Workouts 101 – Forbearances, Modifications, And Other Loss Mitigation Strategies: What To Do When Your Borrower Can’t Pay

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As of March 2022, the year was shaping out to be another strong year for the mortgage industry. But, lenders should always be prepared for loans that don’t pan out the way they are supposed to, and should be ready to jump in with the proper steps to work out loan defaults when borrowers are in trouble. Geraci’s team of experts is always available to provide guidance and strategy on how to manage loan defaults with discipline and proactivity. We also break down the essential components of well written agreements to keep lenders out of future litigation.

You will learn:

  • Available legal strategies and best practices to manage loan defaults
  • What communication and documentation should lenders be using if their borrowers are requesting loan relief
  • How to properly evaluate and document various loan workout scenarios such as modifications, forbearances, deed in lieu, assignments of rents, etc.

Melissa Martorella:

So with that, let's get started.

So lost mitigation options. So we've got a bunch here and this is really just an overview of what we're going to talk about today in the webinar. So different options that we have. We have forbearances, modifications, deeds in lieu, foreclosure in both judicial and non-judicial or trustee sales. We have breach of guarantee actions and then we have other legal relief and that includes receivers, writs, and attachment. I would say you probably want to go in this sort of order as you are trying to manage a borrower default or when your borrower is having an issue with paying. A lot of times lenders are quick to say, I want to foreclose or I want to do some other sort of very intense legal action. And oftentimes, sometimes that's necessary, but oftentimes just reaching out to your borrower, talking to them and working with them a little bit upfront can save a lot of legal fees down the line and a lot of hassles and delays down the line as well.

So recommend you go through the steps provided here before you jump to a solution later along the line. So big picture when a borrower defaults you're going to want to make sure you maintain formalities. And what do we mean by that? So a lot of times lenders will talk to their borrower, find out they're not paying or can't make a payment or whatever is going on. The loan's in default for some reason and they jump on the phone and borrower's like, yeah, if you just give me a month or two, I'll pay it off. And in two months I got you no big deal. But nothing's followed up in writing. This causes problems down the line. In the great recession, there were a ton of lawsuits. This is back in 2009 or so when a lot of borrowers defaulted. There's this concept of oral misrepresentation and basically people are like, I never said that.

I never agreed to that. And there's nothing in writing talking about what you did agree upon on the phone. And so you're kind of stuck as a lender and especially as a lender, if a borrower's in a hardship at all it can really go against you if you're sitting there saying, oh yeah, they said they'd pay and do all of these things and then you have a really sympathetic borrower sitting in front of the court as well saying, no, they said they'd work with me. They said they'd do all of this. They waived those rights. It's much better to get everything in writing to make sure whatever the agreement is truly formalized. So with that, we recommend that you memorialize all calls in writing. So you jump on the call with the borrower and you're like, Hey, what's going on? I'm noticing you missed a couple payments.

Want to get on top of this? See if I can help you out. You guys come to some sort of solution, great, memorialize that in an email. Send the email and get them to agree. Yep, that's what we talked about. That's what I'm agreeing to do. Also, what I would recommend is sending a letter to the notice address provided in the loan documents also memorializing what's happened on that column, what the agreement is. So if the loan documents say you have to send a letter certified mail to 123 Main Street, which is a borrower's address for purposes of notice under the loan documents, send that letter there as well to make sure there's no argument that you didn't properly notify the borrower of any agreement. And then the last thing that I would do even on top of this is yeah, you've got an email, it says what you're supposed to do, but did the borrower respond to that email or did you just send out into the ether, know that it's the borrower's email, maybe you've had some communications on it, but what if they gave you that email on the phone and there's a typo or what if they just never respond to you?

You really want to enter into a formal agreement and that's signed by both parties. The only way to do that is to write something up that's formal and it doesn't even have to be something extremely long. It could be a page or two just explaining the loan the default and the next steps signed by both parties. It'll really help you out. But we'll go through a couple of things that I like to see in these kinds of agreements to make sure that you and your borrower are protected and are on the same page as you walk through a default.

The first couple of different options here and I want to go through them because sometimes they're just thrown out. Somebody will call me up and be like, I need a deed in lieu, but maybe a forbearance or a modification is better. And so I just kind of wanted to walk through the differences between these things before you decide on any particular one. So first is a forbearance that's really just a waiver of rights. So the borrower, I'm sorry, the lender is agreeing to waive payments for a certain amount of time or to permit a maturity lapse or maybe to accept reduced payments for a certain period before going back to accept the regular normal payments. Maybe they're agreeing to extend a maturity date while the borrower is trying to sell a property, something like that. In any event, the lender is forbearing from their rights.

They're waiving some of their rights to enforce that loan to charge default interest perhaps to force a maturity date payment to otherwise go into foreclosure or take some other legal action. And the reason you would do that is because you can see the borrower has an exit plan. They need a couple months, the property was supposed to sell, they didn't complete the construction on time, whatever it is, but they have a clear exit strategy and they just need a little help to get across the finish line. That might make sense for a forbearance. On the other hand, you could have a modification and that's where you're really changing loan terms. So sometimes that means you might be giving the borrower more money. Maybe that rehab project costs a lot more than anticipated at the outset, but you've analyzed the property and the plans and you realize it's okay.

I could afford to give the borrower a little bit more under this loan to make this project happen. Or alternatively, maybe you're requiring a principle reduction. Maybe the borrower has to come in and pay down the balance of the loan by a hundred thousand dollars before they proceed something like that. But you're really changing the loan terms there. Another reason you might want a modification is maybe you're lowering or increasing the interest rate. For example, maybe the borrower needs those extra couple months to get the property on the market to sell and you say, okay, I'm willing to do that, but I'm going to increase the interest rate by 2% to cover that time because I wasn't expecting to do that. So you could do anything like that under a modification. And then lastly, maybe you're going to extend the maturity date. This is fairly common.

It's also called an extension agreement, but at the end of the day it's a modification. You are changing the terms of the loan and so you would need a modification agreement to do that. And then the last option that we do have is the deed in lieu of foreclosure. Basically in this situation is the borrower is just wanting to walk away and give you the keys to the property. They, they're like, you know what? I'm never going to come out from under this loan. It's not worth it. I can't deal with the property. I don't want to do it. Here you go, lender, take the keys. It's a very rare situation. A lot of times people like to jump to that conclusion of just give me the property, just hand it over to me. This doesn't happen nearly as often as you would think because it's really a last resort that borrower has to be in a position where they're like, no, there's nothing I can get out of this. It's not worth it. Fine, you can have it. And oftentimes borrowers aren't in that position. They believe in the property, they believe in the project that they've got going on, they're willing to fight for it, and if they are a deed in lieu is really not the option there.

So the big thing you want to know with a forbearance agreement is what are you for bearing from? Is it recording a notice of default charging late charges, charging default interest, and how long are you going to agree to forbear from taking those actions? Usually forbearance agreements are fairly short term in nature. Three or six months is pretty common and it's usually okay. The borrower has missed two payments. Lenders agreeing not to proceed with a notice of default or starting foreclosure based on those payments. They have a right to maybe lenders saying, I won't charge default interest right now but in three months you've got to bring me current, whatever that means. Maybe is the borrower making monthly payments throughout the terms of the forbearance or are they doing a payment waiver until the forbearance period expires? Are all those missed payments due at maturity?

Now there's a lot of options with the forbearance agreement to structure around and say, okay, let me help you borrower. What exactly do you need? How can I help you? And then drafting the agreement to make it very clear when things are due and also making sure that you agree to forbear from a certain period of time. You really don't want a perpetual forbearance of any kind. You don't want anybody to think that you're just in this perpetual state of not proceeding with a default for however long. You want to make it very clear that this is a 3, 6, 9, 12 month agreement and at the end of that time, if whatever the underlying defaults are not cured that you will proceed with your rights and remedies under the loan documents as a lender. A lot of times I've seen people say, oh yeah, well we have a forbearance agreement in place, but it's been like three years since that agreement has been looked at.

I would take a look and make sure there are no new additional defaults. Make sure that forbearance agreement didn't expire because then you as lender open yourself up to a waiver argument that maybe you've waived these defaults at this point in time even though you have a forbearance agreement in place. I would take a look at that and make sure you're not just doing these perpetual forbearance agreements, modification agreements. So things you need to know for modifications, what is changing from the original loan? If you had a 12 month loan for a million dollars accruing at 8% what? What's changing? Are you extending the loan term? Are you reducing or increasing the interest rate? And then knowing what isn't changing and make sure it's very clear in that agreement that everything else in the documents and the underlying loan is still remaining the same. You don't want to open yourself up to giving more or changing more than you're initially anticipating because of a quarterly written agreement.

Modifications oftentimes come into place too when you've got a forbearance agreement in place and maybe the borrower has stabilized, but they need a more permanent resolution. So maybe it's going to be because again, like I was saying, I don't like relying on a forbearance agreement to cover me for a long-term. That should really be a short-term solution. And if after say six months, the borrower is like, Hey, okay, I can bring these loan payments up to up current, but I really need help with this interest rate. I need some catch up periods. If you can maybe tack on a couple of these monthly payments to the maturity date, whatever it is, that usually makes sense and you can put that in a modification agreement and maybe you're extending out the loan for that borrower saying three of those missed payments are due at maturity along with the balloon payment and you're moving on that way. It's a really common way of seeing these agreements done after a forbearance agreement.

And one more thing on both forbearances and modifications. In both of these, make sure you outline what any new default would be. So we have your standard defaults in your loan documents, missed payments and whatnot, but what if there's something else specific that has to happen either during the forbearance period or the modification period? And if it doesn't happen, what happens? Make sure that is clearly outlined in that agreement so that the borrower knows, Hey, if I don't meet this deadline or I don't do this thing or don't take this action now that forbearance or modifica modification agreement is now in default as well, and so the borrower or the lender can proceed with other remedies. So just make sure that you also outline any new default that might occur based on these new provisions that you're providing in these agreements so that you're protected then too because it oftentimes you'll see, okay, like borrower needs to make a payment of $50,000 before June 1st. What if they don't? Did you outline what happens if they don't? Did you specifically say if they don't that it's an additional default under the loan documents?

Arguably it would be, but I don't want to argue that. I want it very clear and stated in the documents that that's the case. Then the last little option upfront is we have a deed in lieu of fore closure. You can't just record a grant deed. Sometimes people think that they can do that and that's sufficient. This will cause you a lot of problems down the road. So first, have your attorney prepare an agreement and that's going to include these following things. First, it's going to say that there is little to no equity in the property and that's important because remember, ADI and loo is only happening when the borrower feels they have no other option. They can't bring this property back, there's no winning here, and they're just like, you know what? I can't get out from under this loan. Take the property. So you want this agreement to clearly state that and you want that borrower signing to that fact whether there's any further recourse to the borrower, well, maybe the property's still underwater.

You want to be able to go after other collateral or other aspects of the borrower or maybe this agreement is done. You know, get the property and that's it. Your loan's over. Make sure you're explaining that in this agreement whether lender owes any obligation to the borrower after the sale of the property by lender. So sometimes we'll see a deed in lieu is a borrower is really unable to finish a project and get the loan or get the property on the market, but what if there is a little bit of equity and the borrower was just like, I just can't do it. Maybe there's an agreement in here that upon the sale, so maybe the lender's going to take over this property, finish any construction, get on the market and sell it, and maybe there's an agreement in here that says, okay, after all these things are paid, borrower will give you x amount. If that's an agreement, make sure that's in here. That is somewhat common as well. And then also, what exactly is included in this transfer? Is it just the property itself? Is it any furnitures or fixtures or equipment? Make sure that that's outlined and make sure you have additional documents as necessary to make sure you cover those transfers so that you do have rights to not just the property but also anything else at the property that you are expecting to have included in that sale.

Another big issue that happens is making sure you have title insurance. Sometimes people will do this and not tell title and then down the line you're trying to sell the property as a lender and then the title company is like, what happened here? And it causes delays down the line because they don't understand that this was a legitimate transfer. So get a title company involved right away because first you'll, you're going to want to do number three. You're going to want to run a date down of the title report. Make sure there's no junior liens you don't know about that you would become responsible for as the owner of that property, or it could affect your ownership of the property if there's a bunch of juniors that are also in default make sure the status of the property, but then also make sure that title is on board and ensures that transfer so that you don't have an issue down the line when you go to sell that property as lender.

So now in any of these agreements in Ahmad, in a forbearance, in a deed, in lieu, these are some key provisions that you're going to want to include in all of these agreements. They will help you if there's ever a dispute down the line, even if there is no dispute. It's something that makes it very clear what the agreement is and it's really helpful for everybody involved to have something to refer back to in three or six months to make sure that what the agreement was is actually happening. So first you want good recitals, recitals tell your story, and if you're drafting this, you want to make sure that you are the knight in shining armor. So you want to explain, okay, back in January of 2020, I made a loan to this borrower. It came due in January, 2021, the borrower couldn't pay the borrower also missed a couple payments as the lender going to for bear from my right to foreclose on this property and extend out the maturity date by six months or whatever it is.

Tell this story in such a way that it makes you look like the hero that you're helping this borrower and doing every that everything that you can to work with this borrower and also make sure it's very clear. Sometimes you get recitals that are extremely convoluted and all over the place. If this is ever in a case where it ends up in litigation, you want to make sure a judge or anybody reviewing this document could quickly read it and understand how the parties got to this agreement. How did we get here? If you've got to get through 15 pages of recitals to even understand why this agreement is relevant, you've got a problem, try to really be succinct but also paint yourself in the best light possible.

Next, you want reaffirmation, and this means having the borrower reaffirm certain things about the property. So all amounts do itemize them. What's the current principle? Balance any interest that's accrued any late charges default interest, what legal fees? What is the total balance due under the loan as of a date certain as of the date of that agreement? And have the borrower initial or signed to that directly. That way there's no dispute down the line. They've agreed to it, they've had the chance to review. Maybe you're even attaching a payoff demand as of a certain date that's itemized. Make sure that you have that so it's very clear that everybody knows exactly what was due at that time.

Also, for our lenders out there that are doing these business purpose loans, that's what we work with. Make sure that you have a reaffirmation of the business purpose of the loan. What are they using the funds for? It shouldn't have changed throughout the term, but you know, want to make sure that you're protected all along the way that this is truly a business purpose loan and exempt from federal regulation. It's the reason at loan application, we want that written statement from the borrower about what they're using the money for. That's why at loan documents, we want the handwritten business purpose certificate saying what they're going to use the money for. It's why anytime down the line we want a written affirmation from the borrower, what are you using the money for? So it's consistent all along. So if they ever claimed in litigation down the line that it wasn't for that, you've got this great trail the entire time showing nope, this was a business purpose loan. The borrower is affirmed to it many, many times.

Also a reaffirmation of occupancy. Things happen maybe at loan application or time of loan documents. This was not an owner-occupied property and it was an investment property as the borrower moved into that property. That's something you would definitely want to know. So a reaffirmation of occupancy status that that's very helpful for you as well to make sure that there's no additional concerns that you have to worry about if the borrower put in reaffirmation of the borrower's authority to sign the agreement. So you're going to want proper resolutions or consents for the party signing that whatever the agreement is, the mod forbearance, whatnot that might mean a trustee certificate. If the borrower's a trustee confirming that the trustee is the party that is necessary or is authorized to sign the loan documents or the agreement, it might be an entity certificate signed by all of the members of an L L C confirming that X person is the manager and therefore authorized to sign under this agreement.

Whatever it is, you want to make sure that you have the proper resolution or consent showing that the person signing this agreement is the person authorized to do so. You don't want to end up in a fight down the line because somebody comes out of the woodwork saying, Hey, they weren't allowed to sign this was my entity, not his. That's fraudulent. You don't want to deal with that. So you want everything possible to make sure to cover your bases, that you have the right party signing and then the last reaffirmation that you want is to make sure that all other provisions remain enforced. So aside from the things that you might be changing or modifying or revising under these agreements, any other provision of the underlying loan documents is still validating force and you want to make sure that that's there because you don't want anybody to argue down the line that you en by entering into this agreement might have waived or otherwise for bear from any of the other rights or provisions under the loan documents.

Some additional key provisions here that you will want in all of these agreements. First, a release of claims going to be very important if you can get this so it's all known and unknown claims, you will want a waiver of these or a release of these from the borrower. That way you're kind of starting fresh, especially if you know that there was maybe an issue at time of signing the loan documents. This will help cover for that. So definitely include that release of claims within the document. Like I was saying before, you want to define future defaults so other defaults under the loan documents like a transfer of the property, other creditors taking adverse action, seizure repossession or other adverse property action fraud or other misrepresentation. They should generally already be within your loan documents, but if they're not, include them here. But like I was saying earlier, if part of a condition to the forbearance agreement is having the property under contract to sell by June 30th, what happens if on July 1st that isn't the case? Make sure that those future defaults are also defined.

Also, you're going to want some conditions proceeding to the effectiveness of the agreement. So for example, maybe there's a large payment required, whether that's a legal fee for drafting the agreement, a processing fee for your internal team to go through and make sure that any changes are documented in the system. Maybe it's a principle paydown of a nominal amount or maybe a larger amount prior to the effectiveness of the agreement. You're going to want to make sure that that's clearly written in there to explain that, yeah, you might have signed this document, but we never received that payment. So this agreement is not yet in effect until we receive that payment.

Another one that I like to see as well is evidence of maintenance of taxes or insurance especially once you start getting into extending out maturity dates and things like that, you might run into insurance lapses or failure to make tax payments by the borrower. If they're struggling paying your loan, they might be struggling with these things too. Make sure that you have evidence that all of those are current prior to the effectiveness of that agreement. You don't want to extend the loan out or otherwise kind of continue on alone and then find out down the line that taxes and insurance have been unpaid and all sorts of problems from that.

And then last, obtain a title policy date down to see if any other defects exists. This is really important. Sometimes people push back on this even if it's just a simple extension of the maturity date and they're like, no, it's fine. I don't need a full date down. I don't need to get title involved. It is really important you do this because this is where you find weird things happening. You'll find out if a junior lien or a mechanic's lien has been recorded against this property. You would want to know about that. Maybe you want that paid down or paid off or evidence that it's current prior to the effectiveness of your modification agreement or your forbearance agreement. What if they've changed ownership? What if they transferred the property to somebody else? That's another default under most loan documents. So you're going to want to make sure that the borrower hasn't done something like that. These date down endorsements are not that expensive and it's important to get title involved, especially if you end up doing something down the line like a deed in lie or whatnot. You really want to make sure title's involved along the way so that they know what's going on. And also to protect your interests as lender so that if upon a foreclosure down the line, you're making sure that your priority remains intact and that there's nothing else sitting out there that could affect your interests.

So now we'll talk about foreclosure. Foreclosure. In an ideal world you've already exhausted those other revenues. You've tried a forbearance or a modification, you've inquired about a deed in lie and you've tried to do these things, but then the borrower's just not budging. They're not working with you, they're not talking to you. Okay, let's talk about foreclosure. Generally, when I'm proceeding with a foreclosure, I want to see at least a monetary default and that other loss mitigation options don't work. Sometimes people will proceed with foreclosure just based on a transfer of the property or things like that, but oftentimes those things can be remedied fairly quickly simply by reaching out to the borrower with a demand letter and requiring charging default interests and requiring them to transfer it back within a certain amount of time. Other examples, maybe your loan is completely current, but a junior lien that you're aware of is in default.

Yes, technically could be a default under your loan, but if your loan is really not is performing and it's in good shape, it's hard for me to want to do this. And also I don't want to see just one mis payment. Generally I want to see at least two because after one mis payment, you should ideally be reaching out to your borrower, figuring out what's going on, seeing if they can make another payment, and then if they don't, okay, let's proceed with the foreclosure. But if you reach out, if somebody doesn't make a payment and then on day 11 after a grace period you're like file foreclosure, maybe the borrower doesn't know that their ACH payment was declined or something happened make sure you reach out and talk to them because they also might not know that their loan is in default and this will avoid a lot of headache and legal fees if you just talk to them a little bit. First.

With foreclosure you have two different options judicial and non-judicial, Judi, non-judicial, also known as a trustee sale. Generally it depends on the state that you're in that with which option you'll have Deed of trust states will usually have both options versus mortgage states generally only have the judicial option but some mortgage states also permit some non-judicial foreclosures especially with commercial deals and transactions. That can be an option. So make sure you're reaching out to council in the state the properties lo located so that which option or options you have. And then also getting council involved generally might be helpful because it could be strategic in states like California for example. You can do both. You might not be able to get final resolution on both at the same time, but you can at least proceed with both and then make a decision down the line as to which option you end up choosing. And that might be strategic to kind of go at a giant defense against the borrower that is troublesome in wanting to get them to pay.

So going through the foreclosure process generally. So here at the firm I manage our non-judicial foreclosure process for California foreclosures. So if you have questions about our judicial process I'd be happy to refer you to our litigation team who handles those. And if you have questions about any type of foreclosure outside of the state of California, reach out to me. I do have referrals for you in other states but even so this general overview is fairly typical for non-judicial foreclosures in all states and it should be a process that you kind of go through before you actually go even start the foreclosure. So first it's going to be that demand letter, which I think is extremely important. Then for non-judicial it would be a notice of default only some states require this, California does then a notice to sale and then the actual auction or sale date.

So first is a demand letter. Your loan documents should state whether notice to your is necessary that there has been a default. Usually well written loan documents will waive this, and so you do not as lender have to notify the borrower that there is a default under the loan documents. However it is best practice even if no notice is required to always send a demand letter to your borrower to be like, Hey, you missed a payment, this is a default. Please cure it within 10 days, 15 days, whatever. Otherwise, lender will proceed with their options under the loan documents to enforce their lien.

It's best practice for a couple reasons. First here it says it'll set the record for litigation. So it really starts the trail, the paper trail of you trying to reach out to that borrower to help cure any default or issue. Also, like I was saying before, maybe the borrower's just not aware that they're in default. Maybe something like, like I said, maybe their ACH didn't go through and they didn't realize or something could have happened and they're unaware that there's default. This'll help get that communication going and if you can do this, it'll really help borrowers want to work with you to clear it up. And also there's typically a 10 day demand requirement to bring the loan current and to cure any default. Sometimes it might be a little bit longer, depends on what the lender wants to do, but I would say at least 10 days is probably a good period of time to say, Hey borrower, here's the issue, please resolve it by this date. Thank you.

Assuming that demand letter goes nowhere and if the borrower doesn't reply or doesn't bring the loan current or whatever it is in California, at least the next step in non-judicial foreclosure would be to record a notice of default. Please note that consumer loans have additional waiting periods under RESPA and different requirements for how long payment defaults for have to be in place. If you have any questions about that, please reach out. Business purpose loans do not have a federal restriction. However, for example in California there's recently passed legislation that's a result of covid that does put additional advanced notice requirements on certain types of borrowers with certain types of properties before you can start a notice of default. So definitely reach out to counsel before you just start recording a notice of default things have changed with the pandemic and you just want to make sure that what might have been true five years ago is still true today.

But after the demand letter is delivered, record that notice of default. There's usually a statutory waiting period depending on the state, 30 to 120 days until you can move to the next step in the foreclosure process, which is typically the notice of sale in California. It's 90 days from recording the notice of default until you can record a notice of sale. And then another little helpful note is say you have multiple properties that are on different deeds of trust securing the same note you would need one notice of default for each of those deeds of trust and they will each incur their own fees. So it's really helpful to now if you have multiple deeds of trust to carrying alone that you'll need a different N O D for each property or for each deed of trust, assuming any waiting period has gone up. Or in some states you can just jump right to this step in the process is the notice of sale and this is going to set the initial auction date.

It might not be the end auction date you might decide to postpone because maybe the borrower has finally reached out because now there's a date certain where they might lose their property and they're like, okay, wait, hold on, help me out. And so you might agree with them via forbearance agreement at this time to postpone that sale. So this notice of sale will just set that initial auction date. But yeah, the it's the next step in the process. And then depending on the state, there are various timeframes and requirements that happen between notice of sale and the actual auction date about publication requirements, notice requirements, things like that. But generally in California it's 21 days, generally under a month until the notice of sale is recorded and the actual sale date occurs on the day of auction you want to think about your bidding strategy.

So our initial recommended practice is still in place except for loans that may be subject to other additional legislation in California SB 10 79. If the property is a one to four family property this pinning strategy does not apply but assuming it's commercial or multifamily property in California this is our recommended practice. Generally come out with a starting bid first, figure out what's the total amount owed under this loan as of the sale date, and then figure out what your starting bid is going to be. Also figure out what your maximum bid is going to be. That might be the total amount you're owed or it might be something less than that. If you're like, you know what, I would be okay walking away with this amount of money and then figure out your increments for bidding. So say the total amount owed under the loan with everything included is a million dollars.

You might start at $500,000 and go up in $25,000 increments until that total amount of million dollars. That's a perfectly normal bidding strategy. And the general tip on that is not to start at the loan amount or really at the total amount owed because in California at least you could do a breach of guarantee suit where any difference between what the property sells for at auction and the total amount owed to you as lender you could go after any guarantor for that difference via a breach of guarantee suit. Like I was saying though, if this is a wonderful family property, at least in California SB 10 79 is in place and it causes a lot of issues. We're not going to talk about them here but this recommended bidding strategy would not apply for that kind of a loan. If you have questions about that, feel free to reach out. I'm happy to advise you through that process.

The last little item that I'll mention is multiple property issues for the day of auction. So if you have multiple properties securing the same loan, it might also be a strategic call for you to talk to your council about how you should bid on each property. So maybe you're saying if that total loan balance at the end of the day is a million dollars, then you've got two properties securing it. The one that's going first, you think you might want to start with that one because it's more valuable and you think people might bid on it, but stop the bidding at a certain point. Maybe you stop the bidding at $700,000 on that and then when you go to sale on the other property, you have another $300,000 available to you for bidding at that property. It's definitely a strategy that you should talk through with council unless you're really familiar with foreclosures on loans with multiple pieces of collateral.

But it's definitely something that's important because that strategy can really help you as lender going down the line judicial foreclosure process very briefly again, we have counsel here at the firm that can help you in California. If it's outside of California, I'd happy to be happy to refer you. But some real basics for a judicial foreclosure is that you have to file a lawsuit. There's typically a period of time where the borrower has to answer and if they don't, you could theoretically get a default judgment and then proceed with a judgment of foreclosure and sheriff's auction. That would be the best case scenario Under these situations I would assume that's fairly rare and borrowers do respond. So in any event, you might have to go through the whole foreclosure lawsuit but at the end of the day, assuming you win either by default judgment or through the results of the lawsuit you would get a judgment of foreclosure entered and a sheriff's option permitted a sale date would be set and after that sale depending on the state, you the borrower might have a right of redemption where they could purchase the property back at the loan balance.

So that's something to be aware of in states where judicial foreclosure is your option or if you're opting for a judicial foreclosure in another state and this is generally going to cause a cloud on title during that redemption period. So even if say you in the auction at the or end of it just know that it be difficult to sell that property right away because of this cloud own title.

Little comment about eviction. So say you foreclose a property and you are the winning bid bidder either as lender or a third party going into bid you need to consult with eviction council. If you know that people are in that property don't assume that just because are the title owner of the property that you can change the locks, enter the property and just take it over. Doesn't matter how bad the borrower other tenants are acting you probably need to formally evict them before you can do that. So definitely reach out to eviction council if you need a referral. We do have several. This is not unfortunately, you would think that you own the property and you can walk right in. Chances are that's not an option, especially if you know it's occupied like we were talking about before too. We have breach of guarantee lawsuits available.

So that deficiency balance is established at the time of sale. So in that example, the total balance owed to lender as of the sale date was a million dollars. The property sells for $750,000. So there's a $250,000 deficiency between what the property sold for auction and the total amount you could seek a breach of guarantee, so suit against the guarantee guarantor on the loan if you have one for that balance. Depending on how large that deficiency balance is, it may or may not be worth it because it can be expensive at time consuming, but if it is a large deficiency, that may be worth it for you. And we generally recommend to retain a private investigator to conduct an asset sale before you proceed as well to make sure that the guarantor even has assets to pay that deficiency before you proceed with any legal proceeding.

Last little note on judicial foreclosures they can also be combined with other actions. So maybe there's a quiet title action, maybe part of the issue with the foreclosure and the default was borrower maybe transferred the property to somebody else or took out another loan or there's some other issue at play. In that case, you might need a client title action. You could do that in conjunction with a judicial foreclosure depending on the type of property it might be done in conjunction with a receivership. Basically the court will appoint a receiver to go in and collect any rents or help out with any construction, things like that. Basically manage that property. So you might do that in conjunction with a judicial foreclosure, but usually the cost is very high, so it's only going to be done on large commercial properties or multifamily properties, that kind of thing. And sometimes they're able to be run at the same time as the trustee sale, so know whether that's an option for you in your state.

And then finally have extraordinary relief. So all of these other options don't work. So like we were saying, seek receivership. If the economics make sense, usually it actually doesn't make sense and courts are pretty reticent to provide because they're basically saying, without a formal judgment on this thing, we're going to allow somebody else to come in and manage this property. It's really expensive to do so may not make sense. And then a prejudgment attachment of assets. You could freeze bank accounts of any borrower or guarantor. These are other options that you might have depending on what's happening with the default under your loan and maybe the relationship or prior experience with that borrower.

And that's that. We have a few, sorry, a few q and a, so I'll try to get to those quickly for you. Remember, if you have any questions, feel free to put them in the q and a little bubble on the Zoom webinar not the chat box. Second reminder that we will have a follow up email going out with the slides with the recording of this presentation as well as some information articles and that kind of thing related to this topic. My contact info is here as well in case you have any questions that you'd like to reach out for. And then finally, we do have our Innovate conference coming up in a few weeks. Information about innovate will be found in that email, so if you have not signed up look for the details there and reach out to us if you're interested.

Sorry, let's see. So going into the q and a, what modifications are allowed to where you would have to notify or obtain consent from a junior lien holder? This is a great question. So if for example, you have a million dollar loan and there's a junior behind you for $500,000 and you want to advance additional amounts under your modification agreement, typically in that you would need consent from a junior lie holder and probably a subordination agreement to subordinate their lien to any additional amount that you're advancing so that you can make sure that your lien retains priority over their lien through that process. So definitely where you're advancing additional amounts under the loan. Otherwise, if it's just something where you're extending the maturity date or maybe you're increasing the interest rate or something like that, if it's not changing really the amount owed under the loan, then it's less relevant to notify a junior leader.

Next question, how often should we be reaffirming throughout the loan term? How often should we be? I'm not entirely sure I know what this question is asking, but if you're asking how often should we be reaffirming the loan balance or something like that throughout the loan term, anytime you're entering into a formal agreement, I would reaffirm anything that might be in dispute that could be the current outstanding balance of the loan, maybe the amounts of various reserves under the loan what the current defaults are anything like that you would want to reaffirm anytime a new agreement is being entered into.

Sorry, I'm just going to clear these out very quickly that we can go through question. I thought California was a single action state preventing pursuing the guarantor of foreclosure as pursued. It's if is that not true? So if you end up selling the property or the property ends at sale, either at or greater than the amount owed you would not be able to do anything there. What we're doing is a breach of guarantee suit in the event that the property sells for anything less than the total amount owed, that's permissible under California, even though we are a one action state. So if you have questions about that or want to know maybe some strategy related to that with any current foreclosures that you have, feel free to reach out and I can put you in touch with some members of our litigation team who can walk you through this process.

Another situation here, we have a $975,000 loan on a rental property. Our borrower inked a long-term lease tenant didn't pay for several months. Borrowers now about six months behind. Tenant is out of the property. It's being used for a short-term rental. Investors want to start foreclosure. What should I do? I probably, it depends on what any investor agreement you have or servicing agreement you have as far as what rights the lender, or I'm sorry, the investors might have to direct you to take action but assuming if the borrower is able to bring payments current via forbearance agreement or some sort of modification and the investors on your loan are willing to enter into something like that, that's probably the best step is I would probably talk to that borrower, figure out what their options are to bring that loan current and see if your investors are willing to deal with that. If you want to email me, I'd be happy to work with you to get that together and see if we can work out some sort of agreement with both the borrower and your investors.

Next question. How do we know if the operating agreement they send us is accurate and the most up to date? So great question. Sometimes you won't know, but that said is you usually have backup methods of verification. So you can typically review on the secretary of State who they've named as their managers, and if the operating agreement isn't matching, that's usually a red flag to figure out why. It might just be sloppy documentation or it could be that there's some sort of fraud happening. Otherwise, if it's generally consistent from time of loan origination to whatever agreement that you're entering into, it's probably fine. And also what you want to do is run all of these documents through title so that you make sure that you get any sort of title insurance as necessary. If there's any confusion about authority under the documents so that that's in covered under your title insurance.

But generally if there's major changes to parties so say a time of loan closing there's an L L C and Melissa Marella is the manager and she is one of the members. And then John Smith is the other member. And then at the time of the forbearance agreement, we just have John Smith as the manager and the member. And you're like, what happened to Melissa? Usually what I would want to see is some sort of agreement signed by Melissa saying, I'm no longer the manager and I'm selling my interests of this in this company over to John Smith. You'll want to see that documented and signed by the person who's using anything under that operating agreement.

Do you have priority on the property if you are a first lien over other unsecured lenders if borrower files for bankruptcy? I believe that is true. However, I am not a bankruptcy attorney, so if you'd like to reach out, I can put you in touch with some of our bankruptcy attorneys here and they'd be better answering that for you. Another question, what if you are not advancing additional funds but are adding back payments onto the loan increasing principle? Do you still need junior loan approval? And that situation? I might want it especially if it's going to be tacked on increasing the principle balance. Because basically what you're saying is, okay, what was originally a million dollar loan isn't now a million and $50,000 loan and you want to make sure that those additional amounts are still in senior position. I would argue something like this probably makes sense that it is automatically covered and would still retain its priority over any junior lien holder.

But just to be safe, I would probably reach out changing the interest rate on my first on a modification. Wouldn't that need the second to allow it? No, you wouldn't. You're not changing. Yes. I mean in the sense that payments might be increasing, it might affect the borrower's ability to debt service their second, but otherwise that's not doing anything. Like the reason that you would want a junior to consent if you are increasing the principal balance is because you want to make sure that any additional principal is actually still senior, their junior. So if for example, you have that million dollar loan and a junior for 50,000 or 500,000 and then you're going to advance another 500,000, if you don't get consent from that junior lien holder that that $500,000 that you're adding on is senior, it won't be senior. And so if the junior were to foreclose, it would wipe out that additional 500,000 to advanced unless you were in a lot of litigation and you can somehow argue that it's first. So that's why when you're adding additional amounts, you want consent from those junior lie holders to make sure any new amounts that you're advancing are still senior to their lie. So changing an interest rate is not something like that. So I wouldn't have concerned about it. Junior, they're there.

Is it required to record loan modifications or are there certain situations where it's okay not to have them recorded? I generally record them and recommend recording them every single time, even if it's just a notice that the loan has been modified and doesn't anything about what is being modified is we want to put the world on notice that something has changed from this underlying loan. It might be the maturity date it might be the principal balance, it might be the interest rate, but it's something that anybody looking at title might want to know, Hey, there's been a change to this loan. I thought this loan was this kind of loan, but this modification is telling me that it might be something else. I should reach out and inquire what's going on there. I recommend doing that. And then also when you're recording them, typically that means you're getting title involved, which means they're also going to issue a date down, reaffirming your lean position, making sure there's nothing else on title popping up that could affect your lean position. And so it's just best practices to get them recorded, to get title involved.

What are the different defaults possible aside from regular interests or predated principle amortization? Do you mean late penalties and other fees passed due or something else? Default could be anything. It could be what you're saying. It could be a missed payment, mis maturity date. Maybe late payments that have accrued late charges that are unpaid. It could also be a transfer in the property. It could be a transfer in the ownership of the property. Maybe it's a construction loan and they were supposed to complete construction by a certain date and they didn't. That could be a default. It really depends on the loan and the underlying provisions of it to know what the default could be. But it could be anything. You could make anything. Maybe there's an environmental concern at the property and you're requiring an environmental report to be done within 90 days of closing, and they didn't do that. That could be a default. So it really is specific to the loan itself. So you'll obviously have your standard defaults that would apply in any loan but you could have something more specific that could become a default as well.

And then the last question that I have is how does a borrower bankruptcy effective foreclosure that is if when the bankruptcy is dismissed as a foreclosure clock resume, where it was at the time of the filings? Great question. It's extremely frustrating. We will get right up to the sale date in the morning of the sale or the day before the sale. We get a notice that the borrower has filed bankruptcy. It immediately pauses. So you can't proceed with the foreclosure, you have to postpone the sale. You do not have to rescind the N O D or the notice of sale. You can keep basically, once the bankruptcy is dismissed or you get relief from stay, you can pick up right where you left off. That's a common misconception. And people are like, oh, you have to cancel the entire foreclosure. You do not. You just have to keep postponing until the bankruptcy is addressed and you get official either relief or dismissal. So that's at least a good part of that. But it is extremely frustrating because usually it's a last ditch effort and you know, just something that you unfortunately do have to deal with sometimes in a foreclosure.

And I believe that is it. Thank you all very much. Like I said, there will be an email following with the slides, with the recording, with some articles, with information about our conference. If you have any questions for me, my contact information is here. Thank you. All for joining. I really appreciate it. Have a wonderful rest of your day.

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