Options After Default: California Foreclosure, Default Interest, Loss Mitigation, and Recourse

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Lenders should always be prepared to manage loans that don’t pan out the way they are supposed to, and lenders must be tactical when understanding what to do when a borrower defaults. Geraci’s team of experts is always available to provide guidance and strategy on how to manage loan defaults with discipline and proactivity. Our attorneys are expert strategists in loss mitigation and default management and provide you with the best methods to navigate non-performing loans. Our team can also help prepare you to manage your California loan defaults in light of the recent Honchariw v. FJM decision as it relates to default interest.
You will learn:
  • The available pre-foreclosure and pre-litigation options for lenders when a borrower defaults.
  • The foreclosure restrictions or hurdles are currently in place in California, and how these affect foreclosure timelines and strategy.
  • Extraordinary Relief Options, including unlawful detainer, judicial foreclosure, receivership, breach of guaranty suits, and collection remedies.Options related to the accrual of default interest post-Honchariw v. FJM.

Melissa Martorella:

Thank you for coming today to the webinar. Today we are talking about options after default. In particular we are talking about California foreclosure default, interest loss, mitigation, and recourse. So if you have any questions on those topics, we are here to help today. And we will introduce ourselves in just a moment. A few housekeeping things before we get started. First there will be an awesome email that goes out after this webinar from our marketing team. It will have the slides from this presentation. It will have a recording of this presentation, and it will also have some other helpful links and things like that to articles and other webinars and things like that, that our firm has done on these topics. So it'll be a really great resource. So if you had somebody on your team that wasn't able to make it today, something like that, you can feel free to forward that email to them.

It will have all of the great resources that we talk about today. Second there is a little chat box in the bottom. Don't use a chat box if you have any questions. There is right next to that chat box, another box that says Q&A. So if you have any questions during this webinar about anything that we were talking about, type your question in there. And with that, I will say we will reserve questions to the very end of the webinar. So don't worry if we don't seem to be addressing it right away. We will be talking about your questions and addressing them as time allows at the very end of the webinar. So again, not the chat box, go to the Q&A. So without further ado I will introduce myself. My name is Melissa Marella.

I'm a partner in the department, head of the banking and finance team here at Jurassic, l l p. My team primarily handles lending generally. So if you are trying to make a business purpose loan anywhere in the country, my team will advise you how to make that loan compliantly. We will also draft the loan documents and we will also help out with all of these little default issues that happen after the fact. So if you need a mod forbearance in California, if you, you need a non-judicial foreclosure, that's where my team comes into play. And we'll talk about some of this stuff a little bit more shortly. And with me today, I have Nema.

Nema Daghbandan:

Good morning everybody, and good afternoon to our fine friends over on the East Coast. My name is Nema Daghbandan. I'm a partner here with Geraci LLP, similar to Melissa by practice. I primarily am a real estate finance attorney here at the firm and help with the drafting loan documents. I spend most of my time here with Lightning Docs, our sweet little baby that we birthed this year. That helps you, our clients write loan documents. The same loan documents that we get to use here at Geraci LLP. And I spend most of my time making it slightly better each and every day, just like a little two-year-old walking.

Melissa Martorella:

Oh my gosh. And then last but not least, I have Steve with me.

Steven Ernest:

Hi I'm Steve Ernest. I'm the department head in the litigation bankruptcy group, and we defend lenders anytime they're sued for anything. We represent lenders when they want to file collection actions against their customers, eviction actions against the dirty holdover tenants in their property post foreclosure. We do collection actions for judgements that are already obtained, things like that. So sort of anytime you find yourself in a dispute, we've got great lawyers who can help you with that.

Melissa Martorella:

Thank you, Steve. So awesome. We will get started here. So to take us kind of to the beginning, we got a nice little helpful agenda to see where we're going. I'll be talking about the first two points here. So I'll be talking about some available pre foreclosure and pre-litigation options for lenders whenever you have a loan that's defaulted. I'll also be talking about, in particular to California, some foreclosure restrictions and hurdles that are in place and how that might affect your strategy with regards to foreclosure and your timelines as well. Then Nema will jump in and he's going to be talking about, I know you all are waiting for this but he's going to be talking about options related to the accrual of default interest post Honchariw v FJM, which is a case I know all of you are reaching out to us about which kind of changed the landscape in California with regards to default interest.

Nema will be going through that. And then to wrap it up, Steve will be talking about some extraordinary relief options that you have if you know, other pre foreclosure and pre-litigation options don't work for you. And then we will open it up with some Q&A. So feel free, like I said, put your questions in that Q&A box. We are more than happy to go through those when we get there. So to get started here, just to put it all in context, you made a loan that loan was going great, and then all of a sudden something happens and either the borrower can't pay or maybe they've got a construction project that's not panning out the way they thought it would, or maybe the borrower take out option isn't available. So you've got a little bit of a problem but it's not necessarily, it could be, you know, payment defaults and things like that, but it's not necessarily at a point yet where you want to foreclose or take some sort of litigation action.

You wanna work with your borrower. And so if you're at that point where you've got, you know, you've got some problems with your loan, but you're not quite ready to take a more extreme option, we have some other options here that you can take. So those are forbearances, modifications, and deeds in lieu of foreclosure. A little bit about each one you can kind of decide, depending on the facts of your scenario, which one might be the best one for you. First we have a forbearance. Really what a forbearance does is it's a waiver of lender's rights. So that means, you know, under the loan documents, you as the lender are entitled to payments upon whatever the payment schedule you agreed upon. There's a maturity date you're entitled to all sorts late charges and default interests and other things under the loan documents that was agreed upon when the loan was originated.

Basically what the forbearance is doing is saying, Hey, even though I am entitled to these things as a lender, I'm going to forego my right to those things for a temporary period of time. And I say temporary because sometimes I will see forbearance agreements, especially, you know, I manage the non-judicial foreclosure practice here for California. And I will see loans that have been in forbearance for, you know, years. And that's probably not the best thing. It sounds like, you know, after a certain po point in time, you know, the, the borrower's not getting out of that situation. But, so if you have a temporary forbearance in place where you might waive payments for a certain amount of time because you know the borrower's struggling, you know, with debt servicing the loan momentarily, maybe you either waive those outright, maybe you tack those onto the end of the loan.

There's all sorts of different options there, but basically you're working with that borrower understanding that they're in some sort of hardship and you temporarily agree to waive certain rights under the loan while they get back on their feet. You might even under a forbearance agreement permit a maturity lapse. This is different than what we'll talk about. And b, the modification where you're actually extending the maturity date here you're saying no maturity has passed, but we were going to give you additional time to pay this loan off and work with you through that process. There's still a maturity default in place but we understand that you're not going to be able to actually, you know, bring this loan current at this time or pay this loan off at this time. So really what that forbearance agreement is is you, you, you're talking to your borrower and you're saying, Hey, you know, I know you're having some trouble.

What can we do? What do you need from me? Is that something I'm willing to offer? And then if so, document that very well. So you have that phone call and that conversation. You guys agree upon new, some new terms or, or a temporary period of forbearance. Make sure afterwards that is documented in writing. And I don't just mean via an email, I mean in a formal forbearance agreement that is signed by both parties. So it is very clear that everybody understands what the terms of this temporary forbearance period will be. Another option that you have is a modification agreement. Usually in these ones there's some sort of change of loan terms happening. So it might not necessarily be a default, but it could become a default because if the, the loan terms do not change you know, the borrower will not be able to perform under the terms of the original documents.

Sometimes modifications will happen after a forbearance has been in place. And so you have a temporary forbearance period where borrower was figuring things out and then say three months later, they say, Hey, you know, I would agree to a higher interest rate. If I can have an extended, you know, maturity or an extension on my maturity date, or I need an additional advance to complete construction, I understand that comes at a cost and you guys can agree upon that and then you would ultimately be modifying the loan. So really there's changes to the underlying loan terms. Like I said, sometimes that's more money. You know, if there's a construction project for example, and you know, there's some, something happens and you realize, hey, that original construction budget just is not going to cut it, you can advance there. Maybe there's some, some unexpected lien or some other issue that the borrower needs help with and they need money advanced, you can do that through the modification agreement.

You can also do things like lower or increase the interest rate with a modification agreement. You know, basically the world is your oyster. Whatever you're changing in, in that document, you, you're able to do. So these are just some of the more popular ones. You can also extend the maturity date. And with all of these the modification as well, no matter what kind of mod you're trying to do again, make sure it is formally documented in writing signed by both parties and in particular with a modification. I get a lot of pushback on this, but it is something that we advise and recommend to everybody is to get that mod recorded and get a date down of your title policy and an, and an endorsement to your title policy when you do this, especially if you are advancing more money.

Because if you do that, or if you don't do that, you don't tell title, Hey, I'm giving the borrower another $50,000 and it turns out there's a junior lien holder subordinate to you, that additional advance might not be senior to that junior lien holder that might be in a third position, or even worse, depending on what's happening on title. So I always recommend spec best practice to get a date down review what's going on. You might see things on title that you were unaware of and realize, oh my gosh, you know, borrower transferred the property to somebody else. There's all sorts of liens I didn't know about and didn't consent to. It's always a really great idea to get a title date down anyways to really understand what's happening, especially when in this situation it might be a, a quasi default situation.

And then the last option that I'm gonna talk about very briefly is a deed in lieu of foreclosure. This is really an aggressive option. It's pretty rare as well. Really what's happening is the default is so bad and the circumstances are so bad with this piece of property. The borrower says, you know what? I'm just going to walk away and give you the keys. Sometimes you'll hear this as cash for keys agreements, things like that. But really, you know, whatever is happened, whatever this default is, the borrower is really understanding that, Hey, there is no way I can recover from this. I'm never going to get the cash to pay you. I can't exit this loan. You know, my, the whole strategy isn't worth it. I'm just gonna walk away and take the loss. So that can happen there.

I get a lot of questions, especially when I am drafting loan documents up front at origination, if I can include a deed in lieu with the origination package, and that is not permissible in any state. You cannot enter into a deed in lieu of foreclosure until there is an actual default or dispute under the loan documents. If that has not happened and at origination would hope that has not happened. You cannot have this as an option. So just know that this is something that once a default has occurred, you can talk about this with this bar with your borrower. But even so, this is a very rare option that people go through. This is, this is not very common at all. And down at the bottom here, I also have make sure you're notifying any guarantors, getting consent if necessary so that all parties to the loan, not just a borrower know what's going on. Sometimes you might have a borrower that's managed by one person, but there might be another guarantor unaffiliated with the borrower that's affiliated with the loan. Make sure you get consent from all of those parties. Also get title involved because the title transfer, you'll want to make sure that's insured and documented properly. Sometimes people don't do this, and it creates just a cloud on title down the line that you have to work through.

Next up, we have foreclosure. So generally if you are going to actually foreclose, and whether that is like in California non-judicial foreclosure or potentially a judicial foreclosure you, there's usually a monetary default of some sort. And all of the other loss mitigation options do not work. So you've talked to the borrower, you've tried to give them options, you've tried to come to some sort of agreement to get the loan reperforming or whatever it is, and it's just not working In that case, then your best option might be foreclosure. There are various in, you know, in California we're primarily a non-judicial foreclosure state, meaning you do not have to do a court action in order to foreclose. But we do have a judicial foreclosure option. I know Steve a little bit later maybe talking a little bit about these. But basically you might want to go to a judicial foreclosure and use the court system if you want a deficiency against the borrower itself, and not just any potential guarantor you have on the loan.

This deficiencies might be impossible against that borrower, but if it is an option that you want to retain, then you may want to go to a judicial foreclosure instead of non-judicial. If you ever have questions about which one you want to do, I strongly recommend. And do you reach out to me and Steve, we can walk you through it, talk about your options under the loan in the various circumstances. Usually non-judicial makes sense here in California, but sometimes it can make sense to go to judicial, especially if there are other things happening in the loan. For example, we're talking down here if there's a receivership or writ that's going on, Steve will talk about that a little bit later. But there may be reasons to do judicial foreclosure that might not be obvious on its face. So we're always happy to talk to you if, if you're thinking about doing a foreclosure action to see what the best route is for you.

This slide is kind of crazy, so bear with me for just a moment. But wanted to talk about some current restrictions or hurdles in California for foreclosure. Are two in particular we'll be talking about. The first one is up right now. This is AB 30 88. It's basically this law was passed during covid and it, it extends various homeowner bill of rights requirements to certain business purpose loans. So there's no restriction on con on conducting a trustee sale or moving forward with non-judicial foreclosure foreclosure on a business purpose loan. I get that question a lot of times. There's no, there's no restriction on that, but there might be hurdles to starting that process, and this is one of them. It's really complicated. I am happy to walk through this with you, especially, it's very circumstantial and it's never really an easy yes or no.

Sometimes we have to talk it out with our clients. But basically if all of the following things one through seven here are true then the loan in question is subject to the new homeowner bill of rights requirements under AB 30 88. But if any one of them is not true, then you can proceed like normal. You don't have to have this additional 45 to 60 day process before you proceed with the non-judicial foreclosure. We can take care of it for you if, if it's necessary. There's various notice requirements, you have to reach out to the borrower, that kind of thing. There's all sorts of timelines, happy to help with that. But hopefully you don't have to. So if any one of the following things here is not true, you do not need to do this. So first, the property has to be a one to four family property.

So if you're foreclosing on a commercial property, multi-family property, you do ne you do not need to worry about AB 30 88. Similarly, the loan has to be in a first position lien. So even if it is a one to four family property, but you are a junior lien holder, you do not need to worry about this. The property has to be owned by an individual. In other words, it cannot be an entity borrower. So if your borrower is Nema Daghbandan, unfortunately, you'll have to continue on this process. But if it's Nema, l l c, good to go. You do not need to deal with AB 30 88. That individual owner does not own more than three one to four family properties. The reason they're asking this is they wanna make sure that this isn't, you know, a borrower that has a ton of rental properties out there they're probably pretty well protected this, the goal of this law is to prevent people who maybe have one or two properties to help to make sure that they don't lose their properties.

So if you have a borrower who owns a ton of rental properties, even though their individual you wouldn't have to comply with it here. That said, a lot of times you, the lenders I work with don't know this. They don't know if that individual owner, you know, they go through one through three and they're like, yep, that's true. Yep, that's true. Yep, that's true. And then they get to number four and they say, oh, I don't know. If you don't know, I would assume it to be true because don't want down the line for it to come out that the borrower only owned two properties and you thought the hit owned four. And then it causes all sorts of problems down the line. If you're not sure on any of these, I recommend assuming that it's true. Number five, that property is occupied by a tenant subject to an arm's length market lease.

So if you know the property to be unoccupied, so say it's a fix and flip or something like that, there's no tenant in place and you, you have clear evidence of that, then you could proceed. But if there's a tenant in place, or again, if you don't know whether there is a tenant in place, my recommendation is to assume yes, that, that you should proceed. Number six, another one, unless you talk, you're talking to your borrower. And oftentimes if you're in a default situation, those communications may not be great. Number six, the tenant is unable to pay the rent due to a reduction in income related to covid 19. This is really hard to figure out <laugh>. You might know that this is true, but likely you do not. And so usually on this one, if there's a tenant in place and you have no communications with that tenant, the borrower hasn't told you that the tenant you know, isn't able to pay rent due to this.

I would just assume this to be true, because again, you don't want this ending up to be true and you didn't comply. And then finally, number seven, lender has to be one of the following. California finance lender, department of real Estate broker, I forget what R M L stands for. Residential mortgage lender, maybe, I'm not sure. Nema probably knows or a state or federal bank. Basically, that lender has to be licensed. If the lender is unlicensed, you do not need to proceed. So again, all of these things one through seven have to be true in order for you to need to comply with a B 30 88 and do the additional homeowner bill of rights requirements. If any one of these is not true, then you do not need to proceed. And again, happy to talk to you about it. I know there's a lot here, a lot of analysis. There's like double negatives. Happy to go through it and make sure we deal with this properly.

Assuming you either deal with the homeowner bill of rights requirements or you don't need to comply with them, then you can actually proceed with the California non-judicial foreclosure. The process has very briefly outlined here. Start with the demand letter. Your loan documents will say whether any sort of notice is necessary and whether you really need to do this. If you are using our loan documents, you do not need to send a demand letter that that notice is waived. However, my my recommendation is that it is best practice to send a demand letter to your borrower even if no notice is required, because that sets the le the record for litigation. So down the line if you know, the borrower ends up suing you at the 11th hour right before sale this helps Steve say, Hey, no, we told you, we outlined, we said, here are the reasons for the default.

Here's what's going on. Here's the period to cure. Talk to me. It really helps set the record and set the standard. Make sure that when you are sending that mand letter, you send it to the notice addresses and via the method provided in the loan documents. So not just an email. If you usually communicate with the borrower over email, of course send an email. But it might say in your loan documents that you have to either send it first class mail or certified mail or some other option. Follow that method that's in the loan documents. I also put here typically a 10 day demand requirement. So what I'll say is, you know, say I sent that letter out today, I would say, you have until 10 days from now to reach out and cure this thing, otherwise, I am proceeding with the foreclosure.

Then you would go to notice of default, assuming nobody answers your demand letter and the the default is still in place. You would do go to the notice of default. It's recorded against the property and it puts the world on notice that the foreclosure proceeding has started. Then there's about a 90 day waiting period. And then you record the notice of sale and set the initial sale date and then you go to auction. It's a lot more involved within that. There are various mailings and notices and publication requirements and all that. I am not getting into any of that. If you would like a primer on how to foreclose and, you know, dot all the i's and cross all the T's, I'm happy to talk to you. But that's not the purpose of today. Couple little items about the day of auction and bidding strategy.

This is, again, because of some of the covid related le legislation that occurred. So initially my recommended practice is to have a starting bid amount, a maximum bid amount and bid increments. And what that means is, in a very brief scenario, say the total amount owed to you after all interest and charges and attorney's fees and whatever they are, say it's a million dollars. You could go in and just bid a million dollars if you wanted to, but if nobody bids and you take the property back, there's no deficiency left for you. So if there's a guarantor on the loan, for example, and you want to be able to sue them for any deficiency, well there is none you, you're considered compensated at that point. So it might make sense to start lower than that total amount bid up in increments and stop fitting either at the total amount that you're owed that million dollars or at a lesser amount that he would be okay walking away from the property from.

So, so just kind of think about that when you get to the day of sale about, you know, what you're willing to let this property go for your strategy. Again, if we're working on the foreclosure with you, we're happy to talk through that strategy with you. But I do have here with this old strategy, do not start at your loan amount. We'll talk about this a a little bit. So it does create leverage for your breach of guarantee suit. And this is still a applicable bidding strategy for commercial properties or multi-family properties. That's still totally valid. However there's a new strategy in place. If the property securing the loan is a one to four family property, and then in that case, I would recommend either opening with a credit bid which means the full total amount, that $1 million, a total amount that you are owed or open up at the amount that you are o okay, walking away from the property.

That is because another one of, another law that passed during covid is SB 10 79. And this allows certain qualify qualified purchasers to come in post auction. So after the day of sales published everywhere and people are, you know, yelling things nobody shows up. You take the property back afterwards. There's a time period where certain qualified people can come in and just bid on the property, and it's so long as they pay even one penny more than what the sale or what the property went for at the sale, they will get that property. So that really removes any possibility of a deficiency strategy with regards to these one of four family properties. So when you, if you have, if you are foreclosing on a one of four family property, our recommendation is either open up at the credit bid, the total amount you are owed, or for the amount that you are, okay, losing that property for just in case somebody comes in post auction and bids on the property. And again, if you have a scenario you want to go through, any of us here could talk to you about it. We are more than happy to make sure that you proceeded appropriately with your sale.

Last little thing I'll talk about here before I turn it over to Nema or surplus proceeds. So basically if somebody gr bids more than what you are owed, it will create a surplus. So in that example, your, the total amount owed to you is a million dollars, but somebody comes in and bids 1.1 million. So first, and, and oftentimes I'll get this question, well, that's my money, right? I I made some money. No, you do not <laugh>. So what will happen is you will get paid off so that total amount owed to you, you will get paid. Then it will, then that additional a hundred thousand dollars will go first to any other junior lenders on the property in order of priority. And then it will ultimately go to the borrower. So it will never go back to, to that lender that's foreclosing.

And also it will never go. So say the property or the lien that's being foreclosed is a junior lien and you are the senior, it will never go to you as a senior lien because your lien remains in place on the property. After the foreclosure. Foreclosure, you still have rights. It will never go and go back to that senior lien holder. I get a lot of questions on that. This also means if you own a first and second loan, you want to be strategic with the surplus and strategic with your bidding strategy. Again, they're usually very factual. If you want to talk about them, we are more than happy to to kind of go through what you should do, what you should foreclose on first, how you should proceed. But just know for surplus proceeds it pays off the loan in full, pays anything afterwards and goes to the borrower. It will never go back to the foreclosing lender or the any senior lenders. And with that, those are your kind of options, pre foreclosure, pre-litigation, and I will send it over to Nema.

Nema Daghbandan:

Appreciate that. Melissa, thank you for the summary of the California non-judicial process here. So as many of you know, and and probably many of you are here today you've probably heard news about default interest in California and that there has was a case about default interest. And you're trying to figure out what's going on, how does this affect me, does this affect me? All that good stuff. So hopefully we can try to summarize that and to provide you with a little bit of, of strategy that you can apply today. As well as just give you kind of an update about what's happening with that underlying case. So the first thing is the case is what you see here up on the screen, it's Hawk versus fj. M FGM is a private mortgage lender. And the holding of the I'll give you a little bit of history is, is there was an arbitration between the two parties.

You have Hawk who had defaulted under his loans, and the parties entered into an arbitration. The lender won at the arbitration. Han Rou then appealed the arbitration award at the trial court level here in California. And again, FJM one at that level, again, the case was then appealed to a California appellate court. And the California Appellate Court came to a very odd conclusion. And I say that it's an odd conclusion because it doesn't follow many California kind of state supreme court cases as well as a ton of other cases on this underlying issue. And the case here held that if a borrower fails to make an installment payment, so just the, the general monthly payments, which was, you know, the majority of loan defaults is this exact situation, then the lender cannot charge default interest on the principle balance of the loan.

And I say that's odd because they're analyzing the statute on point here is analyzing late charges. And so they're, they're kind of construing late charges and default interests as equaling the same thing. And I think you have a situation where you probably have some judges here that don't actually understand how default interest really operates as they came to a very odd conclusion in solution here. However, the case is what it is, it is an appeals court case for those that don't know. What that means is that, you know it is binding law in the state of California. So if you are sued by a borrower today they will likely point to this case. And it is at least persuasive to any other court in California. It is not the California State Supreme Court. But it is the only case that really finds this exact fact pattern in this holding.

So if you have a similar situation in which you have a non, just a, a monthly payment default the law of the land in California will state, well, you cannot charge default interest on the principle balance of the loan, which would mean that you are only able to charge default interest on the amounts not paid. So I'll give you a quick mathematical example of how that works. You have a hundred thousand dollars loan, the borrower has missed two $1,000 monthly payments. So they are in arrears for $2,000. And let's say you had a default interest rate that was 5% greater than the note rate. In a normal world, you would've been able to charge 5% against the a hundred thousand dollars principle balance until the borrower re performs. Or if they never reperform, you would just continue to accumulate default interest this case and this holding states that no lender, you may only charge default interest on that $2,000 of installments not paid.

So that's the holding of this case. It does not apply in, in terms of its application. It does not care whether you are a private lender. It does not care whether you are a real estate secured lender. It doesn't, you don't have to be a mortgage lender. It, it's just a lender in the state of California. It's an extremely broad holding, applying to basically any person who gives a loan to anybody in the state of California is how broad this holding is read. And it doesn't matter what the default interest rate is, it could be 1% above the note rate. It could be a hundred percent above the note rate. It does not care. It's simply states that you cannot charge the default interest on the principle balance of the loan under any circumstances at least here in the state of California. Go ahead and get to the next slide.

So, you know, why do we feel as strongly as we do? You know, just putting on our practical hats for a second here borrower doesn't make their monthly payments. So right now, if that happens and, and you wanna follow the holding of the hunch crew case you as a mortgage lender can kindly ask your borrower to please pay you, right? That's effectively what your real option is at this point. You can of course, continue to charge your late charge. You know, as you see under point B here most loans are, many loans in the state of California have a restriction to charge a 10% late charge on the installment not paid. And you typically have to provide a 10 day grace period. But, but the current state of the law would say is, well lender, you know, if they miss that a thousand dollars monthly payment, you can charge any $100 and you can ask them to continue to pay you.

And in reality, what they're really saying here, and the only real result you can get to is, well, you would've previously tried to use the default interest to garner reperformance of your loan. But you don't have that option. You've, you've lost that tool in your arsenal. And so what that really means is your only other tool to really advance this process forward and to create leverage is foreclosure, right? So you're gonna go ahead and start initiating eating a foreclosure, and you probably didn't want to do that on a 30 day payment default, right? It's a bit of an aggressive action. However, you have lost your leverage as a mortgage lender because you can only charge that default interest, that 5% above the note rate on that thousand dollars that was missed in that month leading to a pretty absurd result here in the state of California. Next slide, please.

So what are we doing here at the firm? You know we've, as, as many of you know we try to get involved as a law firm. Whenever we see mortgage lender rights assaulted throughout the country, typically we, that comes in the form of proactive legislation. So examples of that you know, the most recent one that comes into mind is California recently tried to impose a flip tax where properties that were flipped within a two-year period were subject to a, I believe was 20% tax on the sale. Although an issue that does not directly affect private lenders, because that would affect the real estate investors who is flip, who are flipping the homes, who are paying the tax, that would effectively dramatically affect the private lending industry who are making loans to those participants. And so we got involved in that sort of situation.

This is a little bit more unique. This is a situation in which you have a case that has come down at the appellate level. So in this particular instance, our law firm has been engaged to handle the appeal of the appeal. We were not the law firm involved in the underlying arbitration or trial court or the initial appeal. However, in this instance, we have been engaged to handle the appeal. And so we are the party who is responsible for submitting what is known as a WRI to the California State Supreme Court. We are going to the California State Supreme Court saying, we think this is bad law. We want you to revisit this. For those that are unaware of what the, that looks like the California State Supreme Court in a typically year will take approximately one to 3% of petitions.

So those are not great odds to to get in front of the state Supreme Court. That does not mean that we're going to sit idly in the situation. We are currently in actively working with all major mortgage associations and trying to connect with even non-mortgage associations. As you know, this is, this does not affect just mortgage lenders. And we are coordinating with them on two different levels. The first one is writing their own petitions to the state court. So what is known as an amicus brief for those that like legal jargon, but it basically is a, a letter to the state Supreme Court saying that case, that F G M case, we want you to hear this California State Supreme Court. You have a petition in front of you, and we recommend that you hear this case because we equally think that this is a problematic case and we think it was decided incorrectly.

So that is one thing that we are currently doing and very actively in the background and thankfully have lots of partners particularly mortgage associations who are instrumental in these fights. The second thing here is, is in addition to trying to get the Supreme Court to hear this case altogether, we are trying to get this case republished, which basically means that the Supreme Court will not necessarily hear the case, but they will not allow it to stand as a published appellate case, meaning that borrowers cannot assert this case as the law of the land going forward. So that's another legal strategy. The last one here, and, and, and definitely going to be a big boulder up a hill, is fighting this from a legislative perspective. The reason why there is a legislative argument to be made here is twofold. One is that there is a statute that this case was relying upon.

We think it was a terrible reading of the statute, and in fact, not only a terrible reading of the statute, but in, but a, a, a disregard for the statute as the statute states in its in its plain language that the burden to demonstrate that a, a default interest or late charges or any sort of of penalty here is on the lender to, is sorry, is on the borrower, to prove that the, that this is a penalty and not an enforceable charge. It's, it's the borrower's burden is, is how it's reflected for, for business purpose loans. And in this case, the, the, the appeals court judges ignored that and said, no, no, no, it's actually, in fact it's the lender's obligation. So no, all lenders now must be able to go in and defend their right to this.

And, and oh, by the way you can't charge this in the first place anyways, right? That, that's how crazy this holding is. And the last one that's not on here but is worth mentioning is that there's legal strategy being crafted in the background at our law firm related to, well, how do you navigate this issue currently, right? With this case in the background? And that includes modifications to the loan documents. So for example reorienting the description of default interest to more of a cost of funds issue. So when you think about default interest or really late charges or any of these sorts of things, historically, they're used to compensate the lender for the harm incurred. So give you an easy example. The borrower misses an installment payment, that 10% late charge. It's designed to say, well, I, you know, I now have to call the borrower.

I have to get involved. There's, there's time, energy, and effort that I'm going to have to expend to try to get this loan to reperform. And so that's typically what late charges are used for. And, and they're hard to define. I don't know how much that cost that phone call is, or how many phone calls or these sorts of things, but I know that I've got some costs. Default interest is a little bit different. So there is components of that, which is, you know, I have to, to expend additional efforts. But there's also what are known as cost of fund issues, which is give you examples. If my loan was performing and I try to sell it, it has one value, and if my loan is non-performing and I try to sell it, it has another value, right? That's an example of how you were harmed.

Probably a more tangible one for lots of you is if you have a warehouse line of credit and this loan was sitting on your warehouse line of credit, many financial institutions will force you to take that, to take a defaulted loan off the line of credit. So you were borrowing money from your bank at this interest rate and lending it out at this interest rate, and you were earning the spread between those. Well, now you've lost the leverage. That's also a cost to you and, and a pretty sign significant one. So there's lots of other issues that we're gonna kind of start identifying. These are typically arguments that are made by lenders counsel when you're in this sort of litigation to demonstrate why you're harmed. However, we're going to be modifying loan documents to kind of steer and help the litigation that's going to proceed here. If I can get to the next slide, please.

So let's say you're dealing with the situation, you know, kind of where does the rubber hit the road here? If you've got a situation where, where you're trying to charge default interest, and, and as many of you know, there's been a lot of currents in the industry dealing with this right now. So there are competing, and I wouldn't say necessarily competing opinions, but there's different thought processes about how do you navigate default interest currently. So one is the easiest and, and simplest way to understand it, which is there's an appeals court case that sits out there. You can unilaterally and retroactively not charge default interest in the principle balance, right? No harm, no foul modify your practices and, and in fact we see loan cer, certain loan servicers in the industry doing this. It's definitely an option and it's the most conservative route that one could take and one that is, is pretty obvious.

The second one here is to continue with status quo. And what I mean by that is continuing charging default interest. And so what happens then? What if you choose to charge default interest? Well the best analogy I can give here is there's many defaults that are available in loan documents and under loans. Let me give you a simple one that many of you might resonate with. Most loan documents prohibit the placing of a junior lien on the property, right? There may be federal and state prohibitions on that sort of enforcement. So you, so there's oftentimes you cannot accelerate a loan if the borrower simply placed a junior lien. I'll give you another example that might be tangible for some of you. In the state of California, there is state Supreme Court precedent stating that you can never charge a late charge on a balloon payment.

So let's use that a hundred thousand dollars loan example. You have a $100,000 loan. The state Supreme Court has knocked down every single variety of this in which a lender tries charging a late charge on the hundred thousand at maturity, right? It's never gonna be enforceable under the state of California under that. That said, many loan servicers and many lenders still continue to charge these charges. Many institutional loan servicers will charge these charges, and it is a losing fight each and every time. They will never win. If you follow the California State Supreme Court precedent on this issue, but you are all lenders assessing your own risk tolerances and should have that choice to determine for yourselves what risk tolerance you have. And so, just as much as you'll make calculated risk decisions here, you may want to continue to make calculated risk decisions here because you may have significant numbers of loans that are in default that are, have default interests, and that's true monetary harm to you.

We don't believe this is good case law. We think that even though it might be the current law of land in California, we suspect that in the not too distant future, it will not be. And, and regardless of whether it's through ro own efforts, through the haru matter, or whether there are many, many other cases, because this will not be, even if the, the Fjm matter is not the final authoritative voice on this thing, this is not going to go by the wayside. This case will continue to get hammered and there will be a, a significant amount of litigation because again, it affects every single lender in the state of California. It is far too broad, and the approach here is, is far it, it, it disregards all basic contract law here in California and in any other state. And this is not a California's unique issue.

This is just the way that con contracts are analyzed in, in any state, which is are you penalizing the borrower for non-performance? So what if you choose that more aggressive strategy, meaning you choose to continue to charge default interest. So what's the downside risks you're, you're now taking? Well, one, just like any other example that I just gave you, if you, for example, accelerated loan and, and you couldn't have because there's a junior lien, or if you charge a late charge, will, your borrower can sue you for that. They can point to this rou case. It is the law of the land here in California. You may and will likely lose that litigation on the appellate level if you simply point to this case, right? The, so there's no, you know, typically what we've seen in these situations is that lenders intentionally reduce their default interest rates.

So if the borrower comes back and says, you know, I'm going to I'm, I'm contesting this and I'm unwilling to pay this, well, likely that's the point of negotiation, right? So you can weigh the cost of the charging of default interest in other matters and the collection of default interest in other matters and the, and reducing it here voluntarily, right? But what else? So let's assume the worst case scenario, which is you've chosen to charge default interest and in fact the borrower has paid it and the loan has been paid off. Well, they still have a claim. Even though your loan has now been paid off, the borrower can later make a claim because, and they can cite to this case and they can sue you and, and that's how this would work, right? So just as much as any other default that may be available under the loan documents, there may be case law and there's tons of case law on tons of different issues.

However, as we've stated before, lenders will make calculated risks to determine the cost benefit analysis available to them. Obviously, if you're working with a, a loan servicer that prohibits it, you know, they may be making that decision for you. But if you were to ask us, it's not that binary in approach, right? There's multiple ways to look at this and it ultimately is probably your risk decision to be made. So that's the lee of the land. Go the next slide here and I'll go ahead and give it to our dear friend Mr. Ernest.

Steven Ernest:

None of you could hear that because I was on mute. Hopefully you can. Now I'm Steve and I'm the head of litigation here. And among the services we provide to our clients, our evictions or unlawful detainers, sometimes you hear the word ud, that's the U and the D and unlawful detainer, that's what the cool folks call it. So now you're down at the vernacular. So you've conducted a foreclosure, whether it's judo, judicial or non, and you go to find out what you've won and go to look at your house and find that there's a family of clamps living in it. So what are you gonna do? You can't just, you know, screw your gun into their nose and tell 'em to get out. You sue them for unlawful detainer and you have the sheriff come and evict them. The procedure on that first is under no circumstances, if you want to evict your holdover tenants, should you take any money from them if they want to pay you monthly rent, if they want to cure part of the prior default, it might seem like a tasty solution because it's been a non-conforming asset for you for a while.

Don't ever do it. You don't want to be these people's landlord. If you take some money from them, they're going to start making complaints to you because the roof is leaking and the garbage disposal is clogged, and it is then your responsibility to be those people's parents or landlord or whatever and fix all that stuff. And I'm gonna tell you right now, you're never gonna want to do that. You don't want to ensure them when they fall down the stairs. You don't want to pay them when they complain about the black mold that's in the cabinets. What you wanna do is get them out. And the way to get 'em out is don't take anything from them, even though it seems like free money. So the way you start your UD is you file a notice. It's a notice to quit.

You give them either three days or 30 days. If you are pretty sure you know the names of all the tenants in the place, then three day notice is for you. It'll list each of them individually, but probably in these non or in these foreclosure circumstances where you've got holdover tenants, you probably don't know all of their names. And even if you're almost certain that you do, I'm gonna suggest to you that probably you don't because somebody's gonna show up and say at the end that they're a tenant and they were entitled to notice and they didn't get it. So on these notices, what we generally recommend is you give a three day notice to everybody that you know their name and a 30 day notice to all unknown occupants, and that'll cover everybody. Made up names, real names, somebody who is renting the upstairs bedroom for $200 a month from your defaulted borrower.

It'll cover absolutely everybody. You gotta spend a little bit of extra time before you're going to be entitled to evict them, but it protects you. One of the problems with eviction actions is if you've made a mistake, you don't find out until the end and it's always fatal, so you have to start all over. But if you're careful at the beginning, you serve all of your unknown occupants with these notices, then you're going to be able to evict all the unknown occupants, and it doesn't matter who they are. But during this procedure, you're going to want to check the occupancy. You know, sometimes these folks are just waiting until they're an Betsy in Kansas is able to take them in and they're only gonna stay for a while and they're gonna leave. Sometimes they're gonna stay until the bitter end because California is the place they want to be.

And when you're living for free in California, it's even a nicer place. So make sure you check every two, three weeks, send somebody by drive by yourself. If at some point the place looks like it's been vacated and it's unoccupied, you probably don't need me and you probably don't need the sheriff to get anybody out. Be careful though, and give us a call. Don't just again, go barging in the door and have your locksmith buddy change the locks. You can get some trouble for that, but when it really is vacated, you really do have possession and title to your r e o and you can start remarketing it and that we'll get some money to you. And that's probably one of the goals of this whole procedure. If they haven't vacated, you're gonna have to file that lawsuit. So it's a real lawsuit with your name at the top as the plaintiff and all of these people's names, including the unknown occupants as defendants.

And you serve 'em. You have to go out there and touch 'em with the papers, and then you get a short trial. It's not like some of the lawsuits that hopefully you're aware of but not experienced with directly that take years and years to solve. Evictions are fast tracked through our system, so figure 45, 60, 90 days on a long one before you get to a trial. There are ways your defendants can delay those. But generally speaking, that's I think the timeline that you can look at. And when you go to trial, then of course you win because you were careful at the beginning and you organized everything the way that you were supposed to and you didn't accept any rent from any of your tenants. So you get your judgment and your capable lawyers take that judgment and pair it with a WRI package and give that to the clerk of the court downstairs who gives it to the sheriff.

And then the sheriff schedules what's called a lockout, and it sounds exactly like what it is. The sheriff will go there early in the morning, you will send a representative, you'll also bring your locksmith buddy and the sheriff will go in and get everybody out, make 'em walk out. Doesn't matter if they're alive, parrot is still living in a cage in the living room, they're leaving right now. And your locksmith buddy will then change the locks and give the keys to you. I don't know why you're laughing, Melissa. That's how it really works. And everybody will be evicted and you'll get the keys and you get to go in and find out how many pots and pans they've left all over the place. All of that is not your property. There are some marshaling requirements and some auction requirements for you that we can help you with.

But again monitor the occupancy because sometimes they just like to live there for free and once they get a notice to pay or quit, they're going to move out. Sometimes once they get served with the lawsuit, they don't think it's as fun as it used to be and they're gonna move out. Sometimes when they see the judgment, they're like, well, gosh, you know, if the sheriff gets here, I'm not gonna be able to fill my pockets with all the stuff that I own. I'm just gonna have to move out at five 30 with whatever I can grab while I'm walking down the stairs. So they'll actually move. So, hey, attention to that stuff. And if they move out, you're gonna win. You're gonna save a little bit of money and a lot of time, so that'll be good. Can we go to the next one?

So, judicial foreclosures the operation of them, the procedure is just handled through the court. The result of them is largely the same as the non-judicial foreclosures that Mel talked about earlier. You're just gonna have a lawsuit about it. So it's your name on the top as the plaintiff and all of your borrowers and guarantor's name on the bottom as the defendants. A big reason that you would follow this path is when you think there's gonna be a big deficiency and you don't want to go through the procedure of doing a non-judicial foreclosure on your borrower and then suing your guarantor later for the deficiency. This procedure will do all of that at once. In one tidy action, you'll get a judgment to sell the property. You'll get a judgment for the deficiency balance against your borrower, and you'll get a judgment for a deficiency balance against your garran, all of your guarantors all at the same time.

As you might have managed in because you're sending it through the court system. It's gonna be a bit more costly and certainly more time consuming than your non-judicial actions, but there are circumstances where it's probably a better idea. So consider those. It lists on this slide, the anti-deficiency rules. So the big one to pay attention to on that is if it's purchase money loan, that's the one that's usually going to come up. If you have loaned the money to your borrower to purchase the property that we're talking about and they've never refinanced, never done any of those kinds of things probably you're not entitled to an, a efficiency from your borrower. Doesn't apply your guarantor though. So don't walk away from a bunch of money that you can use for your purposes and just give these gifts to your borrowers and guarantors. Look into it a little bit if you have questions, we're always here. Alright, can we go to the next one?

Breach of guarantee lawsuit. So you've already had your non-judicial foreclosure, there's already deficiency and you can't collect it from your borrower because you pursued a non-judicial route, but you know that your guarantor is loaded and so you wanna sue him. I think it's really good time to do it because it's probably at a period of your guarantor's life when everything is going about as badly as they've ever gone for your guarantor. So they're not gonna put up a real stout defense. They're not going to fund a real aggressive defense. So you know what you're doing is hitting them when they're down, which your mom told you never to do. But it's probably a good idea in this circumstance because once you get the judge to sign on the dotted line of your judgment, all of their defenses are over. It doesn't matter what they might think they were going to defend against these payments on all of those defenses are washed into this judgment.

And you know, when it's a, when it's a declining economy, which a lot of folks on the news say that it is now folks just aren't spending money protecting their future assets. What they're doing is letting those things go because they don't want to spend good money going after bad money. But when the economy's going down, if you get a lot of these judgments, you know, see the elevators going in separate directions, you get a lot of these judgements. Now I'm gonna get into in a moment what you do to collect them and you just wait because it's America and our economy always comes back and when it does they have money and you've already done a lot of things to secure it, to get it from them. So it didn't cost you an awful lot to get those judgements now. And when the economy turns around, it's going to be a lot easier for you to collect on them. And probably if you wait to try to get those judgements in the future, either the statute of limitations has expired or your customers are flushed with cash and they're gonna make these lawsuits a big pain in the neck for you. So do them now. It's always better. Next slide please.

Collection options. These are super fun. The first one, every time we get a judgment, we record abstracts for you. There are 58 counties in the state of California. We make strategic decisions where we think your customers either have real estate or might have real estate in the future. And we record in all of those counties. It costs approximately $35 in each county to record those abstracts. Very low price given what you're going to get because at that point you're fishing with 10,000 lines. Any property they own or have an interest in, in that county, your abstract automatically re automatically encumbered. Don't have to know the address, don't have to know the AP N number. Don't even have to know if they own it. County recorder takes care of all of that for you. You don't have to do a thing other than give him $35.

Those will sit there for a 10 or 15 years and so, you know, eight years down the road when the economy turns the other way and your guarantor is thinking about getting married or doing whatever, and he is gonna buy a house and he's long since forgotten about you and they get to escrow and the title company says, well, you got this lien from your private money loan eight years ago, and they recorded a lien and now the guy's brides bee is furious with him and hates him. And why haven't you paid this a long time ago? Well, your lien automatically affixes to the property, they're gonna buy, sell, or refinance, doesn't matter. As long as they're going through title, they're gonna have to pay you. It's also been accruing interest at 10% during that period of time. That is fixed by statute.

Doesn't matter what your loan documents used to say, if you had a 4% loan, you're still getting 10. If you had a 20% loan, you're still getting 10. But they have to pay it. It's the easiest money you're ever gonna get. The title company is going to either issue you a wire or a certified check and it'll be glorious. You'll be tremendously happy. Also you can levy banks. It used to be that if you're gonna get a bank levee, you had to know where your customer had his money, an actual branch. If you levied the Bank of America on 17th Street in Newport and he was keeping his money at the Bank of America in Costa Mesa, five blocks away, you got nothing. Now with centralized banking you hit kind of the five big banks in California and at that point you're going to touch 80% of the banking customers in the state.

I think those are not tremend tremendously expensive. You're talking about the upper hundreds lower thousands in costs to get that to happen. You get a rid of execution from the court, you send that to the sheriff. The sheriff goes and serves Bank of America, Wells Fargo, you know, the big ones, chase. And it counts for all those banks. Another fun part of doing those is it also counts for their safe deposit boxes. When people, you, you know, people under 50 don't really have them, they just have safes in their house. But some people have safe deposit boxes at banks where they keep watches and jewelry in the keys to their yard or whatever else is in there. It also applies to those. And the sheriff will call you and drill act, this is fun. I've done one of these. They drill out the lock that's on the safe deposit box and they pull it out and they'll hand it to you.

Whatever's in there is now yours. Wage garnishments don't work tremendously well for self-employed people don't work tremendously well for folks that work in private business, cuz probably what they'll do is quit their job when a wage garnishment order shows up. But folks who are teachers, government workers, pensions, things like that, jobs that folks don't quit, they work tremendously well for those. And if you get a wage, garnishment orders kind of the same thing. Get a rid of execution from the court, have the sheriff go out and serve it to their employer, and you will get 20% of their take home pay for the rest of their life until your judgment is paid in full. Again, accruing 10% interest, you just get a check every two weeks from the sheriff. So that's kind of a nice one. Each of these things also is sort of an inspirational event for your former borrower.

Now, judgment debtor to call you and make a deal. Ordinarily if they find out that they're trying to buy a house and they can't because of your abstract or you've got a lien on their bank account or you just pulled their grandmother's family bible out of the safe deposit box any of those things, they're probably going to call you and work it out. So some money will start showing up. I think people respond to pressure and the more pressure you put on them, the more leverage you have. And so these are the ways we inspire your customers to do the things that they were supposed to do. And they said they were gonna do a long time ago judgment debtor exams. I could do a whole hour on these. These are just the greatest thing in the world. Judgment, debt.

Am I out of time yet? No. I's laughing at me again. Yeah, I am. So I'm gonna go really fast on the judgment debtor exam, but I love judgment debtor exams. So those A, b and C options that I talked to you about a little while ago, those are the inexpensive ones. Those are kind of the easy ones that you target a lot of folks with. Judgment debtor exams. If none of your money is showing up or you just hate your judgment debtor and you wanna make his life as miserable as you can, or you wanna put some pressure on him, or you just don't have an awful lot to do and you like to interact with your lawyers judgment debtor exams are a great option. So these are kind of like depositions except it happens after you get a judgment. They happen at the courthouse.

You have to go out and touch your guy with the papers. So you know, if you've issued a loan to DB Cooper or somebody who you can't find this is not a great option for you. But we have private investigators who could find them if that's what you wanna do, do you want them to be found? But you're gonna actually have to touch 'em with the papers. So you do that and it's an order that your customer or your borrower judgment debtor show up to court and have a deposition. But the only subject at the deposition is where is your money? Where are you keeping your assets? And you bring a court reporter. You don't do the deposition in front of the judge, you do it in the hallway. So it's sort of cranked. You're sitting on a bench, but all you ask 'em is where do you bank?

Where is your stock portfolio? Where's your retirement portfolio? Do you have any real estate? And if so, where is it? And they have to answer all those questions under oath. And if they lie to you or they refuse to answer any of 'em, you just walk back into the courthouse and you say, judge asked him Murray Banks, and he won't tell me. And the judge will lean on him and make him tell you. And if he wasn't, if he won't, then conveniently there's a sheriff in every court room and they have a pair of bracelets for him and they'll put 'em in the cooler for a little while until they do want to answer your question. Also, this is probably my favorite part about judgment debtor exams, which is probably my favorite part about collection remedy. So we're really getting up to the upper echelons of this.

When they're sitting there right in front of you, you can ask 'em to take their wallet outta their pocket. Do you have a wallet with you? Yes, I do. Can I see it? How much money is in it? Well, I got $57. We'll hand me the $57. Well, I need that to get out of the parking structure. That's not my problem, bud. You can actually make them, give you all the money they're carrying. If they're wearing a nice wristwatch, you can make them give you the wristwatch that they're wearing and you can auction it off. Wedding ring. Same answer. Although, because I'm such a nice guy, I always let women keep their wedding rings, but I don't let guys keep their wedding rings, just the sort of person I am. I guess. Let's say you went through all of this trouble and you found your customer with a private investigator and you served your customer with a process server and you sent your lawyer to court to do this judgment debtor exam and your guy just didn't show up.

I'm not gonna tell you where my banks are and I don't want you to take my watch and wedding ring, so I'm not gonna come. So what happens? I know the answer. What happens is the judge then issues what's called a bench warrant, and that is the same as the arrest warrant that goes out for murderers and everybody else. So the county sheriff's, ordinarily I am gonna be straight with you, don't go out knocking on doors trying to find folks who are no shows at depositions for bench warrants. But the next time your guy runs a stop sign and he's getting a ticket and he's coming home from a nice dinner with his lovely wife the sheriff's going to find the bench warrant because every police car has a computer in it. When they run his license, it'll come up and the sheriff again has a pair of bracelets for your guy and they're gonna take him right from there.

It doesn't matter if it's the middle of the night on a Friday. He's gonna sit there until Monday where they will release him from jail and lead him right into the courtroom and have to tell the judge why he didn't show up for his judgment debtor exam. The court's clerk is then going to call me on this phone right here and tell me that the guy is in their courtroom and he's ready to conduct his judgment debtor exam. I'm going to tell the judge whether it's convenient for me to do it right now or not, and then we'll go do all the things that we talked about and I'll take his watch and his money and his wedding ring and find out where he keeps his banking stuff. So that's fun. And I, I'm sure now that you are all inspired to go to law school yourselves just so you can conduct judgment debtor exams.

So I tell you, it's glorious. It's really a great, it's good. I would do it for free, but I won't. Anyway, the point of all that, they're going to identify their big assets. So $50 outta their wallet is fun. That's not gonna get your $600,000 efficiency paid. They're probably hiding money somewhere and we can find out where it is. What we're doing is we're making it easier for them to pay you than it is for them to play games and not pay you. We're putting a lot of pressure on them, and it's just been my experience in a quarter century doing this, that the more pressure you put on 'em and the more leverage you have, and that's what's gonna make your money show up, which is probably a big goal of this whole enterprise for you. Extraordinary relief. We're way over time because as Nema knows, my stories always go way too long, so I'll be brief on extraordinary relief.

It doesn't happen a lot, that's why it's called extraordinary. But it can happen. So you can get keepers to monitor the intake. You can get rep Levin of collateral before your judgment happens. A lot of things like that. So those will potentially be separate discussions. I think there are a couple of videos on our website where I talk about Rep Levin if you're interested in that. They are fascinating and you'll, I I think I'm probably gonna be up for an Emmy or an Academy Award, whichever those go on. But I'm probably gonna get fired if I don't stop talking. So that is my presentation. Thank you so much for listening.

Melissa Martorella:

Amazing. thank you Steve. Thank you Nema. Real quick, some brief takeaways. Big picture, understand your options when you have a default. There is no one size fits all solution. It is really fact intensive and depending on what's going on with your loan, one, one solution Ma makes sense with loan a and a completely different one with loan beef. That's why we're here. And you have options at all times during a default. It's not like, oh, okay, I didn't do something now. And so that's it. You have all sorts of ones. It depends on the circumstances. Again, reach out to us, we're happy to help. I don't know why I keep saying that. <Laugh>, any questions, our contact information is here. Feel free to give us an email. We are happy to talk to you, go through any you know, especially any facts driven questions that you have.

In addition, our Innovate Conference, I know it's only November but Innovate is coming up this year. We'll fly by and next thing you know, we will be in Newport Beach together. Again. It is April 17 and 18, 20 23. Upcoming trends in private lending. It's gonna be a great time. If you want to register, the registration link will be forthcoming this week, so definitely jump on that. It's when prices are the best. And it you will learn a lot and have a wonderful time. You'll get to meet Steve in person and hear even more stories. And let me tell you, they're amazing. So without further ado, we will go through the Q&A.

Nema Daghbandan:

All right, first question that we've got in the Q&A and just a friendlier reminder, the Q&A box is where you should put all questions, not in the chat box. And thank you for all of you who have been sticking around. We know it's gone a little bit over and we'll make sure we get through these expeditiously. So the fir first question I will ping to you, Melissa, which is for the forbearance and modification. Will you need the borrower to be represented by counsel?

Melissa Martorella:

Thank you. So not generally, they don't have to be. But that said, you know, especially if it's contentious, you might want them to be represented to have their attorney review the agreement, that kind of thing. But you don't need to require it. So if borrower doesn't have an attorney and they don't wanna deal with paying for an attorney, that is also Okay.

Nema Daghbandan:

Great. And so the next question that comes up on here is we found that borrower sometimes go silent when problems arise and won't respond to us, the lender or our servicer. Have you found an approach that's effective in getting a gone silent borrower to respond? Give that one to you as well, Melissa.

Melissa Martorella:

I've found, especially after you've gone through all the other options, you've reached out, you've sent to man letters, I found that, you know, recording that notice of default's really weird, all of a sudden you get all sorts of calls. What are you talking about? Nobody reached out to me. That usually triggers it. It's pretty crazy. Managing the foreclosure practice, how many cleanup within a month of the recording of that notice of default. You know, it it's the threat that just finally became real.

Steven Ernest:

Yeah, just start putting pressure on them, right? Mm-Hmm. <affirmative>,

Nema Daghbandan:

And I'll add one more point to that as well, which is oftentimes when your best efforts, meaning you the lender and or the loan servicer having a law firm, and you don't have to hire our law firm necessarily, but having a law firm write a demand letter tends to grab attention as well. So, yeah. You know, that, that tends to say is we're actually really serious here.

Steven Ernest:


Nema Daghbandan:

Next question. How common is receivership in private lending, especially rehab projects? Steve, our litigator. Extremo. Why don't you take that one?

Steven Ernest:

Yeah. So, you know, I love telling long stories and giving long answers. This one's sort of short, it's really uncommon. Doesn't happen very much. The circumstances, just like the title of the slide, need to be really extraordinary for it to work. You can ask a lot but, you know, keepers and those things not tremendously common.

Nema Daghbandan:

And is that because it's generally very expensive to get and the courts are reticent to give it?

Steven Ernest:

Well, they're fact intensive. You know, it can happen anytime you want it to happen enough. But you're gonna have to have all your documents and in a row and your convincing arguments ready, and we can do it for you. But we're gonna have sort of a heart to heart before it happens to talk about the reality of the circumstances. It's not just, Hey, my guy's not paying me, and so now I want a keeper in his house and I want his Ferrari so that I can option it. It's not gonna go that way. You needed to set that up eight months ago instead of waiting until after the default. Much the same way I talked about the eviction. You know, you, you gotta set it up properly at the beginning, and if you do that, you're gonna win. But if you didn't, it's, it's sort of hard to, to make that happen down the road if you weren't planning for it.

Nema Daghbandan:

Thanks, Steve. Next question here from our dear friend Brian Gallian, is, can we donate funds to help with the issue? I'm assuming that is the the Hak issue. And I would say that lenders get ready to open your pocketbooks at some point, not today necessarily, but get ready to open your pocketbooks. This fight will not be cheap. And my, this fight, I mean, the multi-front war that will be necessary to take down an issue like this, it's legislative in nature, it is judicial in nature. All of these things will require energy and effort. And yes, I would say is if this issue matters to you, which presumably it does you all have a dog in this fight, it's gonna be a big one. We will likely be reaching out in the near term future, talking about how you can participate.

And that's not just financially. We'd obviously love that. And we will likely be putting our ha and hand out to many of you. But also getting involved, particularly if this becomes a legislative issue. As a general, as you can imagine, getting in front of the legislature and saying, we want to charge default interest is not the best rallying cry. But enforcement of contracts and contract rights may be a little bit better. So we will just wanna make sure that the messaging is clear and that, that there are many voices in the room when these things happen. So thank you always, Brian, for your, your support here. Next one on here is, is has the modification of the language regarding default interest already been incorporated into Lightning Docs. For those that do not know, lightning docs are online doc generation system that permits our clients to generate our loan documents.

It is not in the system. We are currently discussing it back and forth at the partners here at the firm about the absolute best approach. But for those that are Lightning Docs users, you will all receive an email blast when it is live and updated. I suspect in the next week or two you'll see an email from us with the modifications that will be in the system. We have already put out some warnings blocks and these sorts of things. If you operate the system today, you will likely notice that there are new warnings being issued when you're making loans in California. But we will be making language changes in the next couple weeks here. Next question here is regarding the charging of the, the default rate. If the N O D amount is filled or filed with the more aggressive approach to collecting the def, the full default rate, does that jeopardize the validity of the N O D amount?

Can the borrower go back and claim an unlawful foreclosure? Yeah, these are the sorts of issues that are gonna pop up, right? I mean this is, there is a case, it is untrue, it exists at the appeals level which means that a borrower can point to this case and try to argue this case is my case and it's, these are my facts and therefore you should apply this law to my case. So there is nothing stopping a borrower. And this is why we, you know, we recommended, for those of you that want to try this strategy, you have one of two choices from my perspective, if you want to charge default interest you can negotiate this down and and eliminate it. Should there be pushback in these sorts of issues and, and go waive the issue if should it arise. And you can also say is I'm going to fight this fight and continue to fight it and going to create the litigation that's going to stem from this. You have two distinct choices depends on your risk tolerance that goes with that, or you can just choose to not charge it whatsoever and do it retroactively and, and not collect any of the default interestes are your, that's the world we live in. Next question

Melissa Martorella:

Really quickly on that as well is say you've recorded your N O D already and you use the interest rate when you prepared the amount and the N O d A helpful reminder to say you wanna take the super conservative approach and follow, hon, you do have the argument that that n o D amount is an estimate of the amount owed. So you can then go in and revise when you do the N O S and then go to actual sale. So know that you, you don't necessarily have to restart this process. That kind of thing is an estimated amount. So you do have that in your arsenal, but you know, we can talk if, if that's something that you are concerned about.

Nema Daghbandan:

Thank you, Melissa. That's a good clarification there. Right, the next question here is for Steve, if you do not want to collect a rent and create a landlord tenant relationship, do you have a choice in rent R S O, which I'm assuming are rent controlled areas like Los Angeles City?

Steven Ernest:

Look at you, you knew what RS O was, that's great. It's a rent stabilization order and it is rent control in places like Los Angeles, like Santa Monica has 'em. So if you're a post foreclosure beneficiary, you are going to be able to wiggle out of a lot of those very spec fact specific. But the general answer is you're probably gonna get away from, and it's best to do that unless what your, one of your goals in life was to become a SL lawyer, in which case, take some breath, fix some toilets, see how it goes.

Nema Daghbandan:

All right, the next question here is from Al Hinkle. With regard to HAHA versus fjm, do you have an expectation when any reversal could be expected? It would seem that we lenders should be prepared to live under this decision for several more years at least. Would you agree? Great question. There are shorter term timelines. So for example we may know in the short term, let's assume that the California State Supreme Court is going to accept this petition. We would know that acceptance in the short term future mean the next few months. However they have, I think Steven, you know, better than I do, is it until August? When do they have to accept the w Ritz altogether?

Steven Ernest:

I would expect to hear back from them in the next six months. Small update. We filed our petition for RH of Sir Chiari on Friday last, so three days ago they've had it over the weekend and I'm sure considering it already, no they're not. But in the, in the next six months is when I would expect to hear back.

Nema Daghbandan:

And so beyond the, the current case presented I would agree with the question being asked here, which is that there is no real short, short term solution to this. And so, you know, whether it's going to be other cases that keep rocking this boat, whether it is a legislative solution, all of those will take time year at least, if not years. That is the likelihood. That said, the only good news with this case is because it's such an absurd result and affects so many lenders, it will create a lot of litigation and a lot of litigation is going to get this likely in front of the state Supreme Court sooner than later, regardless of whether it is this specific case that gets us there. The next question here is, on a judicial foreclosure, assuming you win, do you get your legal fees as part of the judgment, Steve?

Steven Ernest:

Yeah, so eighties movies were the best movies, and there was an eighties movies called when Harry Met Sally. And in one of the scenes, Meg Ryan Memorably is sitting having lunch with Billy Crystal and they're talking about something that I'm not gonna bring up now, but her answer in that is she says, yes, yes, yes. And the whole restaurant goes silent. That's the answer to this question. Yes, my God, unless your lawyer was really bad, you get your fees and costs every single time. And if your lawyer didn't get your fees and costs for you on a judicial foreclosure you're gonna have to talk to somebody about a malpractice action. <Laugh>

Nema Daghbandan:

Beautiful. Next question here is,

Steven Ernest:

Yes, <laugh>, sorry,

Nema Daghbandan:

Seems like getting a guarantor as often as possible is a great thing to do to minimize financial loss. Melissa, why don't you chime in on the non-judicial foreclosure side of this and then Steve, why don't you chime in on the litigation side of this?

Melissa Martorella:

Yeah, I, you know, I always recommend, especially if you are lending to an entity, obviously if you're lending to an individual, unless there is another individual available who can guarantee that loan you know, that's usually pretty rare. In that case it was usually co borrowers. But if you're lending to an entity, I often recommend having the principles of that entity guarantee the loan or, or maybe the members of that entity. It's really great practice because then, yes, in the, in the, at least in the non-judicial foreclosure route, you have the option for any deficiency judgment to go after that guarantor. So going back to my example of the million dollar total outstanding balance say it's a commercial property and you open bidding at $500,000 and nobody else is there and you take the property back at $500,000, there's a $500,000 deficiency there where you're still owed money. You can then go after any guarantor, assuming they have assets, you know, there's an analysis to do, you know, at that time. But you can go after that guarantor for that deficiency amount of $500,000. So it's really helpful. I always recommend it, especially in, you know, even when I'm drafting loan documents, if I see a borrower, an entity borrower, and there's no guarantee or on the loan, I always follow up and ask, Hey, is there somebody you want to pers to provide a personal guarantee? Because it does open your options here.

Nema Daghbandan:

And Steve, any anything to add from a litigation standpoint?

Steven Ernest:

So yeah, you know, to echo those comments, especially when you're learning to an entity well, yeah, when it's, especially in the circumstances of an entity, you're gonna want an individual. Cuz a lot of people will tank the LLC that they created two years ago and they don't really care. But when the only thing they have left in their pocket is the Butterfinger that they got trick-or-treating last weekend you're gonna want to have some other people to levy upon. Right?

Nema Daghbandan:

Next question here. Thank, very valid. The next question here is is do you have a sample example or do you have a yes sample example? Wow, <laugh> a sample example of a scenario of what can be charged legally in a default. I will give you an example here. You have a loan, it is a $200,000 loan and there are $3,000 monthly payments due each month. The borrower has missed the first two months of their monthly payments. They are in arrears of $6,000, right? They're $3,000 monthly payments. They have missed two payments. And so they have paid, so they owe you $6,000 in addition to the $6,000 of payments they have not paid you, you are assessing a 10% late charge on each of those installment payments, which means that they now owe you an additional $600 of late charges. You can also start, and let's say you have a, you have a default rate of your note that says you're gonna charge 10% above whatever the note rate is.

If there is a if the borrower defaults at all, you can also assess 10% interest against that $3,000 in arrears plus the late charges. And so you can charge default interest now on your cumulative balance of $7,200. That is in arrears. All right? So that's, that's what you could assess it against, not the $200,000 outstanding loan that still exists. You could also charge, do you know, for example, attorney's fees and other enforcement costs. You can pay for Melissa's charges to file that notice of default, all those things. And you can charge interest and default interest on those charges, right? So the, when you are spending money as a lender, you may charge default interest on those. This case does not disturb your ability to do those things. It just simply says that you may not charge default interest on the $200,000.

There's another question that's coming up that I'll answer now because that'll help, which is, when do I get to charge that my default interest on that $200,000. So instead of the borrower missing the two installment payments, they have missed the maturity default payment. So it is now maturity default. They owe you your $200,000 back. They don't pay you your $200,000 back. This case does not disturb the charging of default interest on the $200,000 At that point. Friendly reminder is you cannot charge a late charge on that $200,000, but you can start charging default interest on that $200,000.

Next question here is, when does a deed in lieu of foreclosure, sorry, questions been around. When does a deed in lieu of foreclosure get recorded with the county? I recently issued a loan for the purchase of a property. The title company had the mortgage and deed in lieu recorded with the county after closing. Does the deed in lie normally get recorded after closing? So what I'm assuming here in your package based on is that you had, and I've seen this happen in which lenders try to, as a strategic tool include a grant deed, a deed in lieu that is signed at the closing of the loan. And so the reason the lender does this is that should the borrower default, they then record this grant deed and gain ownership of the property this way. And that is what and, and that is a, a strategy that oftentimes mortgage lenders will ask us to do.

It is not worth the paper it is written on. It has no value. Because each state has a very, very significant interest in the property rights of property owners in their state. And if they were, wanted you to be able to bypass their wonderfully written statutes and foreclosure regimes, they would've let you do so, but they didn't. And so it is invalid. It has no value. It does not matter if it was a de lieu executed at at time of loan documents. When they sign that note in that deed of trust and they also sign a grant deed back to you, you can go ahead and throw that piece of paper away. It doesn't have any value. However, if the borrower does default after the fact, so they've missed those three payments and they say, you know what, I'm not gonna finish, finish this project keys lender have at it.

This property's going back to you. I'm now willing to sign a, a grant deed to give the property back to you pursuant to the terms of a properly drafted deed lieu agreement with a transfer agreement and all sorts of bells and whistles to define the relationship between the parties and making it very, very clear what has happened and how you got here. Then. And only then would a grant deed like that be effective and useful for you to use. The next question here is, you mentioned the new default interest rate case in payments not being made, but what about maturity dates passing and the loan not being paid off? Does this case now apply? And I think we just answered that a second ago. So this case does not apply to maturity defaults. You can continue, you can charge default interest on maturity defaults.

But remember, remember that, that in California and most other states, we still don't actually have good rules on that. There's no statute that says you can charge 4% or 5% or 6% or 7% or any magical number above the normal rate. You must be able to reasonably substantiate why you incurred that loss. We talked earlier about the cost of funds and that is a likely issue for you, which is your cost of funds has, is now going up. You cannot recycle your capital on and on and on. Is there a California statute that limits loan default conditions upon maturity for one to four residential units? You know, I think Melissa had a pretty detailed slide on that. So if it's a, obviously if it's a consumer mortgage loan, you have a dual layer, you have real estate settlement procedures act federal law, you also have California Homeowners Bill of Rights state law.

You have a nice little marriage of those things put together causing lots and lots of issues that would slow down a foreclosure in California. Assuming it's a business purpose mortgage loan, you might be affected. That was the slide that Melissa talked about earlier, earlier with that AB 30 88 that may apply. It may not. It's a very fact intensive analysis. Any foreclosure trustee in the state of California will want to run that analysis for you. So should you end up in a situation where we're trying to figure out can I foreclose on my business purpose property any foreclosure trustee that is worth their waits will ask you a series of questions trying to understand whether there is any impediment for you to record a notice of default. Next question here is, can you get your legal fees back in New Jersey judicial closure?

I, I would assume the answer is yes, but I would happily refer you to many friends that we know in the state of New Jersey that can ha answer that question for you. Unfortunately, we do not judicially foreclosure in the state of New Jersey. Let's see here. The next one is I'm going to skip that one cause I don't know if it's an actual question. Can you give me some kind of reference? I can look up the law that says no late charge on a balloon payment. Sure. Actually this is one of the better ones. So if you actually go to, I dunno if it's our website or our emails or whatever, but if you just type in hon reel on a search on our website it will actually load up the fact, it'll load up the case involved here.

And it'll, it'll load up the cases it was relying upon. There are a couple state Supreme Courts, so it's not a statute that you can look up. It is not there's no California statute on point here other than maybe under the Department of Real Estate law related to loans arranged by a real estate broker. But assume you're a California finance lender under this example there's no statute that prohibits this activity. It is California State Supreme Court precedent. Garrett is the case that comes most likely in mine. Ridgeley is another example. But this case has been ad nauseum meaning charging a late charge on the entire principle balance. And it has gone down to as low as 2% in front of the fine judicial authority here in California. And they said even 2% is incomprehensible. There is no way that on one day you suffered 2% of damages on this entire principle balance.

So you may feel free to charge that you will lose in court on that issue, at least in California. Two questions. These may have been covered but wanted to clarify. The first question is, if you file a notice of default, but the loan has still not matured, can you charge default interest under these new rules? No. It does not matter whether you've charged filed a n notice, adult default have not filed a notice default. It is irrelevant. Whether you've actually recorded a notice of default at this point. It is a prohibition on charging default interest until the maturity date of that loan at least if the, the default is an installment default. Second one here is can you charge if you've passed the original maturity date but are still within an extension period? Similarly is, is is presumably the answer would be no because you would need a maturity default to occur under that situation. Next question here is, what would be the minimum amount you would want to consider requesting a judgment debtor exam? Steve, the dream earnest. You can take that one.

Steven Ernest:

You know, that's, that's going to be dependent on what you want to do. There is no minimum amount if they've, if you've got a judgment in small claims court for 1 cent, you're entitled to enforce it. So the remedy is available to you. There are practical considerations cuz your lawyers are not gonna work for free, so you're gonna want to evaluate that. But you know, if you've got fees and cost provision in your judgment, which probably you do, then it doesn't matter a lot. We'll, we'll chase 'em down for anything, anything that mat here's what I'm gonna say to you. Anything that matters to you matters to me.

Nema Daghbandan:

Thank you. All right. Next question here. There's, there's a really, really fact intensive one I'm gonna pass, but I'm happy to reach out to that specific listener and, and go over that fact pattern with them. The next question that I see here is are you holding this webinar because you anticipate more foreclosures given the Fed interest rate and the economy? And the answer is no. I mean, we, we, you know, as a law firm, our, our focus is on the representation of private lenders nationally. You know, when you make a loan, sometimes they don't get repaid. It is just an issue. And part of our practice and, and we've have always advised our clients on loss mitigation, you know, we make, we are not economists here. I do not know what the crystal ball will hold for the future.

Obviously things are are not going in the right direction both within the private lending community and in real estate as a whole. Whether that will lead to a surge of foreclosure activity the jury is out. I will, I will let smarter minds than us and to tell you what's going to happen there. Did I hear this right? I can sue a guarantor for a deficiency after a non-judicial foreclosure. Doesn't the one action rule apply? And this is probably the most common misconstrued understanding of, of our one-act action rule in California. For those that do not know, if you choose to proceed with a non-judicial foreclosure here in the fine state of California, you are precluded from later suing your borrower for any sort of deficiency. That is what the one action rule states. However, that same exact rule does not apply to going after your guarantor for any deficiency.

But remember there is a ton of legal strategy that we've talked about here on the call, which you may not have a deficiency because of all of the way that we deal with foreclosures here in California. And the deficiency may be worth nothing because your person only has their Halloween candy as repayment. The next one here, the next one here is if a loan goes into foreclosure due to failure to make payments, and then during the foreclosure process the loan matures, can the default rate start on the maturity date? This is a good question. We actually came up with these fact patterns and these questions on our own. Melissa, what, what do you, what are your thoughts on this issue?

Melissa Martorella:

I would say yes at that point, but then you need, but you could not retroactively charge that default interest on the missed payments that had previously occurred. So you, you'll have to cuss and tailor that payoff demand as you go through foreclosure. But yes, in my opinion, you could charge that. Agree. Interested to hear if you disagree,

Nema Daghbandan:

<Laugh>? No. Agreed. I mean, that's the same conclusion as two great minds put together have created one <laugh>. It is in fact the, you know, when a maturity default occurs, you can start charging default interest on the entire rate. Very curious to see. You know, we, we think, you know, there, there is a gaping hole in California, and I will say is this, is, there is, it is very unclear what is the right default interest rate? And that's what we should be arguing as an industry and as a and as mortgage lenders is what is the right rate. But instead we are simply pre precluded from charging altogether, which is silly. The next question here is can you include an acceleration clause in the loan documents calling the note due in the event of default and then be able to charge default interest?

Every responsible set of loan documents will include the ability to accelerate the loan based on default interest. It, it is not going to get you anywhere as it relates to this specific holding meaning that it does not give you the automatic ability to charge default interest on maturity balance. There is an argument to be made, I don't know if it's a good, but there is an argument to be made that you can accelerate the loans, record a notice of default, and then charge default interest assuming that you actually take the property back. There is an argument to be made that you fully accelerated the loan and this case does not apply. But again, we will find lots and lots of litigation stemming from this case, and I don't know whether that's a winner one way or another. The next question here is what if the guarantor and the borrower are the same person?

Oh, it's my favorite question because they cannot be the same person. It is similar to my deed. In lieu example, when they sign a deed in lie at the outset of the loan, if your borrower and your guarantor the same person, what you can do is you can take that guarantor and you can shred it in a pieces because it's worth nothing. It has no value. Yep. A guarantee is a third party or a a third party obligation of another. And if you cannot guarantee your own obligations, so please help us help you and never do that. Next question here is, outside of California on a non-owner single family residence business purpose loan, can you charge administrative freeze during the foreclosure process? You kind of do. I mean, so for example, you charge you know, the enforcement costs. So you hire the wonderful Melissa Marr start your non-judicial foreclosure action, and then you hire the handsome Steve Earnest to, to conduct a judgment debtor exam.

All of those costs, your, your loan documents are responsible permit you to charge those costs. Can you charge an administrative fee? Meaning you the lender, can you start charging other fees? Historically we would say no. And the reason why I'd say no is because you had default interest that was compensating you for that loss. But now you're in a hunter world, so can you continue to do it? I don't know. I probably not. I mean, because what is the, you'd have to effectively think about it this way is you must be able to now defend and, and really wasn't say of the law before. This is what is the reasonable cost to decompensate you? So I think you kind of gotta pick your choice of poison if you are absolutely never going to charge a default interest, that it may make sense.

And you could charge an administrative fee because you would have to be able to go and have Steve argue in front of a court of law saying, well the mortgage lender had to answer and pick up phone calls. He had to hire this person to do this, and he had all these sorts of specific costs in here. I can give you a breakdown of all those costs and you can make the argument that you suffered direct harm. Maybe make sense? Our hope in all of this is that you can just go back to default interest, which would've covered all of this stuff in the first place. Next question here is, isn't the solution a short term loan with extensions six months with three extensions, for example? It's another idea we have kicked around here at the law firm. So you know, one of the, and just preface this, which is saying is, well, instead of writing a one year loan, two year loan, three year loan for your short term loans, why don't you just write a three month loan or a six month loan and then basically have extensions or automatic extensions, these sorts of things so that you're basically creating a maturity default sooner rather than waiting for the duration of the launch was hard.

It's, it's a way to do this. There's a lot of, you know, when we, we talked about this at the firm last week our general consensus is that the problem you probably run into is that the, the sort of automatic extensions and or if you want to even manually do these extensions, chances are you're gonna mess up the paperwork and you're likely going to make this worse for yourself than better. And then you're trying to get in front of a judge, trying to argue as well, was the extension automatic? Did, did you have the right? These sorts of things. And you're throwing a whole other issue of fact into play. And as you've seen in this hon cases that judges don't do great with facts sometimes. And so here we are trying to not interject new facts that could become of contest.

So our current recommendation is that you don't, if you are already o offering six month loans, offer six month loans, I don't know if I would enter the three month loan business and do automatic extensions particularly on short-term paper. The D S C R loans obviously are, those are gonna be little trickier. You're running, you know, 30 year maturity, those such things. But I think the real result for the short term is you're going to start a foreclosure action and just, you know, try to, to liquidate this asset faster than you normally would have. And that's bad for your borrower, it's bad for you, but here we are you know, yeah, your elected officials matter. Next question is if it probably sells for more than the minimum asking price at the foreclosure sale, who gets the extra money? Melissa?

Melissa Martorella:

Yes. Happy to answer. So this deals with surplus proceeds. So if there is a surplus, so again, that, that example that I gave, it's a, your total amount owed to you is a million dollars and it goes for 1.1. You will get paid in full with your million and then that remaining a hundred thousand will go to any junior lien holders and then to the borrower. It will never go back to the foreclosing lender and it will never go back to any senior lender that it still has an interest,

Steven Ernest:

But you get all of your costs and fees. Yes.

Melissa Martorella:

Right. But I would assume that million dollars, if you put your payoff demand together correctly, that includes all of your costs and fees and things like that, make sure you do that. When you are foreclosing and adding all of that up, you are entitled to it,

Steven Ernest:

Right? But then all the costs of disposing of the excess proceeds are going to come out of the excess proceeds themselves too.

Melissa Martorella:

Oh yeah. But it's like nominal, like the port foreclosure trustee. It's like 200 bucks or something and they have to do this whole administration process with surplus proceeds. It's really sad.

Nema Daghbandan:

It is

Melissa Martorella:

Sad. It's really bad.

Steven Ernest:

You're bringing us down.

Nema Daghbandan:

Foreclosure trustees aren't done

Steven Ernest:

So much fun. Now, this

Melissa Martorella:

<Laugh> Sorry, <laugh>.

Nema Daghbandan:

All right, next question is, what if a single member, L L C and the guarantor is the single member as a person, do you still feel the same way about the one actionable? And so yes, it, it does not, it, you know, this is actually more often than not the case in which you have a single member L L C and the principle of that L L C will execute your guarantee. That is a very, very common arrangement. That is a, that human, that principle is separate and distinct from the L L C. They will hire Steve's less handsome counterpart to try to argue that they are in fact this same person. And this was an artifice. And really Steve is Steve, l l c. But that is not an, an easy argument to make. It is not necessarily a good argument to make. And Steve will handsomely and, and persuasively crush them in court. That's the right or not, that's the word I was gonna use too.

Melissa Martorella:

Yes. The one thing the one point that I will make on this is if the borrower held this property as an individual, so say it's not a purchase and it's a, you know, a cash out refi, something like that, and you as the lender require that they move, transfer the entity into an L L C to have this structure. If that's your business practice, you don't lend to individuals, you lend to s SPS only, that kind of thing. That's one thing. But if you don't generally, and you were saying, you know, Hey, I need you to have an L L C and I need you to personally guarantee it, and there's no other business practice behind it. There is the argument that this is a sham guarantee because the lender forced the borrower to change the way title is held in order to get around the one action rule. That's it. I think that's also pretty hard to prove. But that is a little fyi. So I would probably make this your standard business practice rather than a random one-off situation.

Nema Daghbandan:

I agree. All right. This'll be the last question for the day. Thank you all for sticking around. Hopefully you found this valuable. For those that have any questions after this, you have our emails on the screen, so feel free to email any one of us and we will happily get back to you. The last one is, isn't a solution a short-term loan with extensions? And one of the one of the conditions for the extension is that the loan cannot be in default. And that that's right. Right? I mean, that's kind of the same example we talked about a second ago. That is a condition. So for example, when we write loan documents and we have conditional extension language, one of the conditions precedent for that extension to be valid is that the loan cannot be in default.

The problem you, and this is kind of the, it goes back into while this may be a solution and it is not, it is definitely a viable solution. It is one that comes with good paperwork risk, meaning how diligent are you in documenting these extensions? If you want to make these automatic extensions that don't require as much documentation you're going to run into an issue in which the borrower will likely state things like, well, the lender never told me. I didn't, I wasn't aware I was in default, these sorts of issues. So we're, we're trying not to inject questions of fact. When you're, when you're, when you wanna foreclose, the goal is to have a very, very clean file. I think these sorts of automatic extensions somewhat makes them a little bit more vague. And vagueness is what good borrower council love to seize on.

It doesn't have to be a good argument, it just has to be an argument. And vagueness is a great argument to make. And when you have vagueness, you have what is known as questions of fact in our litigators parlance. And when you have questions of fact, that means the case cannot, that the judge cannot summarily dismiss the case anymore. They must do some fact finding. And as you know, when they're finding facts, it is very expensive and it takes a long period of time to find those facts by a trier a fact here, the judge. And so rather than wait something that could have been dismissed early in litigation, you are now in fa fact-finding mode and that is discovery and all sorts of expensive legal fees. So we believe that a you know, kind of your typical playbook is still probably the best playbook for those issues.

But again, if you're already doing six month extensions and that's kind of your been your six month loans with six month extensions, go for it. I wouldn't change your, because that means you already have the systems and processes in place to do those in the first place. I'm with it. I'm for it. I don't know if I would recommend a bunch of new attorneys who are used to be doing one year loans now doing three month loans. It gives me a little bit of pause. I think you may be doing more harm than good because your paperwork probably won't back it up right now, and that's gonna cause you more harm than good. And that is the, any final departing words for our lovely audience here today?

Melissa Martorella:

Reach out to us if we have questions. Always happy to help. We are dealing with these issues daily.

Nema Daghbandan:

<Laugh>. Yes. Thank you everybody. Steve, any any departing thoughts for me, my friend? This is so fun. Let's do it again tomorrow, <laugh>. All right, everybody with that. Take care. Have a wonderful time. This recording will be sent out shortly, hereafter. Take care everybody.

Melissa Martorella:

Thank you.

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