While many Californians have executed Deeds of Trusts on their homes or real estate investments when buying property, few fully understand precisely what they are. There is a vague feeling that they are akin to mortgages and secure loans to purchase property. There is a vague feeling that if one does not pay, somehow the Deed of Trust allows the lender to seize the property. But when pressed, most people do not fully understand a document that is probably the single most powerful document in terms of enforcing rights against them that the law allows.
This article shall briefly review the basics of a Deed of Trust and foreclosure procedure in California. Other states have different laws on their books. The reader is advised to first read the two articles, Real Estate Transactions and Debt Collection before reading further.
What is a Deed of Trust?
When one borrows money, the lender can ask for security for repayment of the loan. That security can comprise assignment of a car’s pink slip; a pledge of various assets owned by the debtor which are secured by filing what is called a UCC-1; or a pledge of real property. If real property is utilized to secure a loan, it is usually achieved by executing a mortgage or, in California, a Deed of Trust.
A mortgage is a document that allows the creditor, who is unpaid, to proceed to court to force the sale of the property to pay off the debt.
A Deed of Trust allows a similar relief, but without requiring the court process.
A Deed of Trust (D.O.T.) is similar to a mortgage, however varies in a few crucial points.
1) A D.O.T. is much easier to foreclose upon then a mortgage because the process to foreclose on a D.O.T. bypasses the judicial process. Assuming the Trustee gives the right notices (Notice of Default and Notice of Sale) the process will go to sale without court involvement at all.
2) The parties involved consist of three persons (Beneficiary(Lender); and Trustee; and Borrower (Trustor).for the D.O.T. and two for a mortgage.
3) Foreclosed real estate may be easier for the tenant who has been foreclosed upon to regain their property[1]
In a D.O.T. there will are three parties involved, a Beneficiary (the Grantor or Lender, e.g. one who gives the loan), the Trustor (Grantee or Borrower), and the Trustee (ensures that the loan is paid back, often a title company.). If someone should default on their loan then the Trustee will organize a sale of the property in order to recover as much of the loan as possible, paying off the Lender(s) and, if any sums are left over, giving them to the Borrower.
For the first ninety days after a Notice of Default is recorded, the Trustor may normally cure the default by paying off back due payments and some minor costs. Once a Notice of Sale is recorded, at least ninety days from Notice of Default, this right to cure is extinguished.
During the process in which the Trustee is selling the property the Trustor may still renegotiate a deal with the Beneficiary or pay back the loan completely and the entire process may be stopped but after ninety days, the right to force the sale to stop is limited. If the property is sold then, because of the lack of judicial mandate, the Trustor may challenge the sale if all procedures are not strictly followed.
The reason no court involvement is required is that the Trustee “owns” the property legally until the property no longer secures the loan and thus the Trustee may utilize itslegal title, in conformity with legal requirements, to pay off the loan by sale of the property in a public auction. The borrower retains equitable title and if sums are left overfrom the sale after payment of all creditors with liens and the costs of the sale, the proceeds go to the borrower.
If the borrower (the Trustor) fails to make a timely payment, often after some informal demands from the Lender, the Trustee will usually record a Notice of Default in the county in which the property is located.. After the Notice of Default is recorded the Trustor has 90 days to cure the default as a matter of right, by paying the past due balance and some costs.
During that 90 days the Trustee will normally determine the priority of loans and liens to be paid off at the sale by ordering a Trustee’s Sale Guarantee which will provide a list of the various liens placed upon the property and the taxes, then the private liens that were filed first will receive payment first[2].
After 90 days the Trustee will normally record and file a Notice of Trustee’s Sale, or N.O.S. This document requires that the public be made aware of the sale through either newspapers or other public notification processes. This notice must continue for 21 days at minimum. At the sale, the property is sold by the Trustee and the creditor(s) may bid all or part of their own loans to buy the property.
If all the costs and loans are paid off, any remaining balance is paid to the borrower. If insufficient sums are received from the sale, the creditors are paid off in order of their claims and the borrower receives nothing.
If the property is a home, the owner normally cannot face further liability on the Note, predicated on the anti deficiency statute. This means that upon foreclosure, the debt is extinguished in full for the home owner. Non residential property may result in further action against the borrower if the sale does not completely pay off the creditors.
Practicalities
Thirty four out of fifty states allow a D.O.T. to be used in place of a mortgage and in some of those states, a Deed of Trust is the only option presented to handle the repayment of a loan that uses home equity[3].
The sad fact is that after ninety days from Notice of Default, it may be impossible to cure the default though many lenders are not anxious to foreclose and will still renegotiate the loan. It is always worthwhile to discuss restructuring the debt with the Lender. One usually has nothing to lose and much to gain. Be sure to avoid waiving the protections of the anti deficiency statue without good legal advice. Indeed, good legal and accounting advice is critical to make these discussions worthwhile in most instances.
While the anti deficiency statue may eliminate further pressure from the note holder after the sale, one still faces the possibility of other debts and one’s credit is normally sullied for at least five to seven years.
After the sale the previous owner must vacate the premises though quite often the owners leave long before the sale.
It is important to recall that Deeds of Trusts are not limited to residential property. Further numerous Deeds of Trust may pertain to a single property, normally to be paid off in order of their recording. Most Deeds of Trust provide that if another Deed of Trust is foreclosed upon the property, that this becomes a violation of the terms of the Note for each Deed of Trust, so all the Deeds of Trust become due and owing.
Thus, fast action should be taken by the borrower the moment one receives the first Notice of Default. Waiting can only result in extinguishment of rights and a snow balling of claims against the Borrower.
[1] Deed of Trust vs. Mortgage Accessed August 6, 2008 http://www.diffen.com/difference/Deed_Of_Trust_vs_Mortgage
[2] California Civil Code 2897
[3] Mortgage Question: What is a Mortgage? Accessed August 6, 2008 Entered July 27, 2007 http://news.mortgagecalculator.org/mortgage-question-what-is-a-deed-of-trust/
