Default and Foreclosure - Part 2 - Chapters 70-72

Question 1

Distinguish foreclosure proceedings as either judicial or nonjudicial

Answer 1

Judicial foreclosure is the court-ordered sale by public auction of the secured property. A Judicial foreclosure is the only foreclosure method which allows a mortgage holder holding a RECOURSE DEBT to obtain a money judgement against the borrower for any deficiency in value of the secured property to satisfy the debt. The judicial foreclosure process can last from eight months to multiple years before it is completed.

Alternatively when a trust deed holder non-judicially forecloses by a trustee’s sale, the property is sold as authorized by the trust deed provisions at a public auction, call the trustee’s sale. Trustee’s sale are considerably less expensive and quicker than judicial foreclosures.

Question 2

Discuss the procedural process of judicial foreclosure and advise a client of their right to reinstate a mortgage in default or redeem a property following a judicial foreclosure sale

Answer 2

The first step in a Judicial foreclosure is filing a complaint in the superior court of the county where the property is located. At the time the lawsuit is filed, the foreclosing mortgage Holder records a notice of pending action against the secured property, also called a Lis pendens, to cloud title of the secured property.

Until a foreclosure decree ordering the sale is issued by the court, the borrower has the right to reinstate the mortgage by bringing any delinquencies in the note and the trust deed current.

If the borrower does not reinstate the mortgage the court will then appoint a sheriff to conduct the sale by recording a WRIT OF SALE and NOTICE OF LEVY.

At least 20 days before the sale, the notice of judicial sale is:

• served on the borrower personally or by mail
• mailed to any person who has recorded a request for notice of judicial sale
• posted in a public place in the city or Judicial District where the property is located, and on the property itself
• published weekly in a local newspaper of General circulation

The sheriff sale is conducted as a public auction and the property is sold to the highest bidder. A certificate of sale is issued to the successful bidder on the completion of the judicial sale.

The successful bidder will not become the owner of the property until the Redemption period Expires. The owner can redeem the debt by paying the Redemption price.

Question 3

Calculate any deficiency in value an owner may owe a mortgage holder after a property has been sold at a judicial foreclosure sale

Answer 3

The remaining balance owed on a note may be greater than the fair price of the mortgage holder security interest in the real estate. The spread when the fair price is lower than the balance due is the deficiency in the value of the property to cover the debt.

A money judgment for the deficiency in the property value to fully satisfy the debt is available to the mortgage holder if not barred by anti-deficiency Statute. The mortgage holder is awarded a money Judgment at a fair value hearing following the Foreclosure sale.

Question 4

certificate of sale

Answer 4

A CERTIFICATE OF SALE is a certificate issued to the successful bidder on the completion of a Judicial sale of a property. Although the bidder purchased the property at the public auction, they will not become the owner of the property or be able to take possession of it until the applicable Redemption period expires. The certificate of sale reflects the owners continuing right to redeem the property and avoid losing it to the highest bidder.

Question 5

fair value hearing

Answer 5

A FAIR VALUE HEARING is the court proceeding at which a money judgment is awarded for any deficiency in the secured properties fair market value at the time the judicial foreclosure sale to fully satisfy all debt obligations owed the mortgage holder a fair value hearing takes place within 3 MONTHS after the Foreclosure sale and that is when the amount of the deficiency is set by the court.

Question 6

foreclosure decree

Answer 6

The FORECLOSURE DECREE is a court judgement ordering the sale of mortgage property. Until the court enters a judgment ordering the sale of secured property, called a foreclosure decree, the borrower has the right to bring the delinquencies current. A foreclosure decree ends the reinstatement period. A foreclosure decree orders the sale of the real estate to satisfy:

• the outstanding debt and
• cover foreclosure sale expenses incurred by the mortgage holder

The FORECLOSURE DECREE also states whether the borrower will be held personally liable for any deficiency in the property’s fair market value to satisfy the debt owed.

Question 7

judicial foreclosure

Answer 7

A JUDICIAL FORECLOSURE sale is conducted by a court-appointed receiver or Sheriff, call the levying officer. Judicial foreclosure is the court-ordered sale by public auction of the mortgage property. Also known as a Sheriff sale.

Question 8

levying officer

Answer 8

A JUDICIAL FORECLOSURE sale is conducted by a court-appointed receiver or Sheriff, called the LEVYING OFFICER. Judicial foreclosure is the court-ordered sale by public auction of the mortgage property. Also known as a Sheriff sale.

Question 9

lis pendens

Answer 9

A LIS PENDENS is a notice recorded for the purpose of warning all persons that a title or right to possession of the described real property is in litigation. At the time the lawsuit is filed, the foreclosing mortgage holder records a Notice Of Pending Action (NOPA) against the secured property, also called a lis pendens. A Lis pendens places a cloud on the title of the secured property, giving notice of the judicial foreclosure action and subjecting later acquired interest to the results of the litigation.

Question 10

litigation guarantee

Answer 10

The mortgage holder foreclosing judicially needs to obtain a LITIGATION GUARANTEE of title insurance. The litigation guarantee is a title insurance policy which lists all parties with a recorded interest in the property and their addresses of record, guaranteeing that all persons with a recorded interest in a property are named and served in litigation, including Junior interests.

Question 11

money judgement

Answer 11

A MONEY JUDGEMENT is an award for money issued by a court resulting from a lawsuit for payment of a claim. A judicial foreclosure is the only foreclosure method which allows a mortgage holder to obtain a money judgment against the borrower for any deficiency in the value of the secured property to fully satisfy a recourse debt. Only when the note evidence has a recourse debt may the mortgage holder pursue a money judgement against the borrower for any deficiency in the property’s value to fully satisfy the debt.

Question 12

nonjudicial foreclosure

Answer 12

NON-JUDICIAL FORECLOSURE is when a property is sold at a public auction buy a trustee as authorized under their power of sale provision in a trust deed.

Question 13

probate referee

Answer 13

A PROBATE REFEREE is an appraiser appointed by the court in a Judicial foreclosure to advise the court on a property’s fair market value on the date of the judicial foreclosure sale. The mortgage holder and borrower present evidence at the fair value hearing to establish the property’s fair market value on the date of the Foreclosure sale. The court may appoint an appraiser, call the probate referee, to advise the court on the property’s fair market value.

Question 14

recourse mortgage

Answer 14

A RECOURSE MORTGAGE is a Mortgage Debt in which a lender may pursue collection from a property owner for a loss due to a deficiency in the value of the secured property to fully satisfy the debt if the lender forecloses judicially.

Question 15

Apply anti-deficiency rules available to a buyer to avoid mortgage holder claims of personal liability for payment of nonrecourse mortgage obligations.

Answer 15

Mortgage Debt under California’s ANTI-DEFICIENCY statute is broken into two types of mortgage debt obligations. All Mortgage Debt is categorized by responsibilities for payment as either: non-recourse debt or recourse debt..

Non-recourse debt is by statute covering mortgages in two sets of facts:

• purchase-money debt of any priority on title (first, second, or even third trust deed), is a mortgage which funded the purchase or construction of a home buyers 124 unit owner-occupied residence or
• seller financing, also called carry back paper = credit sale = installment sale, on the sale of any type of real estate when the debt is secured solely by the property sold.

A mortgage holder holding a non-recourse mortgage debt may NOT pursue the homeowner personally to collect for a deficiency in the secured property’s value to fully pay off the nonrecourse debt following any type of foreclosure Judicial or non-judicial foreclosure, unless the owner maliciously injures the property causing its value to drop.

Recourse debt is any mortgage other than a mortgage classified as a non-recourse debt. A mortgage holder may only pursue a homeowner for a loss on a recourse mortgage due to a deficiency in the price of the secured property through judicial foreclosure, and then only if:

• the court appraised value of the property at the time of the judicial foreclosure sale is less than the debt owed
• the bid is 4 less than the debt owed

Question 16

Advise homeowners on CA anti-deficiency protections available to them on trust deed notes, refinancing, mortgage modifications and short sales.

Answer 16

A REFINANCED PURCHASE MONEY DEBT only retains its non-recourse status if all three of these conditions are met:

• the mortgage holder of the original purchase money debt is the refinancing mortgage holder
• the refinance debt is substantially the same debt as the original purchase money debt
• the refinance debt is secured by the same property as the original purchase money debt.

If a MODIFIED MORTGAGE is secured by the same property as the original purchase money mortgage, then modification of payments, interest rates or due dates do not change its non-recourse status of the modified mortgage.

In a SHORT PAYOFF or SHORT SALE, regardless of the non-recourse or recourse status of the mortgage, a mortgage holder who agrees to accept a short payoff or short sale from an owner occupant of a 124 unit residential property is barred from seeking a money judgment against the owner for any loss incurred on the short sale.

Question 17

Describe deficiency and anti-deficiency rules involving RECOURSE DEBTS.

Answer 17

RECOURSE DEBT is any mortgage other than a mortgage classified as a non-recourse debt. A mortgage holder may only pursue a homeowner for a loss on a recourse mortgage due to a deficiency in the price of the secured property through judicial foreclosure, and then only if:

• the court appraised value of the property at the time of the judicial foreclosure sale is less than the debt owed
• the bid for the property is 4 less than the debt owed

Question 18

purchase-money debt

Answer 18

A PURCHASE MONEY DEBT is a standard mortgage. It is a mortgage which funds the purchase or construction of a 124 unit owner-occupied residence also called a non-recourse debt.

Question 19

short pay-off

Answer 19

Anti-deficiency protection has also been extended to homeowners who negotiate SHORT PAYOFFS or SHORT SALES with their mortgage holders and close a short sale to dispose of their home. A short payoff or short sale is a sale in which the lender accepts the net proceeds at closing in full satisfaction of a greater amount of mortgage debt. This means that the lender accepts a mortgage payoff that is less than the Mortgage Debt, however the lender considers the mortgage fully paid off or satisfied.

Question 20

anti-deficiency

Answer 20

ANTI-DEFICIENCY is California’s legislation limiting a mortgage holders ability to recover losses on a default when the mortgage properties value is insufficient to satisfy the Mortgage Debt. Mortgage Debt under California’s anti-deficiency statute is broken into two types of obligations. All mortgage that is categorized by responsibilities for payment as either recourse or non-recourse.

Question 21

Understand the government policies encouraging tenants to become homeowners through the mortgage interest tax deduction (MID)

Answer 21

The federal government encourages residential tenants to become homeowners by allowing them to reduce their income taxes if they finance the purchase of a residence or vacation home. Under the MORTGAGE INTEREST DEDUCTION (MID) tax scheme, the interest accrued and paid on mortgages funding the purchase price or cost of improvements for a principal residence or second home is deductible from the homeowner’s Adjusted Gross Income AGI as an itemized deduction which reduces the owners taxable income and in turn their income tax.

Question 22

Distinguish when interest paid on a home equity mortgage secured by a principal or second residence is tax deductible

Answer 22

Interest paid on Home Equity Mortgages, secured by the properties owner’s principal residence or second home, is deductible when the funds are used for the purchase, construction or substantial Improvement of the property.

Question 23

Advise buyer on the ceiling thresholds for mortgage interest deductions

Answer 23

Two categories of mortgages exist to control the deduction of interest paid on any mortgages secured by the principal residence or second home.

Interest accrued on the following mortgages may be deducted from Adjusted Gross Income-AGI to lower an individual’s taxable income:

• interest on the balances of “purchase or Improvement mortgages” up to a combined principal amount of $750,000 or up to $1,000,000 and
• interest on all other mortgage amounts up to an additional $100,000 in principal, called “home equity mortgages”

Question 24

Determine a buyers income tax reduction due to the interest paid on mortgages for the purchase or improvement of a principal residence or second home by use of a tax analysis form.

Answer 24

MORTGAGE INTEREST DEDUCTIONS (MID) for the first and second home reduce the property owners taxable income, and this reduces the amount of tax they will pay. As an itemized deduction, the accrued interest paid is subtracted from the owners Adjusted Gross Income AGI under BOTH the Standard Income Tax (SIT) and the Alternative Minimum Tax (AMT) reporting rules.

Question 25

Discuss tax deductions for Refinancing and Property Value Ceiling

Answer 25

When an owner Refinances a purchase/improvement mortgage, interest may only be written off on the amount of refinancing funds used to pay off the principal balance of the original mortgage.

Interest paid on any portion of a mortgage balance which exceeds the FMV fair market value of a residence is not deductible. In practice, the FMV fair market value rule applies almost exclusively to home equity mortgages.

Question 26

fair market value

Answer 26

FAIR MARKET VALUE -FMV is the price a reasonable unpressured buyer would pay for property on the open market. Interest paid on any portion of a mortgage balance which exceeds the fair market value FMV of a residence is not tax-deductible.

Question 27

home equity mortgage

Answer 27

HOME EQUITY MORTGAGE is a junior mortgage encumbering the value in a home remaining after deducting the principal on the senior mortgage from the market value of the home.

Question 28

itemized deductions

Answer 28

ITEMIZED DEDUCTIONS are deductions taken by a taxpayer for allowable personal expenditures which, to the extent allowed, are subtracted from Adjusted Gross Income AGI to set the taxable income for determining the income tax due, call schedule A.

Question 29

mortgage interest deduction (MID)

Answer 29

MORTGAGE INTEREST DEDUCTION - MID is an itemized deduction for income tax reporting allowing homeowners to deduct interest and related charges they pay on a mortgage encumbering their primary or second home.

Question 30

points

Answer 30

POINTS paid to a lender to originate a mortgage are considered prepaid interest for both tax and financial purposes. These points are subject to different deductibility criteria than standard interest. As prepaid interest and under the general rule of deductibility, only the fraction of the points paid which accrues annually over the life of the mortgage may be deducted against that years income.

One point equals 1% of the mortgage amount. Points are also known as a fee charged by a lender as prepaid interest which in turn reduces the note rate on the mortgage, with a equally 1% of the amount of the mortgage.

A specific exception exists for points on mortgages for principal residences which may be fully deducted in the year paid. For example:
As an exception to the life of mortgage accrual reporting, and thus a loophole to avoid taxes, the entire amount of the points paid on mortgages that assist in the purchaser Improvement of an individual’s principal residence is allowed as a personal deduction in the year the mortgage originated. The immediate deduction for All Points paid in connection with these homeowner mortgages is another government subsidy, part of the overall policy to encourage homeownership in lieu of renting. The points deduction exception for a principal residence does not include points paid on mortgages secured by a second home such as the ownership of a vacation residents. Further the deductibility of the mortgage point in the year paid, instead of over the life of the mortgage, depends on who paid the points - the buyer, the seller, or the lender.

Question 31

principal residence

Answer 31

A PRINCIPAL RESIDENCE is the residential property where the homeowner resides a majority of the year.

Question 32

qualified interest

Answer 32

Interest deductions on home mortgages are only allowed for interest which has accrued and been paid, called QUALIFIED INTEREST. Qualified Interest is interest on a mortgage which has accrued and been paid and is allowable interest deduction for ownership of a first and second home. Interest on first and second home mortgages is deducted from an owner’s adjusted gross income AGI as an itemized deduction.

Question 33

second home

Answer 33

A SECOND HOME is an individual’s alternative residence where they do not reside a majority of the year

Question 34

adjusted gross income (AGI)

Answer 34

ADJUSTED GROSS INNCOME (AGI) is the total of the taxpayers reportable income and losses from all three income categories.