sort of title record owners of the property, your foreclosure trustee will send out these notices on your behalf. And the order of priority of payment is that any junior lien holders and in their order of priority would get it first.

So assuming that there was a second position loan behind you and they were owed $50,000, they would get a nice check for $10,000 and it would have wiped out their lien interest. If there are more junior holders and there are more funds, it would go down in that order. The last person who receives the funds, if there are any leftover, is the borrower. Under no circumstance are you the lender going to get those funds. Those are not your funds to receive. They are the borrower's funds if there are surplus. If you own the first and second position loan, there are often strategic options to deal with which one should you foreclose under If you have a junior loan altogether, there are strategic ways to play foreclosure game. So what you should understand is that if you have a first and second loan, you can likely foreclose under the first because playing the surplus game is you will also get the surplus.

So there may be a strategic reason, particularly if your junior loan is defective in some way. But again, I would say if you own the first and second you, your first call should be to an attorney to understand what to do strategically about your foreclosure action itself. And if you're in a junior loan position, you should also very much understand what happened. I'll give you an example here is oftentimes junior lien holders are of the incorrect assumption that when they foreclose that it has any effect on the first position lender. So they believe that when you're going to the auction that you should include all the first amounts because they think that when they go to auction they would include their loan amounts plus the first amount, but that's simply not the case. If you foreclosed under a junior lien, all that happens is the person at auction purchases the property subject to the first lien remaining intact.

So if you, let's use an example, a hundred thousand dollars first, $50,000. Second, when you go to foreclose at auction and let's say you open up the foreclosure auction at $30,000 and no one else bids at the auction, that property reverts back to the junior lien holder. They end up owning the property and the junior lien holder owns the property subject to the first $100,000 lien if it went to a third party auction. So let's say for example someone came in and bid $60,000 creating a $10,000 surplus, the person who purchased it would've purchased it for $60,000. They would get ownership of the property. The junior lien holder would be paid in full, their $50,000 and if there were no junior lien holders, the borrower would get the $10,000 to them. Those funds would not go to the senior loan lie holder. Those funds only go to junior lie holders, but that first position lien of $100,000 would still remain in place and the person who purchased it at auction would have to deal with the first position lie holder.

So why did we tell you not to start at the opening bid amount, the vast majority or at your maximum bid amount? The vast majority of loans that we see in this industry are loans to LLCs or corporations and they contain a personal guarantee. It is a common misconception that you are prohibited from a breach of guarantee lawsuit if you proceed with a non-judicial trustee sale. That's not true. As long as the loan documents were properly written, the guarantee is still enforceable even though you've chosen to proceed with a non-judicial foreclosure map. When determining the amount of the liability to the guarantor in the circumstance, that is determined at time of auction. So if you proceeded with an auction and you started at $50,000 under your a hundred thousand dollars loan and no one bid anything further, the beneficiary would get the property back and the value that they would've received that day is $50,000.

And so they would still have a balance due of $50,000. That is the liability to your guarantor. You could then sue your guarantor after the foreclosure auction under a breach of guarantee further the remaining $50,000, which is why you should not start at your maximum bid amount. Even if your borrower or if your guarantor does not have assets it's still a good leverage piece to go after. So even if you're like, I'm not going to do a breach of guarantee, Sue, it's not worth it. This is still a very good bargaining chip because people don't like to be sued. And if you start the breacher guarantee suit, that's a pretty big rock to throw. And so it's oftentimes used as a piece of leverage. For example, to get, let's say you have a guarantor or sponsor who's living in the property now or or they're otherwise obstructing your access to the property, you're not giving you permits or otherwise being a challenge to you.

It's usually a good tool to get possession of the property very quickly by trading liability under the guarantee for possession of the property. The next thing here is to determine whether you should proceed with a breach of guarantee to, our general recommendation is the hiring of a private investigator to determine bank account assets and other assets that this personal guarantor had. So we are often engaging with a private investigator to determine whether you should actually proceed with a breach of guarantee suit. So we touched upon this earlier, which is other than a non-judicial foreclosure and a breach of guarantee suit, what are other options that may be available to you? One is a judicial foreclosure action. Oftentimes we see judicial foreclosures being done one in two contexts. One is you want liability against your borrower, you want to seek deficiency against your borrower. Depending on what happens with property values, if they go down significantly enough, these may come back And a rising market, people are generally not using this because there isn't a true deficiency to go after against the borrower.

Oftentimes it's because there's a defect in title. So for example, you for your deed of trust has the wrong legal description in it. So you can't actually proceed with the filing of a notice of default. You need to clear up title in addition to foreclosing. So you need to do a quiet title action in addition to your judicial foreclosure action. So there's another reason you want to do it. Oftentimes we are dual tracking a judicial foreclosure and a non-judicial foreclosure. And the reason we are dual tracking them is because I want some other sort of relief. So for example, if I want to place a receiver on the property, I've got an income producing multi-family property, I've got an operating nursing care facility that needs operators to be in there. If I choose to foreclose I've got some other reason where I want a receiver in place.

I will do both a non-judicial foreclosure and a judicial foreclosure at the exact same time with the intent of completing the process through my non-judicial foreclosure, but I'm using the judicial foreclosure to start a receivership action. Lastly, there are extreme or extraordinary remedies available. So for example we talked about receivership as a form as one of those forms. So a receiver can come on the property, it can collect rents. They basically step in the shoes of the property. If you had a construction project, they can complete the construction project to try to shield liability from the lender. As a general rule, receivers are hard to get. They are hard to economically pencil out and right now it is unlikely you will be able to receive even this sort of extraordinary relief. So receiverships often are not the right solution. But one of those things that you should very much understand prior to proceeding with an action is have someone have your attorney do an analysis as to whether a receiver may make sense to either insulate you from liability or otherwise try to get cash flow from the borrower during this time period.

Another thing from a arsenal of available options is that you can run a multi-track option, which is, for example, a judicial foreclosure with a receivership simultaneously running a breach of guaranteed soup. And what you would do is you would seek a wri of attachment on the guarantor's bank accounts to actually freeze their bank accounts until the completion of the action so that they basically are locked out of their finances. This is what we usually call here at the firm, the shock anah approach. So if you've got a really challenging party who's threatening to sue you or otherwise not playing particularly fair our recommendation is that you go on offense rather than defense. Again, in a covid related world, this may not be available to you at all. Our judicial system is pretty locked up right now so you may not be able to obtain extraordinary relief, but once the dust settles is you should make sure that you're talking to someone who understands what your options actually are as it pertains to extraordinary relief and your receivership or otherwise, your other options available here.

Melissa Martorella:

So in conclusion today we have a couple key takeaways here. First is understanding the different options that you have. When a borrower defaults, there's really no one size fits all solution. It shouldn't be a blanket, no forbearance, no modification. We're only proceeding to foreclosure, especially if the default is related to covid 19. Also, just even depending on the facts outside of that, it may make more sense to do a forbearance or modification or even deed in lieu rather than proceeding straight to foreclosure. So know your different options and if you have questions, consult with an attorney to determine which is the best one to manage your default. Also, if you do choose to foreclose act, now we have that California assembly bill that's making its way through that could prevent non-judicial foreclosures. We're already really restricted on judicial foreclosures as it is. So really act now and make sure that you start your process as soon as possible if you're thinking about doing it. And then finally, we talked a lot about this, but know your bidding strategy. It's very complicated and it's usually something that when it comes time to sale, you should talk to your attorneys about to come up with a great strategy that's going to really represent what you want to do with the property and with the loan. So it's definitely not something that's as easy as just providing bidding instructions. It's definitely something that you should really strategize and think through ahead of time.

Nema Daghbandan:

All right, and we are at the end of our presentation and we are in our q and a period. Before we get to q and a. It's just a couple friendly housekeeper reminders. At the bottom of all of your screens is a box that says q and a. We currently have 15 questions in the queue. We will answer them in the order they receive and you will, and we'll continue to answer them. So feel free to ask questions right now before we answer those questions. Just a friendly reminder that a copy of this presentation will be sent out directly after the presentation so you can watch this or share this with your office staff after the fact. Hopefully it's been of value to you. We have multiple webinars coming up. I know there's just one that's showing up on the screen but in reality, we actually have multiple additional webinars because we are trying to just add a lot of value during the time period.

So there will be effectively weekly webinars and in the follow up email we will identify all of them for you. But the one on the screen that we will discuss here is managing contract disputes. So in a normal world, our law firm is very much representing private lenders from entity formation and loan documents and handling their litigation disputes. And right now it's all, it's really a new normal. So one of the things that we're dealing with a lot of is just basically breach of contract disputes in one shape or form. So give you guys examples that are probably relevant in your world is there's a lot of real estate litigation dealing with the purchase and sale of properties with the buyers trying to back out of the agreements with the sellers trying to keep the buyers in or trying to keep their deposits in loan agreements.

We're dealing with issues such as lenders maybe not advancing construction funds or trying to haul construction funds and potentially having liability to their borrowers for not advancing construction funds. In the context of loan purchase and sales, there's the likelihood of an increased early payment default obligations and the loan buyers forcing the sellers to repurchase the loans and managing those issues. But effectively, contracts of all kinds are coming under attack are managing partner Anthony Geraci and our litigation associate Darlene Hernandez will be presenting next week on that issue. Same time, same place. In addition, we are also hosting our very first and our virtual conference which is going to be on May 20th. It's called Lender Connect. You're probably getting some of the emails on that one. Give you a little bit of an idea of what this is and what to expect. So this is not a webinar or it's not a presentation, it's, it's really recreating all the great things that you can experience at a conference and creating it in a virtual environment.

So what does that look like? We will have a virtual exhibitor hall. Those exhibitors will have zoom meeting rooms where you can sit and talk to exhibitors during exhibit hall time. We will have great speakers presenting. So I was just talking to Seth Davis this morning at Western Alliance Bank who will be talking about how to obtain a line of credit from a bank, what their expectations are. So great content and great speakers that you're used to and probably most important for all of you, and very much something that I think we miss here is just getting to meet people in a one-on-one setting. So we'll be using a ton of different technologies combined together where you'll be able to match make. So you'll be able to state I'm interested in meeting loan buyers or loan sellers. I'm interested in people who can originate commercial deals in Missouri.

Whatever it looks like. There'll be a match making component when you match make with the people virtually. There will also be an option where you can start a zoom meeting with them directly. So you'll be able to get that great one-on-one contact that I think a lot of us are missing right now to meet people in the industry and to be able to do it from the comfort of your home wearing shorts, but of course wearing a tie on top. But we'll all be able to try this together. So really excited about it, hoping for the days in which we'll be able to get to see each other in person. But until then, trying to replicate that experience as much as possible. Details can be found at our website, which is draw clp.com. We'll also in the email out to you provide you links for registration.

I know that's a low dollar amount. I don't know the exact one, but again, the email will provide it to you. But any questions on that are our media marketing team will be able to help you. So without further ado, we are at a position where we can actually start answering questions for. So we now have 17 questions in the queue and we'll keep going through and feel free to ask additional ones. So the very first question that I see here is, a borrower may get a loan as a rental property or other non-owner occupied property. What happens if there is a forbearance if you're, or if you otherwise, for second

Speaker 3:

Question.

Nema Daghbandan:

And actually let, let's, let's restate, cause there's a additional commentary to this, so let me try this one more time. A borrower may get a hard money loan as a rental property, but move into the property after closing. How does this affect a forbearance or foreclosure? How do you strategically deal with this now considered a consumer loan or an owner-occupied loan? Great question. When we get all the time, and to rephrase the facts, you made a business purpose loan, clearly a business purpose loan. Let's say it was a rental property, or let's say it was a fix and flip, or let's say it's any other business purpose loan that you're dealing with. But what happens is when it's time to extend it, modify it for Barrett, do some next action. You now know that the borrower lives in the property. Now, did they change the character of the loan?

The answer to this question is no. You cannot change the nature of a loan after a loan has been originated. The nature of the loan, whether it was for business purposes or consumer purposes, is established at time of origination and only a time of origination. What they do after the fact can't change that. You may now have an owner occupied property and that's a different situa, and that's true, but that doesn't change the fact that it was a business purpose loan to practically deal with this issue in California. The additional requirements under California's foreclosure laws, though the additional contacts do not apply to business purpose loans. So those additional restrictions don't apply. Similarly, RESPA restrictions don't apply. So you don't need 120 day payment default because they didn't change the nature of the loan. It's now owner occupied. You have a now more sympathetic borrower on your hand.

So to the degree that you end up foreclosing and the borrower tries to sue or stop the foreclosure action through a bankruptcy or otherwise a lawsuit there is a more sympathetic borrower that you are dealing with. But that's not a legal problem. That's a practical issue that your judge will likely be more deferential to this person throughout this process. But there is no real change other than the fact that you probably need to just understand that there is a more sympathetic borrower sitting on the end of it. The one thing that I will say that you need to be very cautious about is choosing to modify the loan or refinance the loan. Those sorts of things are now more complicated because now you know that the borrower is living in the property. So advancing them additional principle or otherwise, now becomes more complicated because now are you now making a consumer loan is a different challenge, or if you refinance, did you now make a consumer loan? And those are bigger problems and issues that you'll have to deal with, but a forbearance is really not all that problematic or really proceeding with a foreclosure action at that time. So the next question that we have

Melissa Martorella:

Here, do you have to lift the notice of default or rescind the notice of default if your borrower signs a forbearance agreement? This is another great question. The answer is it depends. You could do that as part of the agreement that you come to with the borrower. You could say, Hey, I'll rescind the NOD and return for borrower completing X, Y, z some payment amount, whatever the terms of your forbearance is more common in my general recommendation would not to be lifting the NOD unless there's some real reason to maybe they're trying to sell the property and it's making a hard to sell or something like that but you don't have to. And the reason that I like to keep the NOD on the property during the forbearance period is if the borrower defaults under the forbearance period, now you can just pick right up where you were during the foreclosure process. Instead, if you had rescinded the NOD when you entered into the forbearance, you'd now have to rerecord that notice of default and that 90 day waiting period. Now restarts versus if you had just left it on there, you might not continue with the notice of sale after 90 days, but at least that that 90 days is still ticking down during the forbearance period.

Nema Daghbandan:

Next question here is, I have a business purpose loan in California that has a one year maturity. Is a demand letter required or can I just go ahead and file and start the process? If a demand letter is required, how soon can I file? My note comes due on May 1st, 2020. So the first thing is that there are a lot of conflicting issues here. So one is California has California civil code 29 66, and that requires you provide for a balloon note that is greater than one year and secured by a one to four family property. It required you to provide notice before 90 days or at least 90 days prior to the maturity date and no more than 150 days before the maturity date, you have a legally required notice balloon notice that you were required to give to your borrower for a loan greater than one year if it had a greater than one year maturity.

So let's assume that it's a one year loan like the borrower, like the example is here. You were not legally required to provide this notice, but what we are talking about here was really a demand letter and the demand letter is different than that. Notice the demand letter is I'm making a demand that you pay your loan is in default, you didn't pay. I'm demanding that you pay and if you do not pay me within these number of days, I will proceed with a foreclosure. And so for the purposes of this is one is you have to read and understand your loan documents. Your loan documents may state that you are going to provide notice and cure and you have to abide by whatever the terms of your underlying loan agreement are. When we're writing loan documents, we generally do not have any sort of notice and cure period, but it depends on what your loan document state.

So that's the first thing. Assuming that your loan documents do not require a notice secure period, then you could bypass this requirement and simply not provide a demand letter. We still recommend that you do. You're just not legally required using your examples that your loan is coming to May 1st, 2020. I was sent it. It's a maturity default, so there really isn't a grace period per se on a maturity default. So what I would do is on May 1st is I would provide a demand letter on May 1st saying you failed to pay and if you do not provide full funds by May 10th, then we'll proceed with foreclosure on May 11th. That's what I would do in this situation. You're not legally required to do it. You could proceed technically with the recording of a notice default without that demand letter, but I like to do it and the reason why I like to include the demand letter is if the borrower sues. I don't want them to make any silly non claim of, oh, I had no idea. I didn't know it was a blue note. I want an unequivocal litigation record of, Hey borrower, we sent a notice, we sent it by FedEx. You received it, you signed for it, and you clearly knew that your loan was due. And so it just sets up a nice first piece of defense in litigation.

Melissa Martorella:

The next question we have here is if you have a non-judicial foreclosure, can you still get a judgment if the borrower signed a personal guarantee? There's a lot to unpack here. So we talked about this a little bit after the foreclosure sale occurs. If there's a deficiency balance, you can do a breach of guarantee suit. However, based on the wording in this question we'll jump a little bit more in depth here. It says if the borrower signed a personal guarantee, so an individual borrower cannot guarantee their own loan you would need a separate third party to guarantee that loan. So if you made the borrower to NEMA an individual and NEMA also signed a guarantee that guarantee is an effective, it means nothing. So in that case, you would not be able to get a judgment against NEMA as a guarantor because he's already the individual borrower under the loan. That said, if NEMA was the borrower and then Melissa was the guarantor, then you could come after me after the non-judicial foreclosure sale because of the deficiency at the sale. So you could come after me for the additional proceeds or for example, your borrower is an LLC and the principles of that LLC signed a personal guarantee, then yes, you could go after those PR principles for any judgment later on. So just wanted to make sure based on the way this question was worded, that we understand that individual borrower cannot guarantee their own loan <affirmative>.

Nema Daghbandan:

Next question here is if California assembly bill 8 28 passes, does this prevent a lender from charging default interest or is it simply a prohibition on recording a notice of default notice of sale or trustee? I did not see anything in my quick glance. I can't affirm with absolute certainty that there's any prohibition, but for my quick read of the legislation has passed, or sorry the legislation has proposed, I did not see a restriction on the charging of default interest, but it's California, we never know.

Melissa Martorella:

Next question, we have a borrower that is over has several payments past due from February, March and April. They've been late many months before that. They keep promising that payments will come soon, but nothing comes. The borrower states that there are rental issues from pre covid. Would you recommend filing an NOD? So we've talked about this a lot, especially in other webinars where you're really determining whether it's a legitimate covid related default and therefore forbearance requests or if this is just a bad borrower who's consistently laid on payments, who doesn't have a good reason now and is just using this as an opportunity to try to get some leeway here. In this case it sounds like it's probably you have that situation where it's a borrower taking advantage that's otherwise a terrible borrower and doesn't pay on time but I would still probably have them provide documentation about why they can't pay and then you can analyze that and document exactly why you are going to proceed with a foreclosure sale or filing an OD so that you can have it clearly documented in the file in case there is any litigation down the line.

But definitely, especially at least that February 1st payment, that was really before covid was a huge issue here especially in California, it does seem that it is not covid related. So I wouldn't necessarily say that you would have to provide a forbearance or others sort of grace to a borrower like this.

Nema Daghbandan:

Next question here. These are great questions by the way. I always very impressed by the quality of questions that all of you've been asking. So the next one here is a demand letter via email and we've communicated several times through email regarding prior to recording us and default. So loan documents should have a section in the state. What is notice, right? What does it mean to be provided with notice? And there's usually an address associated and it's usually a physical address very some loan documents will have an email address, but the vast majority will have your physical address technically to notify a party under the loan documents you are required to send it to their physical address or whatever it says in your loan documents. And the loan documents will often state it's received based on if it's deposited in the mail it's received three days later if it's sent by FedEx, it's received the next day. So we'll have a timing aspect of it as when does the person technically have received that document regardless of when they actually received it. So if the demand letter should be one of those things that you always send to the notice address provided for in the loan documents, even if you've been communicating via email, I don't mind sending it in addition through email, but I'm trying to set a litigation trail and in litigation dotting is and crossing ts is paramount.

Melissa Martorella:

The next question that we have here is what is the process when a business purpose loan is secured by the borrower's principal residence? So for example, it was the expansion of a family owned food service business and they secured that business purpose loan with their primary residence. So another great question in this case it's a business purpose loan. So all of those state and federal consumer related foreclosure laws will not apply. So the 120 day payment requirement from respa any sort of pre-contact that are needed under California law, it's a business purpose loan. So you can proceed immediately with a foreclosure obviously after the foreclosure sale completes, if you took the property back through the sale, you'd have to do an eviction action, things like that. And obviously you have a very sympathetic borrower on your hands as Nima stated. So you may want to work with this borrower a little bit more rather than immediately moving to our foreclosure sale. But that being said, there's no additional either consumer loan requirements or other requirements that you need to do. It's still a business purpose foreclosure.

Nema Daghbandan:

Another great question is next. So if you accept payment, so you've recorded a notice of default and you've, you've accepted payment, isn't that considered a modification which could have negatively impacted your notice of default? And the answer is yes. If you did nothing, you simply accepted payment the and you said nothing as a lender, you've got a notice of the fault in the file and you did nothing, it would very much negatively impact your foreclosure. If I was the borrower's counsel I'd say is you lender waived your rights to proceed with your notice of the default because you accepted the payment and did nothing. Most loan documents have non-waiver language, which spaces I can't vol unless I can't accidentally waive my rights. Despite that, what you should do in these contacts is if you ever receive payment and there's a notice of default is you can do one of two things.

You can choose to reject the payment safest route by all means, and you can do that or alternatively is you can accept the payment, apply it in the order in which your note states it does. So for example, our promissory notes when we write them says every payment we will apply to charges first we'll apply to interest second and then to your principle. Third, apply it in whichever order it says on your note and send a notice to the borrower saying, thanks for the payment, we've received it. You are still in default. Here's the amount you still are owed. Here's your reinstatement amount. Your payment did not remove your file from a default. So as long as you're and sending it to the notice address and the loan documents being very formal in your approach will save you. So it's not the acceptance of payments that the problem, it's the acceptive of payments and in the absence of further communication is the problem.

Most foreclosure trustees, because again, we're a law firm so we understand the nuance of this. Most foreclosure trustees will say, I'm not willing to accept the payment, I just want you to reject the payment. Most loan services related just reject the payment because they don't want to. They're writing big policies and procedures, they're not thinking about the nuance. They can't apply this level of nuance. When we are foreclosing as a law firm, we're going to lay out all the options. And so from our world view is we're trying to figure out is how to make you successful and obviously any dollar in the door is useful from your perspective. So it's very much providing that layer of nuance, not just having these blanket policies in place that a big loan servicer or a foreclosure trustee is going to have to institute to avoid litigation. From that perspective

Melissa Martorella:

And kind of related to this topic, I had somebody ask me either yesterday or the day before, does that letter have that no waiver letter have to come from an attorney or is it just as effective if it comes from me, the lender? And that's totally fine to send on your own if you have a form that you want to use you do not need to have an attorney drops out letter for you, although we can assist with that. The next question that we have here is if you substitute out the trustee. So if on your deed of trustee you have one trustee listed and you decide to sub in a new trustee who's going to help you with the foreclosure process. So if you substitute out the trustee, then only the trustee can accept payments, right? No. So the trustee has two jobs basically under the loan.

One is to do the foreclosure, so move through the process, file and notice of sale deal with all of that or they can reconvene that deed of trust once the loan is paid back in full. So those are the only two things a trustee can do. That said, I think a lot of you are probably using loan servicers who are also acting as your trustee. So in that case, I mean probably you want the trustee who is your loan servicer to continue to accept those payments. But just because you're in default or you subbed out your trustee doesn't mean that that's the person that can now accept payments. It's whoever your servicer is or your lender is under the documents.

Nema Daghbandan:

Next question, is a formal forbearance agreement always necessary? If I am willing to simply delay foreclosure action for a few months, can I simply convey this to the borrower in writing via email? Last week Melissa and I did a webinar called forbearance 1 0 1 and we went into this into great detail. So after this today's webinar I think they'll probably provide a link to that one if you wanted to catch this. But the short answer to your question is that you absolutely want to use a formal forbearance agreement. And the reason why you want to use a formal forbearance agreement is because you want to make it crystal clear of what you are doing and what you are not doing. So are you going to charge default interest? Are you not going to charge the default interest? Are you going to charge lay charges? Are you not going to charge lay charges? Are there any other forbearances that you are giving them? Is it simply a matter of time? How do they breach that agreement? What if they sell the property during that time period? What if the property burns down? There's all of these things that you're not properly anticipating and a properly drafted forbearance agreement is anticipating. And so just as much as you are cautious and careful about your loan documents, you should be cautious and careful about your forbearance to make sure that you are not causing grief even though you're just doing the right thing.

Melissa Martorella:

Next question is if the loan matures and it takes five or six months to get to the actual trustee sale, can you collect interest during that time? What about default interest and legal fees? Can that be added as well at the trustee sale? These are great questions. So technically if your loan matures and the borrower doesn't pay the maturity date balloon payment the loan is in default. So you can immediately start accruing default interest under that loan. So that means during this whole foreclosure period time, 4, 5, 6 months, however long it takes, that entire time can be the loan will be accruing at the default rate of interest. So you can definitely charge that. You can also charge late fees for monthly installment payments that would later be due throughout that period post maturity date while you're dealing with the foreclosure process. Also legal fees, any other charges that you know incur dealing with the default. So you know, pay a trustee to deal with the foreclosure sale. All of those fees can be tacked onto the outstanding balance owed. And so when you get to the actual trustee sale, you want to make sure all of those fees and charges and amounts that you had to put forward in order to deal with the default and the loan make sure that those are all incorporated in the total outstanding balance owed.

Nema Daghbandan:

Next question here is what happens with any nods that were recorded before the state of emergency began? So the current state of California law is you can continue to record notices of fault. Now you can do 'em before and there's no prohibition. So the current state of California law also means it's probably impractical to finalize the sale right now but there's really no effect of the state of emergency didn't actually stop the filing of nonjudicial foreclosures and even technically the completion of them, the pending legislation in place would stop you from doing any next step in the process recording the NOD recording a notice of sale or proceeding with the auction. It would actually prohibit you from doing so but it wouldn't stop the tolling period. So let me give you an example is let's say you record a notice of default today and tomorrow the California legislature passes ABA 28, that time period, the clock already started and the legislation says nothing about what happens with that time. What that means is in 90 days from now, I'm assuming that the 90 days from now the state of emergency has already been lifted and you passed that 15 day window in the legislation, then it means you would've been able to proceed with your notices of sale in the 90 days. So effectively this legislation had no effect on you because you had beaten the clock on the legislation, which is why we recommending to start now rather than wait.

Melissa Martorella:

Our next question that we have is in order for a deficiency to exist and able to execute against a guarantor, should the notice of trustee sale published amount reflect the entire debt including all default interests? Does it create a problem if the trustee's date upon sale reflects a higher debt due to the default interest than the published amount and the notice of sale? That's a great question. So we definitely recommend at the notice of sale that you include all the outstanding amounts owed. That said, it's still as of a date certain, so it might be as of May one when you record the notice of sale. That's the amount outstanding. And so you could be a hundred thousand dollars plus $10,000 in default interest and $5,000 in fees. But a month or two later when you actually get down to the sale, you've accrued even more default interest, maybe even more fees or whatever.

So that amount on the trustee's deed upon sale is likely going to be higher anyways. But as long as that trustee's deed is reflecting the total amount owed as of the date of sale, that's the number that the deficiency is going to be based off of. Obviously you want it to be as accurate as possible at the notice of sale stage. So I would definitely be including default interest in any charges known up to that date in that amount. But that doesn't mean that that's the end all amount when you get to the actual sale.

Nema Daghbandan:

Next question here is really an example. So the question you're saying is if the borrower did not make the April 1st payment and on April 8th they notified the lender and servicer that they will not be making any further payments due to covid 19 and the effects on their business income for at least four months or whatever the state will allow. Is it our guidance that we should wait? Is it, would the law firm guide you to wait until May one and really May 10th to wait for that additional grace period and then send a demand letter to then file a notice of default on May 11th? So let's, let me give you kind of a big picture is one is if your borrower missed April one I would provide them with a forbearance, a formal forbearance request form for them to complete. So I don't care what their stated reasoning is, I want them to state it in writing and I want them to provide backup documentation.

If they provide backup documentation that demonstrates that it was rental income, they lost the rental income and they can provide evidence of this, then our policy, our recommendation is that you actually give them a payment forbearance during the time period. Assuming they provide you any backup documentation or it's fraudulent in any way, then our guidance would be to proceed with the foreclosure. If the borrower is telling you they're not going to do anything right? So let's say for example they provide, they say, I'm not signing anything, I'm not providing you anything, then I would provide them, then I'd file a foreclosure action or actually realistically as I'd provide my demand letter saying is I've received, we provided you a request form, you've stated you're not going to complete it and therefore we are denying your request. You now have 10 days to pay this loan in full. If you choose not to do it within 10 days, we will record a notice of default is what I would do under your fact pattern. I would not wait for the second payment default. They've already explicitly told you that they're not intending on paying anymore.

Melissa Martorella:

The next question, if the borrower claims the property is now, can you still foreclose on a commercial loan timeline? We dealt with this a little bit before, but remember, it doesn't matter the occupancy of the property, it matters what the type use of the loan proceeds was at the time of making the loan. So if this is a business purpose loan, when you made the loan and you have clear documentation showing that it was a business purpose loan, the borrower later moved into this property, I don't care, we can still proceed with the foreclosure on the regular timeline. So you know, don't have to deal with the RESPA or the California requirements for that. So it really just matters at the time of loan origination. Was this a business purpose loan? If it was, then you're good to go.

Nema Daghbandan:

Next question here is if a lender performs a non-judicial foreclosure and the collateral property has a pending hazard insurance claim, does the insurance claim amount get assigned to the lender after the foreclosure? And the answer is no, because you're under an insurance contract. There is an insured, which was your borrower and remains your insurer to the borrower cause there's no new insurance contract. And if you had your documents properly written and had proper closing done, then what should have happened is you should have been added as a mortgage E to the borrower's insurance policy. And there's a whole section we can do on insurance and that's a whole different day and issue. But assuming you're considered a mortgage E, what happens upon a casualty loss before or after the foreclosure sale? So the insurance company says, yes, we agree it's casualty loss. If they covered casualty loss, then what happens in that context is the insurance company provides a check payable to the borrower because they are the insured and they also make it payable to you, the beneficiary because you are the mortgagee.

And then it would be the matter of contract about what you are to do with those insurance funds. And that's why you always have loan documents with massive insurance provisions to deal with the situation. So big picture wise is dealing with a potential hazard insurance claim in addition to a foreclosure is always a precarious situation. So I couldn't provide you much more meaningful from this point without knowing your very specific facts. But know that whenever you're dealing with insurance loss plus foreclosure, there's a lot of strategic guidance that goes into something like this and you're going to want to talk to someone like us or your own attorney to figure out how to manage that particular situation Well

Melissa Martorella:

Next question is another scenario here. So on a 50% LTV loan, the borrower did not make the April 1st payment. The loan matures on August 30th. Should I proceed with filing an OD on May 11th? If the borrower fails to make payment or communicate or wait until August 30th, I would probably now reach out to this borrower, especially considering the current environment and say, Hey borrower, we know that there's a lot of issues right now with people making payments due to covid. Here's a forbearance request form if you need it because you missed your April 1st payment. Please note that this makes your loan in default, but we're willing to work with you if you need assistance, fill out the form. If they provide documentation showing that they qualify for a forbearance, obviously provide that. If they don't, they ignore you, whatever, then I think you can definitely proceed with filing an NOD as soon as you would want to. And even setting aside covid in this kind of a situation, you would never have to wait until the maturity date to proceed with the notice of default. Simply the payment defaults that you have under this loan would be sufficient to trigger a default and therefore let you go forward with a notice of default.

Nema Daghbandan:

Next question here is, are there any special foreclosure considerations when the property is transferred to a third party? From my worldview, I mean, again, I don't know all your facts, but just assuming that someone transferred the property and particularly if they sold the property to a third party, I am not forgiving whatsoever in that context because the person who now own the property has no relationship to me. And so I don't really appreciate that from a lender standpoint. And so I'm pretty determined to file a foreclosure action pretty much immediately upon that context because there's a lot of now and new unknowns. I have a new party to the transaction, I have no relationship to that party, they're not my guarantor, they're not my borrower. I don't have recourse against this party. So as a general rule, if the property was transferred, I'm simply proceeding to a foreclosure action. I sent a demand letter first because I would want to set the litigation trails straightforward, but I'm not I'm going to do one of two things. I'm either going to foreclose or we're going to enter into an assumption agreement where this new owner now assumes the loan because I want them to assume the loan and maybe sign personal guarantee depending on their structure. But that's what I'm going to do in this situation. I'm not going to just simply let someone get ownership of the property and do nothing about it in the background.

Melissa Martorella:

Next question is borrower didn't pay the April payment, then they requested to pay the April payment without a fee. Do I still do a forbearance? There's a lot to unpack here, but basically, you know, as a lender you can waive any fee or charge that you want. You know, could waive the April late fee, no problem. So if they ended up paying, so say there was a 10 day grace period, they paid the April payment on April 12th and they made it in the regular amount, the lender could waive the late fee that was due, but I would probably if that's all you were waiving and you're still expecting the May one payment on May one, I don't know that I would do a full blown forbearance, but I would probably document it in an email and with a letter to the borrower explaining what happened and that yes, you are willing to waive that one late charge for April. However, going forward, if they're late on any other payments the late charge will be due and that way you're not waiving your rights going forward.

Nema Daghbandan:

All right, next one here is I have a borrower who has several thousands of dollars in accrued interest and unpaid late charges. Is filing a notice of default if filing a notice of default is required to include the reinstatement? I'm sorry, lemme lemme just read the question first myself cause I don't think it's

Melissa Martorella:

Not very clear.

Nema Daghbandan:

And then I will get back to all of you on this one.

I'm actually not sure, I'm going to skip on the next question here cause I'm not sure I follow that question. All right next one is, if a lender pays off an existing loan on a property in a refinance transaction for a now rental investment property, is it important for the lender to confirm the original loan which is getting paid off now was originally for a business purpose loan? Yeah, so for example is this comes up a lot. So people buy their primary residence, they do well in life, they go buy an investment property down the road or not, they go buy their new primary residents and they rent their former primary residence. So in this context is and is when they bought their first home, they got a Wells Fargo traditional consumer mortgage loan they've chosen to move out of the property, they're now renting it and they want to refinance that Wells Fargo loan cause they want to cash out or otherwise. So that's the refinance of a consumer mortgage loan, right? There's no question about that, but the borrowers effectively change the nature of the asset at this point. They turn what was a consumer asset into a business asset. It's now a rental loan. So you would very much want to document that it is now a business purpose loan and demonstrate that you've got the rental income on it. So yes, you could still refinance what was originally consumer debt without making your new debt, consumer debt, assuming the facts were made sense in that situation.

Melissa Martorella:

Another question just popped up, when can you foreclose on a business purpose loan on an owner-occupied property? You can do that any time. I think we've answered this question a few times now, but basically it doesn't matter if it's an owner-occupied property, if the loan is a business purpose loan, you can immediately proceed with a foreclosure sale or recording a notice of default there. You don't have to deal with the RESPA requirements or the California requirements dealing with consumer foreclosures. So you can proceed immediately.

Nema Daghbandan:

And then we've got a few those are all the questions in the question queue and there's also a few in the chat queue that will hop to answer here as well. So the first one here is does the two payments missed before foreclosing apply to owner-occupied loans? I thought that was 120 days before you file. That's correct. So on in a business purpose loan, our recommendation is two missed payments and two grace period on a consumer purpose loan that is governed by respa and RESPA says that you need 120 day payment default before you can proceed. The next comment that sits there is if you have a business purpose loan on an owner occupied property, when can you foreclose? I think we've touched upon that one a few different times so we can leave that one alone. The next one is, do you sell covid forms? I'm not sure what forms necessarily, but I think we had mentioned earlier in our conversation today that you should get a formal forbearance request in and you should send it through a formal form. We've produced a form, it's free of charge, it will be sent to all of you after the webinar. We've sent it in our previous forbearance 1 0 1 webinar, so happy to provide that free of charge and it'll be delivered to you through email after this webinar.

Melissa Martorella:

Let's see, so another question just popped up here. If the borrower wants to reinstate a notice of default or basically reinstate the loan and rescind the notice of default, do I have to require that the reinstatement amount includes all pass accrued interests? Yes, so I mean I would definitely do that. I mean you could obviously rescind an N OD and enter into some sort of forbearance agreement where the borrower repays all pass due amounts over a certain period of time and rescind the n od during that forbearance period. That said you don't have to do that and you could require that the borrower would pay all amounts that are passed due before you reinstate the loan and rescind the NOD.

Nema Daghbandan:

All right, and last, oh and another question came in right when I said last <laugh>. You're good guys. All right, so the second to last question, unless someone else ask another question is what would your legal position be on moving forward with a trustee sale if there was a blanket list pendant against the borrower that was specific to an unrelated property? I will spin that question around in a variety of different ways. Let's just say, let's make it broader. What should you even file a notice of default or should you please proceed with the foreclosure sale assuming that there's a Liz pendant on the property? And the short answer is sure, there's nothing stopping you from doing so. It's a cloud on title, right? So what does that mean when you proceed to the actual auction? It's very unlikely anyone's going to want to bid on a property at auction that has a list pendants of any variety.

They're not going to, most purchasers at auction are not going to do a deep enough dive of title to understand whether it's irrelevant or irrelevant list penance. They're just not looking for it. The moment they see the list pens they say is, I'm not touching this thing. I don't know how bad this thing is. And so if your intent is to own the asset and you then sure you, you'll likely end up owning it at a foreclosure sale be simply by virtue that there's a legitimate or illegitimate penance on the property. There's nothing stopping you from proceeding with a foreclosure sale just by virtue of having a LI penance on the property. It will stay on the property after the sale. So whoever ends up owning it, you or third party will have to deal with the LI pens after the foreclosure sale is finished.

Melissa Martorella:

Another question here. If the loan has origination issues and the maturity date has come, it is suggested to do new loan docs to extend the loan and cure the original loan doc defects. I guess it really depends on what the origination issues are. If this thought it was business purpose and it ended up being consumer purpose and you have no documentation to show that it's business purpose, I mean you've got a lot of problems there. Otherwise, origination issues. If it had to do perhaps with the borrower not having authority to sign on behalf of an LLC or something like that, obviously we've got some defects there. A forbearance agreement might be a good route to start with. Rather than refinancing this loan or doing or extending or otherwise. That way you can kind of waive proceeding with the maturity date default right away get the borrower to give you a release of any claims that they might have because of those defects under the loan documents. And then once that forbearance period expires, assuming they haven't paid off the loan or otherwise refinance the loan with a different lender you could then proceed with a foreclosure sale. Again, our forbearance webinar that we did discuss this in depth and the links to that will be provided in the follow-up material to this webinar.

Nema Daghbandan:

And that was the last question. So I want to thank all of you for sitting around on this. It is with great pleasure that we get to do these with you. We really, really, really miss seeing you in person. <laugh> Can't wait to get together again. We hope all of you are well out there. We hope all of you are safe. We hope all of your businesses are doing as well as they can given the circumstances. And just want to thank all of you for the tremendous support we keep receiving over time. We really do care for all of you and hope you have a wonderful day. Take care everyone.

Melissa Martorella:

Thank you.