Forbearances, Modifications, and Deeds in Lieu: Navigating Workout Strategies

Melissa Martorella:

Alright, we will go ahead and get started. It seems that the attendees have slowed down, so we will get going. Welcome and thank you for joining us for today's webinar presented by for Law. Today's presentation will be on Forbearances, Modifications, and Deeds in Lieu: Navigating Workout Strategies. A few housekeeping topics before we introduce ourselves and get going. First, there is a q and a button on the menu bar here with Zoom. If you have any questions, please put the questions in the Q and A tab, not in the chat box. We will not be monitoring the chat box, so please put any questions that you have in the Q and A and we will handle all of those for you at the end of the webinar. Secondly, this webinar is being recorded, so if you have anybody else that isn't able to attend this webinar today and you want to send them this link, it's being recorded and so you are able to send this to them after the fact so they can benefit from what we're talking about today too.

Melissa Martorella:

And finally, the slides will be available as part of this after the fact. So no need to ask those questions about slides or recording. Yes and yes and that'll all be available after our marketing team here at TRO will be doing a great job at sending you all a follow-up email with the recording, the slides and some relevant articles on this topic as well. So without further ado, we'll get started with today's webinar. To introduce myself very quickly, my name's Melissa. I'm one of the partners here at Fortra Law. I've been with the firm for almost 10 years now. I manage the banking and finance team at the firm and I also handle our non-judicial foreclosure practice groups. So I deal with some of these things fairly frequently that we are going to talk about today and then with me today and the star of our webinar is Kyle.

Kyle Niewoehner:

Hi, thanks Melissa. Yes, I'm  Kyle Niewoehner. I am also in the banking and finance department and just about seven years now, I handle a lot of the forbearance, modifications and deeds in lieu. And so I'm going to be presenting a lot of this today and then kind of bringing Melissa in later on some of the stuff that she more handles. So without further ado, we're just going to get going here. Overview of the agenda. We're discussing the legal strategies and best practices to manage loan defaults, and we're going to get more in depth on the types of communication and documentation that you should be using when borrowers are requesting forbearance, scissor relief or trying to restructure the loans. And we are going to also look at how to properly evaluate and document these strategies and the different types of documents that you would be using and how you're going to be using them.

Kyle Niewoehner:

Just more of kind of an overview of the specific types of documentation, even beyond what was in the title of the webinar, the Forbearances modifications and indeed and lose are kind of the primary types. We're also going to be talking about assignment of rents enforcement, about demand letters, foreclosure, as well as some other legal options such as breach of guarantee, appointing receivers, and some other types of litigation strategies that you can use once you're dealing with a default and potentially with a default that can't simply be resolved. So just first of all, when you have a borrower go into default, you want to maintain formalities back during the Great Recession and in the aftermath there were a lot of lawsuits that were related to misrepresentations, lack of communication, miscommunication, et cetera. And certainly we still see that come up all the time today where a borrower is asserting that the lender promised them something and the lender says, I never actually promised that we talked about that, et cetera.

Kyle Niewoehner:

So when you're in these situations, even though especially I mean in today's world, there's so many different options for communicating informally, we still recommend that you go through the trouble to memorialize your discussions with the borrower. Emails are great because everything is going to be in writing and can be saved if you are getting on calls with them to discuss things. Obviously sometimes you want to get on a call, you do want to follow that up with the email immediately. That just basically puts in writing, here's our understanding of what just happened on the call. And so if the borrower does want to come back later and is trying to assert this thing happened on the call, you said this on the call, you can point to the email and say, look, whatever you might think, this is what we got off the call thinking, here's our understanding of what happened and that's going to be really helpful to you later.

Kyle Niewoehner:

And you also want to be sending communications to the notice address and this is also something when you're originating alone something upfront, you want to make sure you have a good notice address for the borrower because when you get in these situations later, you want to be sending it to a proper address for them. Certified mail is preferred and really kind of the more you can get of making sure that you are getting to the borrower the better. You want to take as many precautions as possible and you only want to enter into formal agreements that are signed by both sides. The different types of documents that we're going to be talking about here are a range of things. Not all of them are going to be signed by both sides, but when you are formalizing some type of agreement, particularly if you are basically changing the terms of the loan through a modification or forbearance or dealing or something like that, you want to make sure they're signed by both sides because unlike the original loan documents where you can just have only the borrower signed because the lender is going to fund the loan and thereby confirm that they're accepting these terms, when you're in these types of situations, you now need both parties to sign because the lender is going to be generally giving something, doing something that's not part of the original terms of the loan.

Kyle Niewoehner:

So you want to make sure that it's clear both parties are agreeing to it.

Kyle Niewoehner:

So first off, with these sort of major forms of workouts, we want to look at the big differences between them. So a forbearance kind of the name says it all is the lender is forbearing from exercising some type of rights under the loan. Obviously the classic forbearance scenario is there's a default. The bar says, give me more time. The lender is not going to extend the loan or cure the default and say, oh, this has been cured. The default still exists, but you're willing to give them more time. And so you're deferring payments and that can be a lot of different types of ways because sometimes you do require some type of payment during the forbearance that's all negotiated. Forbearances are very customized documents. Sometimes the lender says you don't have to pay anything for X amount of months. Sometimes there are going to be payments required or partial payments or a payment upfront, but at the end of the day you're agreeing to not foreclose or to at least pause your foreclosure for a certain period of time.

Kyle Niewoehner:

And then with a modification, you're not agreeing to delay foreclosure, you're actually going to be curing the default. If you're coming from a default scenario, the modification would be, okay, we're going to restructure the loan, you're in default, we're going to restructure the loan to give you more time. The classic scenario here would be the loan goes into default and you agree we're going to actually just extend the maturity date for you. But there's again a lot of options with the modification. You can do a lot of things with it. You commonly see lenders say, I'll give you more time, but I'm going to need to increase the interest rate. And sometimes there's a principal reduction payment required and it's whatever you negotiate with the borrower. But the big difference with the modification is once the modification goes into effect that the default has been cured.

Kyle Niewoehner:

If the default hasn't been cured, you would be in a forbearance that the forbearance is going to maintain an existing event of default through the entire life of the forbearance, whereas the modification cures any defaults that are currently existing before it's signed. And then the third option, the deed in Lou is really the end game scenario and the bar is going to sign over the property to the lender. And as we're going to discuss later, the deed in lieu is really a default resolution document. It's not something that you can use to avoid foreclosure. You can't have them sign in deed in lie when you originate the loan or when you extend the loan or something like that. A deed in lieu only becomes an option at the point where the loan is in default and you have the right to foreclose and at that point you can negotiate a deed in lieu with the borrower, but you can't use it to circumvent foreclosure from the outset.

Kyle Niewoehner:

So looking more in depth here first at the forbearance, when you're documenting the forbearance, you are going to need to state clearly what are you forbearing from because you can do a forbearance at all stages of foreclosure or a default, so you may simply have a default on the loan and you're going to foray from starting foreclosure. You could also have recorded like in California, if you've recorded your notice of default, you've started the foreclosure process, you could do a forbearance and send and that could involve either you rescind the notice of default and you would effectively be having to start over from foreclosure on the foreclosure if the forbearance expires without repayment or you could leave the notice of default in place and say The notice of default is there and that period is running, but we are going to give you X period of time where we're not going to record the notice of sale, we're going to leave the notice of default, but we won't proceed until whatever day you agree.

Kyle Niewoehner:

You could even do that once you're at the notice of sale stage. Although at that point you're obviously going to need to talk to your foreclosure trustee and make sure that you're postponing the sale and making sure that you manage that aspect of it. But you can do a forbearance at any point in the foreclosure process. You may also forebear from other things like if there's default interest that has accrued under the loan, there's late charges that have been incurred, you can agree to forgive some of that, et cetera. It's whatever you negotiate with the borrower and then you just need to clearly document in the forbearance here is exactly what I'm agreeing to whatever period of time to how much I'm going to forgive. And then obviously the core term there is how long are you agreeing to forbearance from taking whatever actions that you're not doing with the modification?

Kyle Niewoehner:

As I mentioned earlier, this is a restructuring of the loan, so you're documenting what you're changing from the original loan, what isn't, and generally in our modification form, you're going to have a provision that says everything that hasn't explicitly been changed in this document is going to remain unchanged. But I mean obviously in general you need to make sure that that's there. If you're using some other form of documentation or something and you're not coming to us to just remember, that needs to be clear that anything that we don't explicitly change is still going to be the same. And if the forbearance is initially offered, you may negotiate then over to a modification if they need a more permanent resolution. As I kind of mentioned earlier, some of the stuff that you can do with a modification, you may say, okay, I'm actually willing to give you more time and we'll even cure the default. We'll agree that the default is forgiven but I need to increase the interest rate or something like that. With these documents, you're just negotiating with the borrower and figuring out whatever it is that you both can agree to.

Kyle Niewoehner:

So with Deeds in Lieu, it's a lot more complicated than the previous two options that we've mentioned. And this is something I do try to caution people about when they first come to us on ad and Lie because I think there is a general perception that ad and lie is sort of the quick and easy route to resolving it and generally ad and lie is faster than going through a foreclosure, so that is true. However, the perception that maybe you can just say, Hey, on Monday let's do a dean and L and then maybe by Friday you'll have the property and it'll all be resolved is really not realistic.

Kyle Niewoehner:

Title companies don't like Deeds in Lieu one of the riskier things that title companies will do and from a lender side, you really do need help from title because if you don't get title insurance and we're talking here about a new owner's policy, you're going to get the property you want an owner's policy, there are very real risks that you get the deed to the property, you have title and then later that gets challenged and you really want to have title insurance in place to make sure that you have actually gotten the property with marketable title. And so even though it can be a real pain to go through the process of getting title insurance on these, it is vital. It can be very frustrating, but to go without it is potentially to have done the whole process in vain and later you find out I need to find another solution because I can't sell the property.

Kyle Niewoehner:

So you want to make sure that this is properly documented, have an attorney prepare it. You want to make sure that you clarify whether there's further recourse to the borrower or to the guarantor and that's something you got to negotiate because generally speaking on a deeds in lieu, there's not going to be further recourse to the borrower. That's the standard model of a deeds in lieu. There could still be further recourse to a guarantor. You're going to have to negotiate that. The lender may want there to be, obviously generally the guarantor is going to want to be off the hook, but we do see pretty commonly where lenders will maintain a right to recourse against the guarantor. That needs to be clearly documented whichever way you go, and then whether the lender owes any obligation to the borrow, we sometimes see an agreement where the lender says, Hey, I'm going to take the property from you, but when I finally sell it later I will give you part of the proceeds.

Kyle Niewoehner:

So that obviously incentivizes the borrower to do this type of arrangement because often if you're in kind of a fire sale position for the borrower, they're looking at this as I'm not getting the full value of this property. This is a bad deal for me and it may be something they would agree to. Once you say, Hey, I see that you're in a bad position and I will give you a certain percentage or proportion of the proceeds, usually that would look like the lender sells the property later they get paid off for all the interest fees and principle of the loan and then whatever there's leftover, they may give it to the borrower, split with the borrower. Usually you're probably going to split with the borrower, but that's just another thing that you can negotiate to potentially make a deeds in lieu a more attractive option for the borrower and then you need to negotiate whatever is included in the transfer.

Kyle Niewoehner:

Obviously the land is going to be included, that's the baseline, but then if there are additional pieces of equipment, furniture, et cetera on the property, you're going to want to negotiate that and then that would be included if there's personal property and a bill of sale that goes along with the rest of the documentation for the deeds in lieu, you want to clearly document that otherwise you could have a dispute later where the deed gets recorded and you've clearly got titled to the real property, but then there's personal property and the borrower saying, Hey, I didn't agree to that. I need to be able to get that off. So just want to make sure that that's all clear and you don't leave room for a dispute later. And then we had a note in here just to hit this point again, you can't get a deed in lieu from a borrower prior to a default.

Kyle Niewoehner:

So when you're originating a loan, we get this question sometimes or even when you're extending a loan, if you're doing a modification, you're extending the loan and you're curing at any default, the loan's going to go forward a good standing, you can't get a deed in lieu from the borrower at that point. Now with the forbearance, you can potentially get a deed in lieu because under a forbearance agreement the default stays in place. And so we do see this sometimes where a deeds in lieu and a forbearance are agreed to simultaneously and part of the forbearance is that you're going to forebear from recording the deed in lieu for a certain amount of time and give them a chance to sell the property, repay the loan and refinance whatever they're going to do. But you just need to be very careful about this because if you get a deed in lieu from the borrower during a time when the loan is not in default, that's not going to be enforceable.

Kyle Niewoehner:

It's basically the states would view that as a public policy issue where the lender is circumventing foreclosure laws. If lenders could just sign borrowers up for a deed in lieu at the origination of a loan, suddenly the whole foreclosure system is being circumvented and the whole reason the foreclosure system is in place to provide these protections that states want to give to borrowers, and that's why you can't just have a borrower sign a deed in lieu whenever because they can challenge that in court and then the court is going to look at that and say, this is the public policy issue. You're circumventing these foreclosure laws that the states have very carefully crafted. The deed in lieu is really meant for a situation where the lender is foreclosing or has every right to foreclose, and if the borrower doesn't want to go through that, doesn't want that foreclosure on their record, they're allowed to just deed it over to the lender.

Kyle Niewoehner:

Yeah, and then maybe this should have been the first point on this here, but the title report at the beginning of doing a deeds in lieu process, you need to run an updated title search. Even if you think what's been going on with the property, you need to get an updated title search and not just a property profile. You want to go to a title company and get an actual a date down or a new preliminary title commitment and look at what is on the property because if you record a dean of L, you're taking the property as is. It's not like a foreclosure sale where you're wiping out all the junior liens, wiping out whatever is also on the property. You're just becoming the owner of the property here and now you have the same issues to deal with of the things on title that your borrower had.

Kyle Niewoehner:

And so you want to make sure that you know what you're getting into before you jump into this process. When people come to us on these, we generally say, let's go get a title report and then we'll talk about this because prior to seeing what's on title, you can't really make an informed decision that this is the best strategy to go with. Once you look at title, you may say, we actually need to foreclose because I want to wipe out these junior liens. So the starting point out of Dean Lou is get a fresh look at title and see if there's any issues and whether you can just proceed with taking ownership to the property.

Kyle Niewoehner:

Those are the overviews of the specific ones. And then just to talk about some key provisions that are overarching. Whenever you're in a default situation and you're looking at any type of workout, any types of solutions here, you want to make sure you document in the recitals the history of the loan. You want to tell your story from the lender perspective. You generally want to show that, Hey, we made this loan, the bar went into default, and you want to specify exactly what happened, exactly what type of default it was when it happened. If there's multiple defaults, you definitely want to list all of them and when they happened so that if it does end up going before a judge and they're looking at it, they're going to quickly see, okay, this lender had a bunch of issues with this loan when they went into this default mitigation, they were trying to work with this borrower.

Kyle Niewoehner:

Often in these types of workouts, I mean Dean and Lewis is kind of a classic example. It can look like, oh, this lender just got this borrower in a vulnerable position and they got them to do this, this and this. And so it's very important to show that the lender was in a bad position here, the lender was at real risk, the lender wasn't get paid, et cetera, whatever the situation is that the lender had a problem and that whatever they have done with the borrower was really mutually beneficial. And you want to make clear reaffirmation when you're doing any of these types of agreements. This is a time when you can avoid future problems by making sure that everyone is on the same page. You're getting the bar to sign this document, and so this is your chance to make sure that they can't go back and challenge any of this stuff later on.

Kyle Niewoehner:

You want to make sure this is all clearly laid out and as a borrower wants to come and sue you later, you bring this document to court and say, Hey, they signed this. Look at all this. They agreed this, they agreed this, they agreed this, and the lender is going to be at least on these types of things, you're going to be protected. The amounts due. Borrowers sometimes want to come back and say, well, no, that wasn't actually due or this, I made this payment then and why is there all this default interest, et cetera. So you want to clearly list as of the date of the agreement or as close as you can get, here's all of the amounts due, including even miscellaneous charges if you've had to incur legal fees, if you've started the foreclosure and you've got foreclosure fees, you want to make sure all of that stuff is in there as documented.

Kyle Niewoehner:

You want to again reaffirm the business purpose of the loan. This is a good time probably to say we are assuming as we pretty much always do that, we're dealing with business purpose loans here. This is not a webinar that is telling you how to do workouts on consumer loans. So assuming business purpose of the loan here, you obviously want to get an affirmation there because the big fear on any of this stuff is that the borrower comes back later and says, Hey, this is a consumer loan. So any chance you get to reaffirm the business purpose of the loan, you take that similarly with occupancy. If you are in a non-owner occupied business purpose, you want to make sure that you reiterate that and then Barr's authority to sign the agreement. You actually do want to verify authority the same way that you did with the original loan documents.

Kyle Niewoehner:

So if you needed a resolution of the members of an LLC for the original loan, you want to make sure you get the same signatories authorizing this workout agreement because just the way when you make a loan, you don't want some other member of the company saying, Hey, the guy who signed the documents did that illicitly and now you've got a lawsuit between your borrower parties, et cetera. Same thing can come up on these workouts and certainly sometimes on the borrower side there might not be agreement on their side of how to handle these. And so you need to make sure you again, go through the stages of getting proper consent from any parties that are required for the borrower to enter in these types of agreements. And as we already talked about, you want to make sure that you have a statement in there that all the other provisions of the original loan documents are remaining in place besides the ones that you're changing explicitly in the agreement.

Kyle Niewoehner:

Then you also want to get a release of claims. This something that is standard in our documents on these types of agreements, but this is a chance for you to get a release of claims from the borrower. There's certain types of claims, you can't really get a legal release usy, you generally can't get them to release their ability to maintain a USY claim, but a lot of other claims that you can. And so have a pretty thorough release of claims in our documents when we do these workout agreements, and you definitely want something in there that just gives you some additional protection on miscellaneous types of lawsuits that they might enter into later. Then you want to define future defaults in addition to defining the defaults that already exist. And of course the default provisions in your original loan documents should carry through, but you also want to define some additional future defaults and make sure that that stuff is clear. And sometimes there may even be defaults that weren't defaults under your original loan documents and you're like, okay, I know this specific thing could be a problem. I want to put this in here. Or you may have just a special provision. Sometimes we see the bar is required to list the property for sale within 15, 30 days or something from entering into this agreement. And if they don't do that, that is now that would be an event of default. So you may also customize your event of default provisions through this new agreement.

Kyle Niewoehner:

Another really important concept is the conditions precedent to the effectiveness of the agreement With the original loan document, it's pretty clear the borrower signs and then the lender funds the loan and then at that point it's effective with these types of documents, it can be more complicated. The borrower may be signing and the lender is signing the document, but there's still some stuff that needs to happen before the document is effective. For instance, if you're making the borrower pay a bunch of stuff upfront related to the document, which could be legal fees or an extension fee or a forbearance fee or something like that, and if they're paying through closing, you want to make sure that the borrower doesn't sign this and then say, Hey, I've got a forbearance now and they never actually made the payments they were supposed to make. So there's a section in our documentation about conditions present to the effectiveness and all that stuff needs to be met even if both parties have signed the document, if the borrower doesn't meet those conditions, then you can still say, there's no agreement here.

Kyle Niewoehner:

This is not effective yet. So that's really important to look at that provision and make sure that you've got everything in there that you are requiring. And then last of all, getting a title policy date down. We talked about this already with the deed in lieu. You also want to do that with the modifications and the forbearances. You want to make sure you understand what the situation of the loan is since you're agreeing to usually give the borrower extra time, maybe even giving them other concessions and you don't want to do that and then realize later, oh, this loan is in way more trouble than I realized. So you want to go and get a date down to your title policy or get a new title commitment. Sometimes title companies don't like to do date downs for whatever reason, but you just want to get a fresh look at everything that's been recorded on this property and that may change whether you even want to enter into the agreement or it may add additional thing they need to deal with like, Hey, you need to pay off this mechanics lien or something before the effectiveness of the agreement goes back to point number five above here of maybe there's something on title that needs to be a condition precedent to the effectiveness.

Kyle Niewoehner:

And then sometimes you also see that they deeded the property to someone else that's never fun but does happen. So you definitely want to go through this. And then just one other note on this as well, you may also want to get a date down endorsement from title. That can only be done if you are recording something on title. So like a forbearance for instance is not a recorded document. You're not going to be able to get an endorsement on a forbearance title will only give endorsements when you're recording something and on a modification, sometimes lenders don't want to record their modifications and sometimes that may be fine, sometimes there's no reason to, but keep in mind that you're not going to get a date down endorsement from title unless you are recording a modification to the security instrument, but that doesn't affect your ability to go and pull a date down or a title commitment or something like that. The initial title report is a separate thing from whether you can get an endorsement to your policy.

Kyle Niewoehner:

Okay, so now some more enforcement related type of stuff, assignment of rents, you should have one in your deed of trust or your mortgage. Our deeds of trust and mortgages just come standard with that and you can't just demand the tenant start paying you rent. There's procedures you actually have to go through for that. The notice, so it depends on the state, but there's typically guidance in California, there's a specific form that you send to a tenant when you're enforcing an assignment of rents. That's something that we commonly draft for our clients, but you want to make sure you go through the proper procedures as opposed to showing up at the property and telling the tenant, Hey, you have to pay me that, or you get their email address and just send them an email. So definitely recommend talk to an attorney about this and make sure that you're going through the proper procedures for the enforcement and even after you send a notice and if you send the proper statutory notice, the tenant might not pay you.

Kyle Niewoehner:

You can think of it from their perspective as this person that they really, they don't know now says, Hey, pay your rent to me. And they're thinking, if I pay my rent to this person, then well this is my landlord going to do to me. So an assignment of rents is not something that you can really bank on in the way that you can bank on like a foreclosure process. It's something where you can do it and you hope for compliance, but it is no guarantee. The tenant may just say, we're not doing that and we'll talk a little bit about a receivership later, which would be the way that you can fully enforce this, but it's a difficult route. So I it's most effective with getting a receiver, but as we'll talk about the receiver option has its own pitfall. So bottom line is this is an option and sometimes it is effective and it's also generally pretty cheap to just send the notices.

Kyle Niewoehner:

That part of it is not particularly onerous. You draft these pretty simple notices and you mail them to the tenants and you wait to see what happens, but it's just not something that we would tell our clients to rely on this as being your main option if you get into an event of default. And one thing you can do though is if you are able to have any contact with the tenant at the beginning of the loan, for instance, if you have an SNDA with them, that does probably increase your chances of being able to collect on these because now the tenant is aware that you're the lender that you have legal rights for this property as opposed to this just comes out of nowhere. They didn't even know there was a loan, a mortgage, whatever. And suddenly somebody's telling them they want rent and so early contact with them is going to increase your chances, but still no guarantee.

Kyle Niewoehner:

So demand letters in a lot of these types of situations, this is going to be the beginning of your workout process because once you do have a default, unless you are able to just simply engage with the borrower and start negotiations, the demand letter may be the first option, especially if you have a non-responsive borrower or if you're simply intending to start foreclosure right away, we'd recommend that you do a demand letter before starting foreclosure even if it's not necessary. So the loan documents will state whether this is necessary. When you're talking about business purpose loans, there's generally not a requirement to send a demand unless there's some type of special circumstances, like if there's been some type of a public policy thing, if there's been a law about with COVID, obviously we saw a bunch of extra requirements being put into place, but just generally speaking, it's usually not going to be legally necessary.

Kyle Niewoehner:

The loan documents may require, although ours generally don't, but it is a best practice. And just going back to some of the stuff we talked about earlier about making sure you show yourself in the best light in these situations in case it does end up before a judge, even if there's no legal requirement, giving them a demand letter with a short period of time, often we just do 10 days, that makes you look better. It makes it look like, Hey, we're above board here. We're not trying to just go steal the property as quick as we can from this borrower. We're just trying to operate in a normal way for a lender of, Hey, there's a default. We're going to give you notice, give you a little bit of time, we'll talk to you, but if you don't do anything then we are going to proceed with a foreclosure or whatever you've decided on.

Kyle Niewoehner:

And then the foreclosure option, this is not a foreclosure webinar, but it is something that we wanted to mention because it's pretty related to all this other stuff. So generally we only recommend a foreclosure on a monetary default if there is some type of other default. We don't encourage you to talk to your attorney, talk to your foreclosure trustee about that situation. Foreclosing on a non-monetary default is certainly possible, legally possible, but it is kind of more complicated, and so you should consult with your attorney before you start on that type of process. Monetary default is pretty cut and dry, and generally this is what you do after other loss mitigation options don't work. As mentioned, we recommend sending a demand letter first and then usually the bar will talk to you, talk to the borrower and figure out what are the options and do I actually just need to foreclose here?

Kyle Niewoehner:

The two flavors of foreclosure, judicial and non-judicial, that's going to depend on the state. Here in California you are typically going to be a non-judicial foreclosure because that is faster, simpler by far the most common, but you do have a judicial foreclosure option in California and there are times when you want to do judicial foreclosure in California. If you want to maintain your rights to pursue the borrower for a deficiency as opposed to just a guarantor, you may want to do that. Again, that's something before you start foreclosure, talk to your attorney, talk to your foreclosure trustee and talk through the scenario. And most of the time it will be non-judicial, but you want to discuss that. And then there are also obviously states where you have to do judicial, and then there are other states like California where you have an option between the two and you want to discuss that option and make sure you understand what the implications are of doing one versus the other. There are even some mortgage states where you can do non-judicial foreclosures. So once you are doing a foreclosure or a deed in lie even you may be faced with eviction. And I'm going to turn it back over to Melissa here.

Melissa Martorella:

Awesome, thank you so much, Kyle. That was wonderful. Yeah, so as Kyle has walked through a lot of the different options available to you when there is a problem in the loans in default, there may come a time either through foreclosure, through deeds in lieu where you end up with possession of the property, you have title to the property. Just because you now own the property doesn't mean you can just go in there, kick people out and change the locks immediately if there are tenants at the property or say the borrower is living at that property, even if it was a non-owner occupied loan when you've made it, but they since moved in through this default process, et cetera. Just because now you have title doesn't mean you can just change the locks and kick them out immediately. You need to evict the people who are living there, and that's called an unlawful detainer action. So I've got a little plug here for our partner, Steve. He manages the litigation team over here at Ttra and he has ample experience dealing with evictions, unlawful detainers. So if you have this situation where you've now obtained title to a piece of property and you want to make sure that you are able to get access to that property appropriately and deal with tenants accordingly, Steve is a person you can reach out to help.

Melissa Martorella:

Steve is also a great resource for the next few slides as well. So as Kyle sort of alluded to earlier, you might do a foreclosure, you might take title back to the property or maybe the property sells third party, and so you've gotten paid down somewhat based on the amount that the property sold for at the sale. But say for example, you're owed $1 million total at the time of the sale, but for whatever reason you're okay letting the property go at a lesser price or maybe people don't bid and you end up taking the property back for $700,000 at that time, you're basically saying as the result of the sale that you've been paid up to $700,000 and you have a $300,000 deficiency remaining hopefully because now you have title to the property, hopefully that property, you're able to fix it up, flip it, sell it, use it as a rental, whatever you're going to do with it to make up some of that loss loss.

Melissa Martorella:

But if not, and even if so, what you can do in this situation is do a breach of guarantee lawsuit If you have a guarantor on the loan for that deficiency amount for that $300,000, even if you've done the whole trustee sale, you can still do this, as Kyle also alluded to during the dean and lie portion, you might say we're not going to pursue any recourse towards a borrower, but we might actually proceed against a guarantor for some reason. And so you have these options to you available That said, say you are owed a million dollars at the time of sale and the property, you open at a million dollars and get the property back and maybe you made a mistake and the property's not worth that much, something like that, that doesn't matter. The amount of the deficiency is determined at the sale at the auction.

Melissa Martorella:

And so by you saying that the property is good for a million dollars and nobody bid and you take it back, you've established that there is no deficiency at that time. So that bidding strategy is very important and you might want to talk to either litigation counsel if you're thinking about a breach of guarantee suit or with counsel generally to navigate how you should be bidding during your foreclosure. The last little plug on this as well, just because you have that deficiency doesn't necessarily mean that the guarantor's worth anything. And so before you go down that rabbit hole of litigation and filing claims and all of that, you probably as a first step want to retain a private investigator to do an asset sale on that guarantor to see if they're even worth anything because if they're not, you'd rather find out right away versus filing a suit, paying attorney's fees and all of that just to find that the guarantor has nothing. So that's just another helpful tip here that Steve is certainly able to walk you through if you need help.

Melissa Martorella:

And then finally here we have some other extraordinary relief options. So say you're working through a modification, it doesn't work out or forbearance or maybe you're going through a foreclosure. There are some extraordinary relief options that might make sense, especially if the economics work out for you. So the first one is seeking a receivership. Again, this is another litigation action. You have to get the courts involved. You can get them to appoint a receiver at the property, which basically is almost like a property manager and they'll go through, collect any rent. They might end up paying you that there's a whole schedule that they'll file as part of the lawsuit here as far as where proceeds from any tenants and that sort of thing will go, it might make sense to do this on large commercial properties, income flowing properties and that sort of thing.

Melissa Martorella:

But generally, if it's something where a fourplex and it's apartments, that might not make sense for how expensive it is to get a receiver. So like Kyle was talking about the enforcement of the assignment of rents, you've done that, you've sent those lenders that just costs a couple hundred bucks, it's worth it to do it if they're not paying, depending on who the tenants are, it might make sense to do a receivership, like I said, if they're large commercial tenants, but if they're not, it might not actually economically make sense to do that. This is also a very extreme sort of relief here. You have to show a lot of cause as to why the receiver is necessary. So of course we're also reticent to provide this option as well. So it's something where again, you should talk to counsel and make sure it's actually worth it in that scenario because it can be costly and it may not actually be given to you.

Melissa Martorella:

The last one as well, it's a pre-judgment attachment of assets. Again, Steve can work through either of these for you if you need assistance, but basically you're able to freeze bank accounts of a borrower or guarantor if you are able to show cause and be able to basically put those things on hold and be able to potentially put a lien against those accounts for the amount that you're owed. So these are just more options for relief for you. Again, they're very involved on these ones. You should definitely speak to counsel on them as far as whether that's a good option for you, especially economically. I can't stress that enough just because these options are available to you. Depending on how much you're owed, it may or may not make sense. And again, you may want to be digging into whether there are even accounts that are worth freezing or putting a lean on before you're going down this path. And again, council will be able to walk you through that.

Melissa Martorella:

And that's it for today's webinar. So thank you all for listening to us. We'll get to the q and a here in just a moment, but before we do, we just want us to do a little plug. We have our Innovate Conference coming up August 21st to 22nd at the VEA Hotel in Newport Beach. You can register now. We have a little code here for 100 for all of you lovely people who have joined us. On the webinar today, you'll get a special rate of 7 95 if you sign up with that code before July 4th. The website is below where you can register. If you don't make it to register before July 4th, if you reach out, we can always chat with you about a discounted rate. But that said tickets are selling fast and we would love to see you there. I will be there. Perhaps I can get Kyle to come as well and we can answer some of your questions in person. So would love to see you at innovate and please go ahead and register.

Kyle Niewoehner:

Alright, and now we will start the Q and A and let me pull that up. As Melissa mentioned at the beginning, we're going to be going through the q and a on your webinar screen, the chat section. I don't know if anybody did that, but we take the questions out of the q and a, not the chat. So if you put something in the chat, please go put it into the q and a so that we see the feed here because we're going to just go through these Q and A ones and we won't be looking at the chat ones at this point. So starting off here, I'm just going to start at the beginning from Richard. I'm probably not pronouncing that correctly, but he asked what is the current legal status of default interest being charged on a business purpose loan secured by a principal residence?

Kyle Niewoehner:

I'm assuming a primary residence. So the main issue with default interest, particularly here in California right now is that you aren't allowed to charge default interest prior to maturity. So regardless of whether it's a primary residence or a non-owner occupied, that's going to be the primary obstacle, assuming it's not a consumer purpose loan, that's really the current issue. I'm not aware of any other states that have a specific restriction on default interest because it's secured by a primary residence, but there are sometimes differences in prepayment penalties or late charges or other things. It's a state by state issue. So I really, for purposes of this, I think I can only answer for California because we obviously can't go through all 50 states. And for California the big issue is just the RA case a few years ago that ruled that you can't charge default interest prior to the maturity.

Kyle Niewoehner:

So if you just have a missed payment prior to maturity, you can't start charging default interest. You can still charge late fees on the missed payments, but that's really the main issue you would have in that situation. Once you hit the maturity, then you can charge default interest. So do you represent lenders in all states? Also, do you represent lenders only in private money lending or no investors as well? Thank you. We do. We do represent lender in all states. Our department. We draft loan documents for all states and depending on the specific types of issues, particularly related to some of the stuff we were talking about today, we may have to refer you over like if you want to do a foreclosure in Massachusetts, we're going to refer you. We do have local council contacts in other states, and so if you come to us, we can tell you, yeah, we can do that or we'll have to refer you to local council.

Kyle Niewoehner:

So we do some work in all states, but there's also definitely some types of work that we don't do in some states, and particularly with regard to foreclosure, we handle foreclosures in California, but we don't handle foreclosures at this point in any other states. So if you're doing a foreclosure outside California, we're going to give you a referral. Similarly, with a dean and L, we handle Dean and Lu's in California, but typically for other states we're going to refer you out. We have occasionally done Dean and lu's in other states, but usually we need local counsel involved anyways, and so unless there's a specific reason for us to be involved, maybe for other reasons, we're often going to refer that out. Do we represent lenders only private money lender and don't investors? We really represent basically anyone involved in private lending as long as they're doing business purpose loans.

Kyle Niewoehner:

We represent node investors, we represent lenders, we represent brokers. I mean sometimes we're representing servicers as well. I mean we basically will take just about anybody who's involved in if the private lending world and doing business purpose loans. So just come to us about whatever your issue is or what you're looking at and we'd be happy to talk with you and let you know whether or not we can help you from the zela. What is new law for forgiveness? For taxes? Are they still giving 10 99 C now? That unfortunately is a question that we can't answer. That is the tax question. We're not tax attorneys. I really have no idea. I'm assuming Melissa, that you don't know either. So you would need to consult your accountant or your tax attorney for that. Another question from anonymous attendee. You mentioned that Dean L is something you may want to make more attractive to your borrower.

Kyle Niewoehner:

Does the borrower even have an option? Isn't a dean lieu up to the lender? A dean in L is up to the borrower. The borrower, as I mentioned earlier, you can't make the borrower sign a deed in lieu prior to a default, and the only way you can get a deed in lieu from a borrower is for the borrower to sign it. So it's not up to the lender. It's definitely up to the borrower. And now the lender also has to agree to it and to ultimately go and record it. But the deed in lieu is something that you have to get cooperation from the borrower for the option with no borrower cooperation is just foreclosure. If you're going to do a de lie to avoid foreclosure, you need the borrower to agree to it From S, how do you manage franchise agreements in a deed and lose situation, for example, in hospitality cases?

Kyle Niewoehner:

Yeah, that's a great question. With a franchise agreement, you want to hopefully have dealt with that up upfront and gotten a comfort letter from the franchisor that would allow you to take over the property, whether through a foreclosure or through a deed in lieu where you can become the owner and you can basically assume the franchise agreement and continue in that arrangement. Now, if you didn't get any type of comfort letter from the franchisor originally, and now you're in this default situation, you're looking at a deeds in lieu, well, I mean it's not too late, but you then need to approach the franchisor at that point and get a comfort letter, get assurances that you can assume that franchise agreement. Otherwise, I mean, this is a great call out of how you want to evaluate a dean in L though because this is exactly the type of thing you'd want to be looking at.

Kyle Niewoehner:

If there's a franchise agreement on the property that's really important for a profitable operation, you want to look at that and make sure you've dealt with that before you get a dean in lieu. If you did get a dean in lie and now you realize that there's a franchise agreement in place or just you realize I never dealt with this, you could easily be in a situation where the franchise or says, sorry, we're pulling the franchise here. You're not in compliance. You're not someone that we underwrote, you're not someone that we agreed to and they're pulling the franchise. So you absolutely want to consider that and talk to the franchisor in this situation to make sure that you can manage that and you can take over the franchise from Robbie James just going to park this year. When is the best time to go after personal guarantee?

Kyle Niewoehner:

Melissa, feel free to jump in on this, but I mean, as Melissa kind of already discussed, typically this is going to be post foreclosure or potentially post deeds in lieu where you have exercised all of their options because if you go after the personal guarantee, the first kind of hurdle you're going to face is you have to prove a deficiency. If you haven't realized your collateral like foreclosed or dealing with whatever it is, then the judge is likely going to just say, we don't know what the deficiency is. I don't know what amount to allow you to pursue under this guarantee because you haven't pursued your other options and your collateral. And so that's I think typically the restriction. And then after that, I mean it's kind of just your choice. I dunno if you have any additional thoughts on that, Melissa, but

Melissa Martorella:

No, that's a great answer, Kyle. The big issue is have you exhausted proceeding against the other collateral first because typically the way the documents are going to read is you have to go after the real estate collateral or other collateral securing the loan first, and then once you have exhausted all of those options, then you go to the guarantee and usually courts will be very strict about enforcing that and making sure you've done that. So once you're either getting to that point or you've done that and exhausted recourse against the other collateral, then that's probably the time to talk about the personal guarantee and proceeding against the guarantor.

Kyle Niewoehner:

Yeah, thank you. From Jeff Smallowitz, must you get permission from any subordinate lenders that you are extending your first position loan? What are the dangers that they claim they are now in first position? So this is also an important consideration just generally of thinking about subordinate lenders. Now, the consideration generally in terms of lien priority is going to be based on something that disadvantages the subordinate lender or basically puts them in a different position that they were in when they recorded lien priority. Extending a loan is generally not an issue here because it's actually kind of friendly to the junior liens for a senior to extend the loan. It doesn't disadvantage them. Basically you're giving the borrower more time, your senior loan already existed when they recorded or else you got a subordination agreement, in which case the subordination agreement should also deal with this should allow you the senior to extend their loan, but assuming there's no inner creditor, they're not going to be able to claim their first position just because you extended their loan.

Kyle Niewoehner:

That does nothing to change lien priority. It doesn't disadvantage the junior lender. It doesn't put any additional obligations on the borrower. In fact, it's giving the borrower additional time to pay off this loan. But where you do want to be really careful about this is when you're restructuring the loan in any other type of way. If you do an additional advance, if there's a junior lien and you do an additional advance on your first lien, the subordinate lender can absolutely claim that that additional advance is now in junior priority. That is a real risk interest rate increases are kind of a middle ground. I don't know. I don't know, Melissa, if you've ever seen an actual successful claim on a rate increase, but a rate increase on the borrower does potentially disadvantage the junior lender. Depending on what you're doing, you might want to get consent from them. But typically the big issue with a subordinate lien is going to be if you're advancing additional funds because there's a very clear potential risk that the additional funds, not the original funds, but that the new funds are going to be new in the priority stack below whatever has already been recorded.

Kyle Niewoehner:

And then from Leica, what is a good way to check junior liens before doing deeds in lieu? Other than checking title report, there's not a good way that I know of. I know we have clients come sometimes and there's stuff you can get for free, like property profiles and stuff like that that you can just go online and get for free. That stuff in our experience is not reliable. Certainly the title company is not in any way going to be standing behind that or liable if it turns out that was wrong information. So you want, especially before a deed in lieu, I mean you can sometimes if you're just extending a loan or something, maybe we still recommend that you get a proper date down or proper title report. But a ad and Lou is such a big step that you don't want to rely on anything that you're just kind of finding somewhere. You want to go to a title company, you want to make sure you get a proper date down or a new title commitment on the property so that you, you're not finding out later that you got bad information from Richard. Again, on a business purpose loan, is there a guarantor other than the borrower?

Kyle Niewoehner:

Well, that depends on how you originated the loan, but I would say maybe 99% of the time we see our clients do get a guarantor. You don't have to. And there are some types of situations where we see people that are making loans and it's just the bar, whether it's kind of a friendly loan or there may be certain types of collateral that make the lender feel like they don't need a guarantor or you may just be dealing with a large company where you don't have some of the same concerns. But generally the types of deals we're doing in private lending, there's almost guarantor and typically you have a warm body guarantor and sometimes you can add as many guarantor as you can get is great. You may get additional entities that the borrower owns or that are affiliated entities that also guarantee, but a lot of times it's like somebody's LLC and whoever the members of the LLC are, you get them as warm body guarantors or you get a trust or something like that. So we would recommend it typically, unless there's a really clear reason to not get a guarantee, we would just always recommend yes, go and get a warm body guarantor. If they don't want to give that, then I mean they better have a really good reason why. From a lender perspective, you always want a guarantor. There's no downside of having a guarantor from Jeff in California before you agreed to an extension must. You have given the borrower a 90 nay notice that the loan will mature on a specific date, not on business purpose loans,

Melissa Martorella:

Although I'll say in California there is, if it's an owner occupied loan, there is a balloon notice you have to provide prior to the maturity, but otherwise there's not any sort of thing related to an extension specifically.

Kyle Niewoehner:

Yeah, that's good. That's a good call. Melissa, thanks for jumping in there. So I mean I think in general and owner occupied, you need to be kind of more careful, but yeah, generally speaking, unless the loan documents include a provision that you have to give some type of notice, there's not some statutory requirement on that for just general business purpose non-owner occupied from Mike, why wouldn't you just refinance with a new note and deed? That is certainly something that you can always do and a lot of times lenders don't want to refinance a loan that is now in default because they kind of view it as particularly risky. You generally wouldn't make a new loan if you know that the bar is going to immediately go into default, and so there's that issue. But in terms of let's say when you're extending a loan, I think that's probably maybe the primary situation that Mike is talking about here about if you're going to extend a loan, why not just make a new loan?

Kyle Niewoehner:

There are a few reasons. Number one, when you do a refinance, you have to pay for a new title policy and that's generally adding a lot of different expense to the loan. A lot of times that title policy is the sort of most expensive kind of closing cost, and so to go through and get a new title policy is something that borrowers often don't want to do. It's extra expense that like if you just do an extension, even if you get an endorsement, if you get a day down endorsement on your title policy, that's a lot cheaper than getting a complete new policy. And then from a lender perspective, one reason might be if there are junior liens, we got that question earlier about does an extension affect junior liens? An extension, as I mentioned is fine, but if you refinance, you're recording again, you're going back in priority position and now if there's anything junior below you that has popped up on title, not even necessarily a new deed of trust, any type of judgment or lien or anything like that, you're going to go and lower priority.

Kyle Niewoehner:

And so that's from the lender side. That's typically the main incentive to just extend the current node deed of trust is you don't have to worry about your priority position. Changing anonymous attendee here, when is the good time to order the title policy date down once the loan becomes in default, say two to three months after it became a default? Should we order it? I mean we would generally recommend as soon as possible unless there's some other reason why you're waiting. If you think that they're going to pay you off very imminently, maybe you think I'll just wait on incurring this cost, but if there's no reason to think that the borrower is about to pay you off and you think that this is going to drag on, we would say just order it as soon possible because this is information that you need to make an informed decision about what you're going to do. And so the sooner that you have that information, the better From Evan. If all conditions precedent are not bet by borrower in a forbearance, is the forbearance agreement void or voidable by the lender?

Kyle Niewoehner:

Yeah, it would be void, and I'm not even sure if void is the right word to use because it's basically like it never existed, so maybe you could say it's void because you signed it, but it's not effective if the conditions precedent are not met and the borrower comes back later and says, Hey, you agreed to XX things, you can just say, well look at section, whatever it is. You had to do this thing, you didn't do that thing, this never happened. We definitely see that sometimes where borrowers never complete all the conditions and then it's just like if you never did that forbearance at all, never signed it, never drafted it, it just doesn't exist for legal purposes. Then from global real estate. Please explain maturity if the loan is in default, is that the case the loan has yet matured? Not necessarily. The maturity date is the date at which the loan needs to be fully repaid pursuant to the original terms of the note, but typically you're going to have monthly payments, you're certainly going to have other types of potential defaults on the loan and if the borrower misses a monthly payment or let's say they're behind on their property taxes, they missed a property tax payment or the hazard insurance on the property has lapsed, those are generally going to be events of default in your loan documents.

Kyle Niewoehner:

It's certainly in our loan documents. And so there are many ways that a loan could potentially be in default before the loan has matured.

Kyle Niewoehner:

Another anonymous attendee, do the same remediations you discussed apply to cannabis business purpose loans? Yes. Generally there's not much difference in terms of these enforcement mechanisms. It may trickier though in terms of your considerations of whether you want to take over the property, there's also generally a lot of difficulty in trying to obtain cannabis licenses. This is something we've dealt with a lot over the years as these have become very popular transactions is at this point there's really not a good way to assign a cannabis license. If you take over a property that has a cannabis license, you're going to need to try to go through a process of getting a cannabis license on that property that has you as the licensee as opposed to whoever it was previously, whether it was the borrower or a tenant. Now sometimes there are tenants on these properties and if it's a third party tenant that is holding the license, that may be an easier situation.

Kyle Niewoehner:

But then you also have to kind of take into consideration, do I want to be someone who's actually running a cannabis property? Because there is, from what we've seen, a legal distinction between you made a loan to somebody and the property happens to be running a cannabis business versus you're now somebody who owns a property running a cannabis business, there's definitely more potential liability when you are someone who's actually owning and operating that business. And so the remediation options that we discussed don't really change legally. It's more of walking through these other considerations of how involved you want to be with this type of an operation and making sure that you understand what you're getting into. Two from Jennifer Johnson, what are the fees you are seeing for change in terms and modifications? Are you seeing flat fees or a percentage of the loan balance?

Kyle Niewoehner:

Honestly, from our perspective, there's not really much of a difference between a flat fee and a percentage because even when conceptually our client is saying, I want this percentage, we usually just reflect it as a flat fee anyways just to make sure there's no miscommunication about that because sometimes you can also just be like, oh, was it a percentage of the loan balance at this time or at this time it, did it include past due interest or something like that. So when we actually document this stuff, we like to just put the dollar amount so there's no room for confusion there. And in terms of, I dunno if you're asking about how much, but it really depends on the situation. Obviously when you're originating or when you're extending, you commonly see one or two points, but sometimes it's more, and particularly when you get into forbearances, I commonly see higher percentages for forbearances because at that point, a lot of times the lender has a lot of incentive to be foreclosing on the loan and for them to agree to not continue foreclosure, they want to be compensated.

Kyle Niewoehner:

So in that type of situation, you may get a much higher than normal fee in order to incentivize the lender to grant that additional time. So hope that answered that question from Clifford Douglass. Can a lender charge default interest on unpaid interest prior to the maturity date? If the note states that unpaid interest earns interest? First of all, I would just reiterate the earlier discussion on default interest prior to maturity. Right now in California, you can't actually do default interest prior to maturity. And then as to the broader interest on interest question, this is somewhat controversial. We do generally actually have an interest on interest provision in our note, but lenders almost never do that. It's really not a market. And so I would generally just in discussing with clients say, you should probably have a really good reason about why you're doing that because if you do end up in court and a judge is looking at it, even if you have the provision in your note, it's not common and the judge may not like to see that that may look kind of predatory and particularly if you're doing default interest on unpaid interest.

Kyle Niewoehner:

And then if you were doing default interest on default interest, I think you do get in a position there where there might not be a statutory prohibition on that, but I think that looks pretty bad if you end up in court. And that's something that we would generally caution our clients on and say, I mean, do you have a really compelling reason about why that is warranted in this situation? Maybe if you had a loan that had a really low initial interest rate and there were reasons why you thought this was a really low risk loan and then there's bad actor behavior from the borrower or something like that. But I generally would say you want some type of compelling circumstances to do this type of thing. I dunno if you have any thoughts, Melissa?

Melissa Martorella:

Yeah, and just to add to that, this doesn't mean don't have it in your loan documents or don't even try to add it to a payoff or reinstatement demand. You could still do that, but what I actually advise a lot of the time is to use this as a negotiation tactic where it's like, okay, borrower, well, if you can make this payment, I will wipe this interest on interest clause because like Kyle is saying, I think it's hard to enforce and justify enforcing it, but it can be used to kind of work with your borrower and kind of get them to the table to start agreeing to things. So that option is there to you as well.

Kyle Niewoehner:

Yeah, that's a good point. Another one from Richard here on a business purpose loan secured by principal residence, if funds are used to pay taxes and to pay off an existing mortgage, does that jeopardize the business purpose status? I am curious on your thoughts on this as well, Melissa, but I mean generally speaking, it's going to really depend on the situation. Paying taxes, you're pretty okay because that's really protecting your lien, and so that's not changing the purpose of your loan. The purpose of your loan is one thing, and then if later on they're not paying taxes, you're paying them, you're protecting a business purpose lien, paying off an existing mortgage, I mean, I assume we're talking about a post default type of situation because obviously if you pay that off when you're originating the loan, you have a real question then about whether this is even a business purpose loan in the first place. So I'm assuming that this is coming later and I think it likely doesn't jeopardize your business purpose. Assuming that there's sort of a clear and present danger, like let's say that mortgage is foreclosing and you need to do something to protect your own lien, then I think that does go under lien protection, but the circumstances I think would really matter.

Melissa Martorella:

Yeah, I agreed with that. When I first read this question, I was like, absolutely, this is consumer purpose because I was assuming we were talking about loan origination. Both of these things would lean towards consumer purpose at loan origination, so definitely want to look at that. But I love Kyle's answer here, if you're protecting your lien because maybe you're a junior lien and a consumer first is foreclosing, or there's a tax cap tax sale that's coming up and you want to protect your lien, again, of course those things would be okay, but it's something where you definitely want to pay attention to that at the outset because at the outset of the loan, this would definitely swing, I think, in favor of it being a consumer purpose loan.

Kyle Niewoehner:

Another one from Mike, in a decision analysis, you would try to exhaust refinance options with your own resources or third party brokers lenders first before modifying or doing a forbearance on the loan? Well, I mean it really depends. I mean, I don't think you generally jump right to refinance. Oh, I think, yeah, with your own resources. I don't think our clients don't generally jump right to a refinance with your own resources first. If you're in a default position, as I kind of discussed some of that earlier, you don't necessarily want to refinance alone that is in default unless you have some really, really clear explanation from the borrower about why this situation is going to change and it's going to be a good loan going forward. I would say you generally want, you often do want to see if the third party can come in.

Kyle Niewoehner:

That would be a really common reason for doing a forbearance and sometimes even maybe an extension, maybe a short extension where especially if they're like, Hey, we're negotiating with this other lender, we think they're going to take us out. That's a common reason why lenders are willing to give more time or obviously if they're trying to sell the property. Another common reason why you might give them more time, but I would say refinancing with your own resources is very situation specific. And again, you would want to really clear plan from your borrower about what they're going to be doing going forward to make sure that you're going to refinance and have a good loan.

Kyle Niewoehner:

Because as also mentioned earlier, the refinance option does have some additional expense and some sticking points for the lender that they'd want to resolve from another anonymous attendee. How else can we make the deed in lieu more desirable for the borrower? I mean, there's a lot of options on a deed in lieu, but as was kind of discussed earlier, one of the big ones would be giving them some cut of the proceeds after you sell it later. Now, you do want to make sure that that provision is drafted well because it can get complicated, especially if it takes you a long time to sell the property and depending on how it's drafted, the partner could come back and say, Hey, you owe me my money now. It's been X amount of time or whatever, it's been too long. So you just want to make sure that it would be drafted very clearly.

Kyle Niewoehner:

You can also release the guarantor from liability, as we've kind of discussed this at length. That can be a great thing for the lender to keep a guarantor liable. But if you're trying to negotiate and get the borrower to enter it, that may be something that you look at that you're willing to do. If you really believe in the value of the property, maybe you also agree to release the guarantor there's, and you can negotiate whatever with the borrower. But those are, I would say some of the main things is giving them an option to get more out of this later or reducing their liability, releasing a guarantor, et cetera. Those are some of the main options you have to incentivize your borrower from. Ann, what happened if an HOA default forecloses on the property? What happens to first and second liens? Melissa, do you have experience? I know that this was a huge issue back in the great recession. I think especially in Nevada, there were a ton of HOA foreclosures and I think at times they do have a super lien. But do you know more about that?

Melissa Martorella:

It's really interesting because to your point, it'll depend on the state as far as where that HOA priority will end up being. But that said, with an HOA foreclosure, I don't believe it wipes out the liens on the property. But if it is a state like Nevada where there is a super priority for those HOA liens, that's actually something I don't know. And it might actually be problematic for you. I know with loans that we draft in Nevada, we're often looking to see if there is an HOA at the property to see the status of those because of that kind of super lean status. So thankfully, I have not had to deal with a loan where there was an HOA foreclosure wiping out anybody or the lenders wondering what to do, thankfully. But it is definitely something to look into when you're underwriting the loan. Probably. That said, I know that HOA defaults, the process on this is a lot longer because the amounts are typically much lower. And in those situations it's usually owner occupied properties. Not always, but usually it's that. So they're going to have a lot longer of a ramp up period before they would end up foreclosing as well. So there is that, and you would certainly be noticed if you are going to be wiped out in some way that this is happening.

Kyle Niewoehner:

Yeah, I was just thinking about that too. I mean, if you're a lien on the property and the HOA is foreclosing, they are going to be required to give you notice. So this is not going to happen out of nowhere just because it's the HOA, they're still going to have to go through the process. They're going to have to give you notice. And at that point, obviously you probably want to step in and deal with that yourself before you let them get all the way through the foreclosure process. Another one from anonymous, when researching assets of a guarantor, what resources are there besides hiring a private investigator? I feel like this is kind of a Steve question. I dunno if you have more thoughts, Melissa,

Melissa Martorella:

Only a question for Steve. He can definitely answer that for you. But in addition, you can do background searches. I know there's Lexi and west spot searches that you can do on parties and you can kind of get a little bit of insight, but the private investigator is going to do that and then some, and they're really going to dig in and figure that out because they're going to figure out, okay, it's not just Kyle. What else does Kyle own? How does he have it held? Does he have a trust? Does he have an entity where he is holding things and that sort of thing? And the private investigator is going to be able to do that much better than you will, but there are some search options and that sort of thing. But I would reach out to Steve if he would definitely be able to help you.

Kyle Niewoehner:

Can you use, what is it? Is it like forecast or something? The search liens?

Melissa Martorella:

I suppose you could, but that's more so for seeing what's been recorded. I don't know if you can. Yeah, I'm not entirely sure if he could do it for this sort of thing.

Kyle Niewoehner:

Okay. Not liens, but yeah, it would be for stuff they own. Yeah. But yeah, ask our litigation team. They would love to talk to you about that. Another one from an anonymous attendee, when you said the loan needs to be in default before you can consider Dean lie, does this mean we need you have officially filed the NOD before filing this option? Oh, great clarification here. Glad you asked this. No, you don't have to have recorded an NOD before offering the option. It is simply that the loan is in default. They have not complied with the terms of the loan. They've missed a payment, they've let insurance ops haven't paid taxes, something along those lines. You do not have to record the NOD first. There simply needs to be the loan was entered into, it was in good standing and then something happened that was an event of default under the provisions of the loan documents. And at that point, you can consider the de, regardless of whether you've officially started a foreclosure proceeding. Another one from Ann, can a business purpose loan or commercial loan on investment property closed legally without any closing HUD or no escrow papers?

Kyle Niewoehner:

I guess the question is potentially, can you close without escrow? I mean, you can on a business purpose loan, it's not like there's a legal requirement that you have to go through escrow, but we highly, highly recommend it. I mean, you open yourself up to all sorts of potential disputes and litigation later. Even if you are a business purpose loan, that doesn't mean that you have no liability for where the loan proceeds go if the borrowers kind of questioning that later. And certainly this wasn't asked specifically, but I think this goes to a title policy as well. You want to get a title policy. I always tell people, if you're not getting a title policy on a property, you should act like you don't have that collateral because you don't know if you actually have a perfected first priority or whatever priority. You think security interest on the property without a title policy.

Kyle Niewoehner:

You want to get the title policy. And that's going to involve basically an escrow, either title or some other escrow. And the closing hu, so the HUD is people talk about a HUD as just being a generic closing statement, a settlement statement. A HUD is technically like a consumer loan concept, but people kind of use the term interchangeably. You definitely want to have a settlement statement. You need to have a settlement statement that is setting forth the use of the loan proceeds and balancing everything out that, I mean, there's just so much potential liability to close a loan and not have that. Yeah, really couldn't encourage you strongly enough to make sure that you go through getting a settlement statement and making sure that you have some type of escrow or use title as escrow. Evan Frank follow up. Is it automatically void or voidable at the option of the lender?

Melissa Martorella:

I think it's probably voidable. This is dealing with if the conditions are not met, and I would say it's probably voidable by the lender. So if those don't make sense and you still want to proceed and deal with it later, that's fine. So it's probably voidable and if the lender wanted to continue and keep that forbearance in place or that modification in place, you could, but I don't know, Kyle if you have a different analysis there.

Kyle Niewoehner:

No, I think that's probably right because I think it's within event of default on the loan always. The lender can always waive it. You're not forced to enforce it. And I think typically on a forbearance, the lenders agreeing to forebear and give certain concessions in exchange for whatever the borrowers agreeing to. And I do think that the conditions precedent are generally requirements on the borrower. And I think if the lender wants to later, they can waive that and say, Hey, this is still enforceable because all of the consideration that the borrower was receiving, they did receive. But yeah, I think if you are going that route, you want to communicate clearly because you don't want that to come up later. And then the borrower could say, well, we didn't do this and so we thought this never actually happened. You want to jump on top of that.

Kyle Niewoehner:

If it's been like a week they didn't do something, but you want to keep going forward with it, you need to send a written communication to the borrower saying, Hey, you haven't done this, but we're okay without that at this point we're just going to proceed. And then at that point, the borrower is either going to confirm and then you're all good. Or maybe if they say nothing, if you make sure that they did get that message and they say nothing, you're probably also covered. But you definitely need to communicate about that if you're going to waive a requirement after it's been signed from Alex Johnson. What concerns are there if there is a second lien mortgage behind me when working on a forbearance for a forbearance agreement, typically there's not as much concern unless you're making an additional advance because you're now agreeing not to foreclose, which benefits the junior lender typically.

Kyle Niewoehner:

And if you are having the borrower make additional payments or fees to you for the forbearance period, generally speaking, I don't think the junior can contest that because you have this right to foreclose and you're agreeing to not do that, and that ultimately is going to benefit the junior lender. And if they are paying you for that forbearance, I mean that's pretty standard and you deserve some consideration for that, but you really would need to be concerned about that if you are advancing additional funds or kind of changing restructuring the loan in a way that would disadvantage the junior lender. But also a forbearance is not a recorded document either, so it's not going to pop up on title. It's not going to affect lien priority in the sense that you change the situation on title. Another question from Jennifer cannot charge a default rate when secured by a primary residence, California. Does this include multifamily property with tenants that the borrower resides at as well?

Melissa Martorella:

I don't know that this is true. You can definitely charge default interest if the property, if it's a business purpose loan secure by primary residence. The issue is you can't charge default interest in California until maturity date default. And so for any property, regardless of whether it's owner occupied, one to four family, multifamily, commercial, that's going to apply. So I think maybe that's, we're confusing two issues here potentially, unless Kyle, you read it

Kyle Niewoehner:

Differently. Yeah, yeah. I think maybe there's a confusion here of primary residence versus business purpose or really versus consumer purpose. Just because the loan is secured by a primary residence doesn't mean it's a consumer loan. And so it's really the use of proceeds that determines that. And when you have to start worrying about these types of restrictions is typically with consumer. Although as Melissa brought up earlier on one of the other questions, there are times when owner occupied changes situations for business purpose. So you do want to talk to your attorney about that. But the big issue in California is just whether the loan has matured from Alan. We've run into situations where borrowers have taken out second liens that make deed and lie arrangements more complicated. What's your preferred approach for the loan documents? Should we require prior written consent for any additional encumbrances or do you recommend stronger prohibition language?

Kyle Niewoehner:

And how do you typically word these restrictions to make them both enforceable and borrower friendly? Our documents do have a prohibition generally on junior liens without lender's written consent. So that's standard in our loan documents. But keep in mind that whatever you put in your loan documents doesn't actually prohibit junior liens from being recorded. Somebody can still go and make a loan and record the junior lien. What that does put you at is a situation where you can foreclose and you're going to get paid before that junior lender, but it does make D in lieu arrangements more complicated. And this is exactly why we tell people you need to go and look at title first and keep in mind that a D in lieu arrangement is something that the bar has to agree to anyways. So I mean, if your borrower is recording second liens to make a deed and lieu more complicated, that's also probably a borrower that doesn't want to do a deed in lieu.

Kyle Niewoehner:

And if they now say they do want a deed in lieu, then I mean they're going to have to deal with those other liens to your satisfaction. If you have a situation where the borrower thought they wanted to make it hard to do AD and Lou, and then later they decide, oh, I do want to do AD and Lou, but now that there's another lender involved, that's just kind of their fault. And you can't prevent someone from recording a junior lien on a property. There's no way to prevent someone from recording a junior lien. And so ultimately you may just run into a situation where it's not viable to do a deed in lieu because that has happened, and that's where fortunately you have the actual foreclosure option.

Melissa Martorella:

And what I will add to that quickly though is we do have language in our documents, like Kyle said, that prohibits junior liens or requires lender consent. But to Kyle's point, if somebody just records a junior lien against the property and doesn't tell you, well, depending on the type of collateral, you may not be able to use that as an event of default because there's a thing called the Garn Act federally that's codified in California and in other states, which basically says on certain property types and for certain reasons, if a junior lien is recorded or certain other transfers of title happen in those situations, you can't use that as the reason for default and start a foreclosure. So that is something to be aware of as well.

Kyle Niewoehner:

Oh, that's a great point. That's a great point, yeah. From Jennifer, if only extending the maturity data is recording a mod to DOT necessary. Oh, do you need to record it? No, you don't. I mean, we commonly see it where people that are just doing an extension don't record it. Again, you're not going to be able to get a date down endorsement from title unless you do record it, and we generally recommend it as best practice, but we certainly understand a lot of times lenders are like, Hey, I'm just doing a previously agreed to three or six month extension or something like that. We don't want to go to the trouble of recording. And that's okay. I mean, you still have a legally enforceable extension and just assess the risk yourself. We would still recommend that you go and get a title date down. Sometimes lenders don't care to do that, and you just kind of got to assess the risk of this client, this borrower, this property, and make your decision there from veit.

Kyle Niewoehner:

Any issues with structuring an extension such that there is a $20,000 fee to extend, but then 10,000 is credited back if borrower pays back loan in full by date X using a carrot approach? No, I mean people do that. People do that. Sometimes we document that for clients. It sounds like you'd have potentially a deferred extension fee there, or maybe you have a extension fee for 10,000 and then you have a $10,000 exit fee that is eliminated if they pay back the loan by a certain date, et cetera. But yeah, I mean you can get creative with this type of stuff for sure. All right, and I think we finally got through all of those questions. A lot of great questions there, and I think we're ready to wrap up the webinar here. I don't know if you have any final words, Melissa, but thank everybody for attending and we appreciate all the interaction and for your time.

Melissa Martorella:

Thank you all. Have a wonderful afternoon.