The Loan Transaction

Question 1

Loan Transaction Timeline

(casebook)

Answer 1

1. Lender commits to issue loan via commitment letter
2. Lender performs due diligence and examines borrower’s financials and appraises collateral
3. Lender performs title search- often combined with borrower/purchaser title search
4. Closing- lender disburses money, etc.
   
   1. If things go well: borrower pays loan and lender executes accord and satisfaction of the mortgage
   2. If things go badly: borrower defaults and lender forecloses or takes steps just short of foreclosure including acceptance of deed in lieu

Question 2

The Loan Commitment

(supplement)

Answer 2

the lender will agree to make a loan to the borrower on certain terms (amount of loan, interest rate, etc.). Prior to the loan, the lender will inspect the state of the seller’s title and demand assurance about the quality of the property in the same manner as the purchaser. The reason: If the lender ultimately forecloses and takes the property, the lender becomes the owner. The lender must therefore put itself in the shoes of a purchaser of property when it makes the loan.

Question 3

Closing

(supp)

Answer 3

the borrower will receive the loan proceeds, and the lender will receive a promissory note and mortgage signed by the borrower. The lender in a loan transaction is restricted by rules that prohibit the charging of usurious rates of interest.

Question 4

Borrowers Default of the Loan

(supp)

Answer 4

After closing, the borrower might fail to make mortgage payments or cease taking care of the property subject to the mortgage. This is equivalent to the purchase and sale transaction’s postclosing phase. However, in this case, it is the lender and not the purchaser who discovers that he has been burned. At this point, the lender will seek to establish control over the property, take any rentals owned to the borrower, or perhaps have the court appoint a receiver.

Question 5

Foreclosure

(supp)

Answer 5

1. Foreclosure terminates the borrower’s title interest in the property and ends the borrower’s equity of redemption.
2. Judicial foreclosure: when the requirements of due process and trial are met under the court.
3. Non-judicial foreclosure: permitting the lender to foreclose without oversight of the court. The mortgage document providing non judicial foreclosure will be titled either a deed to secure debt or a trust deed. In each case, the document will contain a power of attorney permitting the lender or trustee to sell the property for the benefit of the borrower.
4. Today, except in very few jx’s, foreclosure requires a sale. The goal is to produce a high sale value but in reality, it generates fire sale prices.
5. Courts have applied mortgage law to protect borrowers from lenders who try to say it is a long term lease, etc.

Question 6

Postforeclosure

(supp)

Answer 6

Some state statutes allow for a post foreclosure right of redemption. this allows the borrower to redeem the property within a set time frame. In essence, this means that even if a lender forecloses, the former owner of the home might have a right to get its property back, if the borrower can cobble together enough money to equal the amount of the winning foreclosure bid.

Question 7

Non Judicial Foreclosure

Answer 7

1. Some jurisdictions permit this
2. Mortgagee’s don’t want to wait for a lawsuit to pan out or don’t want to be subjected to the scrutiny of the court; therefore, the lender will be allowed to foreclose on it himself.
3. “Power of sale”- lender will demand from the borrower a mortgage document containing this
   
   1. This means, borrower grants the lender, upon borrower’s default, a right to sell the property at a private sale in satisfaction of the debt
   2. Power of sale allows the mortgagee (or trustee in certain situations) to hold a foreclosure sale without invoking the judicial mechanism
4. The mortgage document containing a power of dale is titled a “deed of trust,” a “security deed,” or a “deed to secure debt”
   
   1. All of these are mortgages
   2. Deed of trust- permits trustee to carry out the sale
   3. Security deed- permits lender to carry out the sale
5. Price: the higher the sale price generated by the foreclosure auction, the more likely creditors will be paid, and the less likely the borrower will owe a deficiency judgment.
6. Courts rarely invalidate foreclosure sales on the basis of low prices alone; the properties are usually worn, there is no broker involved, sold quickly with cash, etc.
7. 2 tests courts utilize to determine the sales price of foreclosed property
   
   1. Some will invalidate the sale if the price is so low that it shocks the conscience; the borrower’s conscience is not the measure; the question is whether the price is so low that the court- an objective 3rd party- would be scandalized by the amount paid by the purchaser at the foreclosure auction. A scandalously low price suggests fraud of some kind or collusion between the lender and purchaser
      
      1. Example: borrower owed 1 million; home was worth 800k-1.2 million and was sold for 200,000; this shocked the conscience
      2. Example: sale price of 100,000- 48.7% of the value of the home- did not shock the conscience where no deficiency judgment resulted because the sale price was greater than the amount borrower owed on the loan
   2. Courts will also focus on whether the foreclosure sale was somehow tainted by procedural irregularity
      
      1. Statutory procedural requirements
      2. Duty to exercise good faith and due diligence
      3. Mortgagee must exert every reasonable effort to obtain a “fair and reasonable price under the circumstances”

Question 8

Judicial Foreclosure

Answer 8

1. Every jurisdiction allows this
2. Means foreclosure is a lawsuit
3. Judicial foreclosure terminates the mortgagor’s equity of redemption; court then issues a foreclosure deed that is similar to a quitclaim deed
4. Many states: sale of the property and issuance of the foreclosure deed terminates the mortgagor’s right to the property
5. Other states: provide a statutory right of redemption. In these states, the foreclosure sale marks the start of the time period in which the mortgagor may redeem pursuant to the statute; in these states, if the mortgagor does not redeem, the mortgagor’s rights in the property terminate at the end of the statutory redemption period
6. Mortgagor is entitled to due process; Foreclosure also terminates all interests junior to the lien- therefore, any party whose interests might be terminated is similarly entitled to due process, including junior creditors
   
   1. One of the most important rules is that a foreclosure by the senior lienholder “wipes out” junior mortgage liens and other junior interests
7. Junior mortgagees are considered necessary parties
8. A party is necessary if the foreclosure will wipe out that party’s interest
   
   1. The foreclosure of the senior mortgagee’s lien will be valid, but it will not apply against any junior interest that was not joined to the foreclosure action. It is necessary to join the junior interests in order to terminate their mortgage lien/easement/etc.
   2. Mortgagor is a special kind of necessary party- if the mortgagee fails to join the mortgagor in the foreclosure action, then the entire foreclosure is wholly void as to all parties
9. Some parties are not necessary, but they are proper. It may be beneficial to the party foreclosing to join a party even though that person’s interest is not wiped out by the foreclosure

Question 9

In a non judicial foreclosure, does the lender/trustee have a fiduciary duty to the borrower to obtain a high foreclosure sale price?

Answer 9

Many courts say no

“A special relationship does not normally exist between a borrower and a lender, and when one has been found, it has rested on extraneous facts and conduct, such as excessive lender control over, or influence in, the borrower’s business activities.”

1. Some lenders adopt an institutional policy of bidding less than the fair market value of the property at a foreclosure auction

Question 10

Remedies for invalidated judicial foreclosure

Answer 10

1. Borrower who believes the sale to be defective may bring an action in equity to set aside the sale
2. However, even if sale is invalidated, lender’s lien is not destroyed
3. Lender’s lien continues on the property; lender will begin foreclosure process again and will hopefully do so properly; therefore, the invalidation is at best a stay of execution
4. If borrower can demonstrate the lender acted in bad faith, may be able to obtain money damages if the lender foreclosed on property knowing that the debt had been paid

Question 11

strict foreclosure

Answer 11

the lender simply completed the judicial procedure that transferred ownership of the property to the lender. However, if the property was worth more than the outstanding debt at the time of foreclosure, the lender kept this amount. This system does not make sense today because mortgages are understood to be purely security instruments.

Question 12

Foreclosure sale system

Answer 12

recognizing the flaw from above, courts developed the practice of ordering a sale of the property. The purpose of the sale is to obtain the highest possible amount of money for the property, to pay off as much of the lender’s debt as is possible.

Question 13

invalidating the foreclosure sale

(supp)

Answer 13

1. a borrower can have the foreclosure invalidated if they can prove the lender somehow depressed the number or amount of bids at the sale, also known as chilling the bids.
2. two other ground for invalidation: the price is so low as to “shock the conscience” (30% below market value), or if it results in an unreasonably low price and was accompanied by some procedural irregularity.

Question 14

foreclosure: (the six great) rules

(supp)

Answer 14

1. only a lender whose loan is in default may foreclose
2. the lien foreclosed, and all junior interests affecting the real property are terminated by foreclosure
3. senior liens and interests are unaffected by the foreclosure
4. money travels first to the lender foreclosing; then downward, by the rile of absolute priority, to junior interest holders; and finally to the borrower.
5. interests senior to the foreclosing lender do not receive any money upon the junior lender’s foreclosure.
6. only lenders who foreclose may obtain deficiency judgments.

Question 15

Postforeclosure Statutory right of redemption

Answer 15

1. in many jurisdictions, statutes provide you the right to redeem the property even after the foreclosure sale
   
   1. Typically, redemption statutes permit the borrower to redeem her property from the party who purchased it at foreclosure, by tendering to the purchaser the entire foreclosure sale price, interest at a rate set by statute, plus costs
   2. Borrower must act within a certain time limit set by the statute
      
      1. Many of these statutes even allow the borrower to remain in possession until the time period expires
   3. In a few states, junior lienholders who were wiped out by the foreclosure may exercise the statutory right to redeem, but in most cases the right is limited to the borrower

Question 16

Deficiency Judgment

Answer 16

In many foreclosures, the sale does not generate a high enough sale price to pay the outstanding balance of the loan owed to the foreclosing lender. That lender may be entitled to a judgment in the amount of the deficiency

This is a judgment against the mortgagor/borrower and entitles the lender to pursue the borrower’s personal assets in satisfaction of the debt