Chapter 11

Loan Enforcement

While it is true that trust deed investing is one of the safer ways in which to obtain an excellent return on an investment, there is always the chance that the borrower may default.  When a borrower fails to pay their debt or violates the agreement, there are ways in which the investor can remedy the situation.  This remedy is a process known as foreclosure, and simply put; it is the process through which the property in question is sold in order to satisfy the debt owed to the lender.  (Note:  Keep in mind that each state may have their own process of foreclosure, so the following information may not apply to your area)

Foreclosure

There are two types of foreclosure processes that are used in regard to trust deed investments:

1. Judicial Foreclosure – this process is the more costly method and is when the courts are utilized to foreclose on the property, and an attorney is required.

2. Non-judicial Foreclosure – This process is usually simple and fast, and is the one that is commonly used for trust deed investments.  A non-judicial foreclosure can be handled by just about any title company or an independent foreclosure company that has a good reputation.

When beginning the non-judicial foreclosure process, there are certain documents that the investor will be required to give the foreclosing officer.  Some of these documents include the original or conformed copy of the recorded trust deed and the original note secured by the trust deed. 

In addition, the agent will request a written statement regarding the default amount, the date up to which the interest is paid, the due date of the payment, and the unpaid principal balance.  As soon as the officer obtains all of this information, they will then be able to organize the foreclosure documents and prepare for the process.

Reasons why foreclosure is initiated

There are a number of reasons for foreclosure, including both monetary and non-monetary reasons.  As far as monetary is concerned, the defaults include are as follows:

®         Nonpayment of a balloon payment (when all the payment is due at one time)

®         Nonpayment of a due monthly amount

®         Advancements for each provision of the trust deed in regards to nonpayment of a senior lien, which would jeopardize the position of the foreclosing trust deed

®         Advancements for each provision of the trust deed in regards to insurance or taxes.

As for a non-monetary default, reasons for foreclosure could include an acceleration clause default because the borrower transferred the encumbering or title property in violation of the provisions outlined in the deed of trust.  Another reason is the borrower destroyed the property value by removing or demolishing the building(s), or by failing to keep the property in top condition.

Necessary documents for foreclosure

There are documents that you will require in order to begin the foreclosure process and include the following:

®         Declaration of Default (DOD) Notice of Breach (NOB) and the election to sell under the deed of trust.

®         Subsection of Trustee (SOT) (required if there is any officer other than the initial named trustee) or Non-military affidavit (required if an individual)

Under the beneficiary’s instructions, the foreclosure officer will prepare the above documents.  Once prepared, the officer will have all beneficiaries involved sign the DOD, NOB, SOT and the Non-military Affidavit with the attached notarization.   Note: Property can also be foreclosed by a senior lienor or through a deed in lieu.

Trustee Sale

In a non-judicial foreclosure, the trustee has the power to advertise and sell the property to a bidder.  The successful purchaser receives a signed trustee’s deed, which is recorded at the county recorder’s office by the trustee under the trust deed.  After the sale, there is no equitable right of redemption to the trustee or any other possible junior lien-holder.

When all is said and done, the entire foreclosure process takes approximately 110 days to complete (usually 90 days for the redemption term and 12 more for the advertising).  It is usually common for foreclosure to start, but does not carry all the way into sale.  The reason is because when an investor takes the foreclosure action, the borrower often realizes the seriousness of the matter and will make the effort to make the agreed payments on time.

Bankruptcy

Sometimes, in order to avoid the selling of their property through foreclosure, a borrower will try to obtain protection from what is known as an “automatic stay”.  In short, the borrower will file a petition for bankruptcy.

A bankruptcy petition that is filed in a federal bankruptcy court before the foreclosure sale of property stops the trustee, in a foreclosure process, from selling the property until the automatic stay is lifted.  At this time, a Temporary Restraining Order will be set in place and will delay the trustee’s sale until the state court can determine whether or not a preliminary injunction will be granted, until a trial or a full hearing can take place regarding the matter.

When it comes to bankruptcy, the investor will require the assistance of an attorney to appear in court, in order to request that relief be granted from the automatic stay.  An attorney will also be required to respond to the Temporary Restraining Order.