California Real Estate Finance
Bond, McKenzie, Fesler & Boone
Ninth Edition
© 2011 Cengage Learning created by Dr. Richard S. Savich.

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After completing this chapter, you should be able to:
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Explain the major provisions outlined in a typical promissory
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 note and deed of trust.
Outline the steps in a foreclosure procedure.
Demonstrate why lenders in California prefer trust deeds over mortgages as security for their loans.
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List five ways a borrower and lender can minimize the possibility of a default and foreclosure.
Discuss how private and government mortgage insurance has reduced the lender’s risk in granting real estate loans.
Calculate the mechanics of insurance coverage under PMI for 90 percent loans.
Describe the controversial practice known as redlining.
Explain the role of the Community Reinvestment Act (CRA).
© 2011 Cengage Learning created by Dr. Richard S. Savich.

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Collateral Provisions of Deeds of Trust
Default and Foreclosure
Minimizing Loan Defaults
Other Lending Problems
© 2011 Cengage Learning created by Dr. Richard S. Savich.

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Maintenance of the property
Hazard insurance
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Fire
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Windstorm
Property taxes and other liens
Assignment of rents
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If borrower defaults, lender can lease and apply to loan
© 2011 Cengage Learning created by Dr. Richard S. Savich.

(Slide 1 of 3)
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Trustee’s Sale
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Allowed by power of sale clause in trust deed
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Notice of Default (three months before sale)
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Send to trustor within 10 days
Could reinstate by paying all back debts and resuming payments
(right of reinstatement up to 5 days before sale)
Notice of sale (two weeks before sale)
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Post on property 20 days before
Final sale
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Highest bidder (except for trustee)
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Cash or equivalent
Surplus funds given to trustor (former owner)
No right of redemption
© 2011 Cengage Learning created by Dr. Richard S. Savich.

(Slide 2 of 3)
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Judicial Sale (foreclose as mortgage not trust deed)
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Procedure
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Sale
Serve complaint
Trial held
Judgment entered
Right of reinstatement
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Highest bidder
Debtor has one year right of redemption (pay off all debt) if deficiency exists
Deficiency judgments
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If sale is not sufficient to pay loan, former owner still owes
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California’s Anti-deficiency Law is the exception
Except for FHA and DVA
© 2011 Cengage Learning created by Dr. Richard S. Savich.

(Slide 3 of 3)
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Deed in Lieu of Foreclosure
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Or quitclaim deed from borrower to lender
No deficiency claim
Voluntary conveyance from borrower to lender
Any of these look bad on the credit report
© 2011 Cengage Learning created by Dr. Richard S. Savich.

© 2011 Cengage Learning created by Dr. Richard S. Savich.

(Slide 1 of 3)
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Impound accounts (aka escrow account or loan trust fund)
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Property taxes
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Insurance
Forbearance
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Moratorium on payments
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Waiver of principal payments
Deferring of interest
Partial payments
Prior prepayments now used
Recasting
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Change in loan terms
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Extended term
Increase of debt
Reduction of interest
Reduction of principal
© 2011 Cengage Learning created by Dr. Richard S. Savich.

(Slide 2 of 3)
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Mortgage Guaranty Insurance
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Cost borne by borrower
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Through MIP or MMI
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Government insured
FHA
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Indemnifies lender
Takes over property
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Sells either refurbished or “as is”
Or HUD takes over loan
DVA
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Pays lender up to insurance level
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Subrogates against borrower
FHLMC
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Three months to cure deficiency
California Veterans Farm and Home Purchase Act Assistance
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Life and disability insurance for borrowers
Private Mortgage Insurance (Discussed in Chapter 5)
© 2011 Cengage Learning created by Dr. Richard S. Savich.

(Slide 3 of 3)
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Automatic payment plans
Consumer protection laws and regulations
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Truth in Lending (aka Consumer Credit Protection Act
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Full disclosure of all borrowing charges
Home Warranties
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Cover major home components
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Plumbing
Electrical
HVAC
Walls, roof & foundation
Usually one year
© 2011 Cengage Learning created by Dr. Richard S. Savich.

(Slide 1 of 3)
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Usury
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Max rate is 10% or
5% above Federal Reserve discount rate
Not applied to seller carrybacks
Redlining
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Refuse loans in high risk areas
Illegal
Community Reinvestment Act
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Lenders must disclose lending data
© 2011 Cengage Learning created by Dr. Richard S. Savich.

(Slide 2 of 3)
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Community Reinvestment Act (CRA) and The
Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA)
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Lenders report on
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Race
Gender
Income
Census tract
Grades each institution
Home Mortgage Disclosure Act (HDMA)
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Annual report of applications and loans granted
© 2011 Cengage Learning created by Dr. Richard S. Savich.

(Slide 3 of 3)
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Short Sales
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Upside down
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The Mortgage Debt Forgiveness Act of 2007
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Retroactive for sales from January 2007
Debt forgiveness for <$2M for personal residence
Effective through 2012
Eliminated 100% financing and other high LTV loans
© 2011 Cengage Learning created by Dr. Richard S. Savich.

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 www.hud.gov
www.freddiemac.com
www.ftc.gov
www.mbaa.org
www.mortgagemag.com
© 2011 Cengage Learning created by Dr. Richard S. Savich.

© 2011 Cengage Learning created by Dr. Richard S. Savich.