Workouts 101 – Forbearances, Modifications, And Other Loss Mitigation Strategies: What To Do When Your Borrower Can’t Pay

Melissa C. Martorella, Esq.:

Alrighty. Seems like we have tapered off with people entering the room. So we will go ahead and get started with our webinar today. First of all, thank you all for joining Kyle and I this morning. We're looking forward to chatting with you all about Workouts 101 – Forbearances  Modifications  And Other Loss Mitigation Strategies: What To Do When Your Borrower Can’t Pay. This should be an exciting one and looking forward to getting into it with you. A few housekeeping items before we get started. First, yes, this is being recorded. After the webinar today, an email will go out. It'll have the link to the webinar as well as the slides. It'll also have some helpful other resources like articles and things like that that we've prepared over the years for you to have a supplemental material. So look out for that, share that with your coworkers or people in the industry that aren't able to make it today so that they can have that resource.

Second bit of housekeeping is there is a chat button here. If you have questions today, we will take them. Don't put them in the chat though. You might have to click on more and then you'll see a Q&A tab. Put your questions in the Q&A tab. At the very end, we will go through as many as we're able to go through to answer those questions. We also have our contact information here, so if maybe your situation's a litle bit more specific, feel free to email either Kyle or I and we're happy to get back to you as well. Looking forward to getting started. So introductions are in order. If you haven't met me before, my name's Melissa. I'm one of the partners here at Fortre Law. I also manage the banking and finance team. So we do loan documents and lending compliance for our lenders, but also a part of our business is what happens when those deals are maybe a little messy about getting the money back in the door.

So mods, forbearances. I manage our non-judicial foreclosure practice in California. So that's my area of expertise. And then with me today, I have.

Kyle Niewoehner, Esq.:

Hi, everyone. I'm senior counsel in the banking and finance department and I do a lot of these workout situations. In addition to the loan documents and origination stuff, we do a lot of these workout situations. So excited to talk with you all about that today.

Melissa C. Martorella, Esq.:

Awesome. So brief overview. Here's the agenda for today's webinar. First, we'll just give an overview of some of the legal strategies and best practices that are available to you all as you have loans that are in default. We'll also go over what communication and documentation lenders should use if borrowers are requesting relief, so what the standards should be there. And then finally, how to properly evaluate and document various loan workout scenarios, whether it's a mod, a forbearance, a deed in lieu, assignment of rent, enforcement, et cetera. So we'll go through each one of those and talk about them. And like I said, we'll have a Q&A at the end, so feel free to put any questions in there and we're happy to answer them.

Kyle Niewoehner, Esq.:

All right. So we'll jump into it here. We're going to go over the various types of loss mitigation options from the different types of workouts and negotiation with the borrower into really just enforcement actions in the last half of this presentation. So I'm going to discuss, first of all, hear the different options of working on a deal with your borrower and then later on Melissa's going to discuss the different enforcement options and what the different considerations are there. First of all, just some good general best practices. When you have a borrower go into default, you want to make sure that you maintain some formalities and particularly that you keep a record of the negotiations. After the great recession, there are a lot of lawsuits involving oral misrepresentation. Borrowers alleging that their lender, their broker was deceiving them or not representing things properly. And still today, I mean, that's a very common way to get into trouble and make things a lot more difficult is by carrying on conversations maybe just over the phone or things like that where it's unclear exactly what's going on.

Maybe you discuss a lot of different possibilities and the borrower comes back later and says, "Well, they told me this and you don't really have a good record of what happened and that makes things way more difficult." So we always recommend, even if you do have a call, I mean, it's not wrong to have a call, but we recommend that you memorialize all of those calls in writing immediately. Usually easiest way to do that is going to be an email. You talk to the borrower, you get off the call, send a follow-up email where you say, "Okay, here's what we discussed. Here's my understanding of what I offered you or what was agreed on or whatever the case may be. " And so that way it's very clear after the fact, months, years later even of what your idea was of what happened on that call.

And if the borrower had a different idea, they then should reply to your email and say, "Oh, we had a misunderstanding. I thought you said this, or I thought that you offered me this, " but at least you have that in your record and then it's on them to respond if they had a different understanding what the call was. And then as we're going to talk about later, particularly with demand letters, if you are going to take particularly an enforcement action, you're going to want to send paper, some old school mail to their notice address and have it physically documented like that. And when you enter into any of these types of agreements that we're going to talk about, they need to be signed by both sides. Obviously when you do the original loan documents, almost the entire document package is just signed by the borrower.

The lender doesn't need to sign most of that stuff. Things we're talking about today though are different. These are agreements where typically you as the lender are giving up rights that you have or you're agreeing to change what was originally agreed upon in the loan. And because of that situation, you have to sign it yourself if you're on the lender side. So both parties need to sign these due to the nature of the agreement.

And then moving here into just a kind of overview of some of the workout options. A lot of times when I talk to clients on a default situation, they're trying to figure out what to do, these all can come up forbearances, modifications, deeds in lieu. Sometimes you're trying to decide between them. Sometimes we even can combine some of them. So just want to give a general overview of what we're talking about here when we're using these terms. When we talk about our forbearance, that is going to be a loan that is in default and the lender is waiving rights of some type. You may be waiving a right to receive payment or you may be allowing the loan more time to pay off. It's already matured, maybe you've already even started foreclosure, but you're going to give them more time. But the point of a forbearance is the loan is in default already and it's going to remain in default, but you're giving them more time and you may also be allowing them to not pay or make lower payments, or you may even be requiring them to make full payments, but you're just giving them more time before a foreclosure.

The modification is a lot more broad in terms of situation. The loan might not even be in default. Obviously, everyone does loan extensions a lot and that's a type of modification where the loan may not even be in default. You just agree to extend it and give them more time. But you can also do a modification when your loan is in default. And rather than just giving them more time, you may come to an agreement with the borrower of, okay, we're going to just change the loan terms and then we can go forward under these new loan terms and the loan is out of default at that point. That's one of the big differences between a forbearance and a modification. With the forbearance, the loan starts in default, it stays in default over the term of the forbearance. With a modification, if it is in default, you're curing it through the modification and you're restarting the loan on a new foundation and you can do basically anything through a modification.

You might advance more money, they might make a principal reduction payment. So there's less money outstanding. You can increase, lower the interest rate, extend the maturity date, then there's just infinite possibilities with the modification. You may add more collateral. There's all kinds of things you might do. But the point is you've changed the loan terms and you're comfortable then with what the loan is going to be after the modification unless there's a subsequent additional event of default. And then lastly here, the deed in lieu, then that's really a foreclosure alternative. It's through borrower signs a grant deed to the lender, walks away, gives you the keys to the property. And now it's on you as the lender to market, sell the property yourself and try to recoup your losses. And that's another option that can be quicker, though there's also some additional risks that you take with the dealer that we'll talk about more later when comparing that to a foreclosure.

So moving here into the forbearances first, the big question upfront, if you're doing a forbearance, what are you forbearing from? I mentioned earlier, the loan is in default already. So the borrower may have missed payments, they may have missed a maturity payment. Either way, you're going to be forebearing from either starting foreclosure. If you haven't even recorded us a notice of default yet in California or in other states, it may be called something diferent, but it's the same concept of whatever the first step is in the foreclosure process, you may agree to not start foreclosure for a certain amount of time, or you may already have started foreclosure. So maybe you're up to the point of you've scheduled a sale and you can still sign a forbearance with them at that point and you could agree to forbear from the sale.

You can also just do other things. You can forbear from charging default interest during a default situation. Usually you probably also are forbearing from recording a notice of default or something like that as well. But I mean, you can lower the interest rate through a forbearance as well. As I mentioned earlier, you can lower monthly payments. The second big consideration here that you need to agree is how long is it going to be pretty basic, but that's a huge negotiating point of how long are you going to actually give them. And then what are you getting in exchange for your forbearance? You can have the borrower pay you a forbearance fee for these, so not even a paydown. And so pretty commonly the borrower is going to pay an additional fee on top of whatever their origination fee was for the forbearance. Now that's not always the case.

Sometimes the consideration for the lender may be a principal reduction payment or something like that. And sometimes the lender just agrees to give them more time because you just want to help out your borrower and you do think that they can probably pay you off if you give them a few more months or something like that. And so you just say, okay, make me some payments or whatever the case may be and I'll give you some more time, but a lot of flexibility here and you just need to make sure that you clearly document these things. And certainly if we're documenting the forbearance for you, these are questions we're going to be asking you to make sure that we understand the situation and what needs to go in the document.

The modification, you need to figure out what's changing from the original loan, obviously. And another important thing here to remember is that anything that doesn't change in a modification is staying the same. And so I mean, certainly in our documents and whatever document you might use for a modification, you also should have a provision that does say anything that's not changed by this agreement is going to stay the same as the original loan documents. And sometimes I get questions about that from clients of, "Oh, don't we need to reaffirm this thing from the original loan documents?" And generally in a modification, as long as you're drafting it properly with that language, you don't need to redo anything from the original loan documents. The original loan documents stay in place and then you change certain items. And then we do generally get a few reps and warranties from them.

You want to confirm the outstanding amounts due and a few other things. But for the most part, the idea is everything that isn't explicitly changed from the original loan is going to stay the same.

And one thing that we do also sometimes see is you may start negotiations with the forbearance and then you eventually realize, okay, we can work out more of a long-term deal here and you may switch to a modification. And again, the big difference there would be after a modification, the loan is back in good standing. So that's the question to ask there of whether you're doing a forbearance or a modification is are the defaults cured? Once we enter into this agreement, is the loan back in good standing or is it still in default? Because it's still in default over the term of whatever you've agreed upon, then you're doing a forbearance. And there's a lot of similarities between forbearances and modifications is why I try to clarify that because they're very similar in a lot of ways. There's a lot of things that you can do the same in both of them in terms of changing the interest rate and even having payments and stuff like that.

So just want to clarify that.

And then lastly here in terms of these workout type agreements, the deed in loop, there's a lot of considerations here. The deed in lieu is attractive because it is generally faster than a foreclosure process and it allows you to get your hands on the property and move forward trying to sell it. Don't rush into these hastily though, because they can also create a lot of problems for you if they are done incorrectly and you can actually be in a worse position than you would've been if you had just foreclosed. Don't just have your borrower sign a deed and go and record it. That is going to create a cloud on title and there's going to be a bunch of unanswered questions from just doing that. So you need have not just a deed, but a whole documentation of what was agreed upon in exchange for the deed, how this is going to work, and addressing all of the loose ends that would be remaining from the loan.

So we usually call this a transfer agreement, and there's also a variety of other ancillary documents for a deed in lieu to comply with various types of issues and avoid future problems. You need to agree whether there's any further recourse to the borrower or the guarantor. Typically, there's not going to be further recourse to the borrower. Usually that's the main consideration that the borrower's receiving for entering into these, but the guarantor is optional assuming you have a personal guarantor on your loan. The personal guarantor could be released or the personal guarantor could still be left liable for their original guarantee, in which case you could take the property through the deed in lieu, you go and sell it to some third party and then based on how much you get from that sale compared to how much was due on the loan at the time of the deed in lieu, you might have a deficiency which you could then pursue the guarantor for.

So that's an important thing when you have a personal guarantor on the loan, that's a key point to negotiate and then to clarify in the documentation. And then whether the lender owes any obligation to the borrower after the sale of the property, this is something that we also see fairly commonly is the borrower may be willing to do a deed in lieu on the condition that when the sale happens afterwards and if there's any extra above and beyond what's due on the loan that they want that or a cut of that, or you can work out a deal with them because the thing that the borrower is giving up with the deed ofLoux is that there's no foreclosure sale. And whereas in a normal foreclosure sale, if there's excess funds, they could come back to the borrower, they give up that right in the deed in lieu.

And so they may want to get that back or maybe partially get it back. A lot of times it's like a percentage that ends up getting worked out of where the excess proceeds go, of some of it goes to the borrower, some of it may be kept by the lender, et cetera. So that's a possibility. Now, again, that doesn't always happen. Sometimes it's just a straight up deed us of property and then we're going our separate ways and we're done with this. But if you are trying to negotiate a deed loan with the borrower and you really would prefer to do it that way, but the borrower's bulking because they think that there's more equity in the property, you may want to offer this type of arrangement and maybe you can actually come to agreement on the deal by using that as a negotiating ship and then what is included in the transfer.

Now, typically the way you are going to want to work this out is the borrower should remove anything from the property that they want to keep before the deed in lieu is recorded because otherwise that gets very complicated. If you now own the property but the borrower has some furniture or equipment or something on the property and they say that's theirs, we do include a bill of sale in our standard deed in loop package where typically you're going to want to have that right to any of the stuff that's in the property after you take title to it again, because otherwise it just gets very complicated. So that's something to discuss upfront with your borrower. You don't want to have that situation way later and they're saying, "Hey, they stole this stuff from me. " And you're like, I don't even know what was in there.

So you want to talk about that with your borrower and then that needs to be documented in the package of what is included in the transfer.

Then you want to make sure you run a title report and verify that there's no junior liens. And first you need to try to negotiate a deal with your borrower as we just discussed, but then before you even start into really documenting this and moving forward, you need to make sure that you get a title report because the thing about a deed in lieu is it doesn't do anything on title other than making you the new owner. Whereas the foreclosure sale is going to wipe out any junior liens through the sale process. The deed in lieu just transfers title and now you're the new owner and you have to deal with whatever is on title. And so you need to make sure that you understand what you're getting yourself into. And so that's usually our kind of first step when a client comes to us and says, "Hey, we've worked out a deal with our borrower." And then it's like, okay, do we have a current title report on this property so we can see what we're dealing with?

And sometimes you may look at that and that completely changes the considerations of what you want to do because you see, oh, wow, there's this junior lien on title. We don't really have a plan to deal with that. Maybe we need to go through the foreclosure process to make sure that we can get clean title. And then on that point of getting clean title, you need to get an owner's policy. So you have a lender's policy presumably already on this, but when you're going through the deed in lieu process, you're going to need to work through a title company that is going to issue you an owner's policy upon the recordation of the deed. Title companies do not likeD and lose. It's one of the more risky transactions that they do and there's a reason for that. I mean, the foreclosure process is very formalized.

You have all the notices, you have the public sale and auction and then a special type of deed that gets recorded and you wipe out junior liens. Title companies generally feel very good about that. They understand that process and because of the formalities, any other issues on title are generally going to get dealt with in a very straightforward manner and deed and lose are just kind of the opposite of that. They're basically chaos. It's like somebody else now owns the property and all of the junior liens are still on title. Anything that might have been out there that's not even recorded yet could still come on. And so title companies are very cautious. And that's also one of the things that you would need to understand as a lender is while these are quicker than foreclosure, they're not usually as fast as lenders expect them to be because title companies need to get comfortable with the situation before they're going to be willing to issue you a policy.

In my experience, that whole process usually takes at least a couple weeks. If you're hoping that you can, like today is Wednesday, if you're thinking, "Hey, I've got a borrowing default, maybe we can just get a deed in lieu and we'll just record it this week and we're going to be done by next week." That's typically not realistic. Title company is going to look at this. They're going to want to review your documents. They're going to have some stuff they want to get from the borrower and they're going to also usually take care of the recording process for you because if they're going to insure, they're going to want to make sure that gets done correctly. So you're going to go through title and they're going to issue an owner's policy. The alternative of you just recording your deed is you're then going to have difficulty selling the property because any buyer who's going to come in is going to want to get title insurance themselves.

And title companies, again, they don't like deed and lose. They definitely don't like deed and lose where there's no insurance on it. And so the title company that's going to insure a future owner, they would like to see that there was insurance on the deed in lieu and that there was clean title. So just to make sure that you have marketable title yourself when you go to sell the property, you do need to get the owner's policy, even though that can be a bit of a pain. It's a necessary pain. And then one final thing to say on this whole concept of deed and lose, because this is another common question we get, you cannot get a deed in lieu at the closing of your transaction. People often are like, "Can I just have them sign a deed in lieu right now when we're closing this loan?" And so then if they ever stop making payments, I can just record that and I'll take over the property.

You can't do that. In California and in any other state, the state would view that as circumventing their public policy of requiring foreclosures. So you cannot get an enforceable deed in lieu until the loan is already in default. And so the way essentially the government is looking at this is we have a foreclosure process, you're supposed to follow our foreclosure process, but if you're basically in foreclosure or you could be in foreclosure because the loan is defaulted and only then will we allow the borrower to make the decision that they would rather just deed this over to the lender than go through this whole foreclosure process. So you cannot get a borrower to agree to an enforceable deed in lieu until the loan is already in default. And then obviously that goes back to some of the other communication things about making sure you communicate when the loan is in default and making sure that you are documenting that.

And certainly this whole negotiation process with your borrower on the deed in lieu, you want to make sure that you document that carefully because particularly on these, there's a concern of if the borrower comes back later and is saying that they were threatening me into this or that they were exercising some type of coercion or something like that. So you definitely want to carefully document your discussions with the borrower about this and make sure that you present yourself as the good guy of not like, "Oh yeah, we really pressured them into this, but we offered this as an option." And it is often that borrowers find this to be attractive because a lot of times borrowers don't want a foreclosure on their record and they sometimes may just want the process done. Obviously, lenders typically are eager to have this all done, but sometimes borrowers also just want to get it over with.

And so you want to make sure you document how you are dealing with the borrower and the fact that this was a mutual agreement, something that both parties saw as a benefit.

And then just a couple of things that we wanted to talk through here, six of the key provisions and things that are going to be in these workout agreements and just across all of them generally. I want to make sure that you have recitals in these. Tell your story as I was just talking about with the deed and lose, the borrowers, when they do lawsuits on these situations later, obviously they try to portray the lenders as being predatory, as threatening them, as trying to force them into a bad deal, et cetera. And so within a document, you want to make sure you lay out the history of the loan. If it goes before a judge, you want them to be able to understand quickly how you got here and to make it clear that basically you aren't the bad guy here. You gave this loan, the borrower didn't comply with the terms with their end of it, so now you're giving another option to the borrower, you're working with them here and that should be usually at the beginning of the agreement.

Next, you do also want to have some reaffirmation. So I mentioned earlier, particularly with the modification that you're not changing things in the original loan other than as you are explicitly setting out. But there are some things that it's good to just get reaffirmations of because they're not really loan terms, but they are things that could come up later and you want to get ... Every chance that you can get to have the borrower double down on this stuff is good to take. So amounts due, want to itemize the amounts due and make sure that's clear. Obviously, sometimes borrowers come back and they dispute what is actually due. So you've got a chance here with the workout agreement to at least at a certain point in time as of the date of the agreement, you've got a chance to get the borrower to agree this is what's due at this date.

And so at least up until that date, they really can't dispute that anymore. Business purpose of the loan use of funds, usually good to just get another affirmation. Hopefully you already have one of those that you got at closing of the loan, but it's good to just get another reaffirmation of that because of course, sometimes borrowers later decide to say, actually, this wasn't business purpose. And so again, you're just having another chance to get them to affirm that and leaving a really good evidence trail if there is any future litigation. Similarly for occupancy, we're assuming generally here, these are business purpose loans. And then also typically non-owner-occupied. Sometimes you may have a owner-occupied business purpose deal, in which case this is not so relevant, but a lot of our deals obviously are non-owner-occupied, most of them. And so again, you want to get them to reaffirm that they're not living in the property.

We all know sometimes borrowers move into the property later. So this is something to get a reaffirmation of as well when you get the chance. And then borrower's authority to sign the agreement. Assuming that you have an entity borrower, you do want to get updated entity documents and make sure that nothing has changed in the borrower entity, that they didn't transfer ownership or management or something to someone else. And then you want to make sure that whatever you need to get proper authority for them to sign, you do that. That's just kind of basic, but good to just remind you that. And then as I mentioned earlier, need a re-affirmation that all other provisions in the original loan documents remain enforced. That should be a baseline of any type of these workout agreements. And then third release of claims, we have a standard release of claims that we put in all of these.

And like in California, there's even some California specific language that you want to put in. It's a good chance to give yourself some protection against future litigation. You can't get a release of claims at the origination of the loan, but now that you're doing this workout situation, this would essentially be consideration that the borrower is giving you. So in any of these types of things, you're giving the borrower something that they weren't otherwise entitled to. And so as part of the consideration for you to do that, you can get this release of claims from the borrower and we use generally very broad language. And so sometimes there may also be something specific that you want to put in the release of claims, but otherwise we just try to be very broad and give you as much benefit as possible from that. And then you also are going to define future defaults.

This would be particularly in the Forbearance and the modification. Now, the original events of default under the loan, that's going to stay in place, but you also just usually want to define some of the future ones. If there's particularly on a forbearance, if there's other defaults, then the forbearance is going to be voided. And some of these other ones, you want to make sure it's clear that your workout agreement is not giving the borrower just carte launch to do whatever they want now during the term of this. There could be a subsequent event of default that is going to cancel your agreement with them, whether it's a forbearance or a modification. You're dealing with an original event of default, which will be stated again in the document. And then you're going to specify if there's another future default, the deal is off because it's not like just because we have this agreement in place, now you can just continue to do other things and expect that we're going to keep up this deal.

And then fifth, we're going to have some conditions precedent. This is a crucial provision here because these are typically by their nature conditional agreements where you're agreeing to give them these change terms of forbearance or whatever it is, but there's things that the borrower has to do that you need to make sure that you're getting what you wanted out of this. And so let's say they have to make a payment to you, whether they're paying a fee, whether they're paying legal fees, maybe there are, depending on what you're doing, there might be escrow title fees, things like that. Usually the borrower's going to have to cover those. And so you want to make sure you put in the agreement that this is only effective, even if both parties sign, this is only effective if the borrower pays all this stuff they're supposed to pay, because otherwise you may send out the document to the borrower and then everybody signs and the borrower doesn't pay, but they say, "Well, you signed this, we signed this.

Everybody signed this. It's agreed to. " And so it's very important to have this provision where they need to do these certain things in order to even have it come into effect. Another one may be tax and insurance, making sure that they're current on insurance, that the taxes are not past due and things like that. Sometimes those may be waived, but those are pretty common. And then there may be also just other things, depending on what you've agreed on with the borrower, there may be other things that need to go into place. Maybe they're giving you additional collateral. Well, that needs to be in place as well in order for you to be honoring the agreement. And I've definitely seen it before where these things get signed and then it turns out they were supposed to make a payment and then they never did that.

And so you need this provision in there so that you can go back to them and say, "No, this forbearance is not in effect right now because you never made this payment and it clearly says you needed to do that in order for this to be a valid agreement in order for it to be effective." And then lastly, talked about title policy a little bit with Dean and Luz, but it's also relevant for the other situations. You generally want to get a date down to determine whether there's other defects that you didn't know about. Often if you're a lender, you get your original title report, you get your title policy, and then you're not looking at title for the rest of the term of the loan. And so when this default situation comes up, it's a really good idea to go back to usually your original title company and say, "Hey, can you give me a date down on the title policy or maybe just a new title report?" So you can see what's on title.

That may change how you want to deal with your borrower, whether you even want to give them a forbearance, for instance, or whether you want to do a modification, because if it turns out there's a bunch of mechanics liens on title that you didn't know about and your borrower's in deeper trouble than you thought, well, maybe you don't want to just give them more time and maybe you want them to deal with that stuff first or whatever. And sometimes you draw a title and you realize, wow, they deeded this property to somebody else during the term of the loan. We've seen that. And then you've got a lot of other things to deal with then at that point. But yeah, so you definitely want to do that before you do a modification and generally also before you do a forbearance, just to make sure you understand what position the borrower's in and what position the property is in and that can change your decision making and it can lead to additional things that need to be addressed in your workout agreement.

You don't want to do a workout agreement with them and then find out later that there was stuff on title and you didn't even know about it and you would've liked to have dealt with it, but you didn't know about it. Again, I have this last in the list, but that's one of the first steps that you actually want to take on these is to make sure that you're aware of the title situation.

Melissa C. Martorella, Esq.:

Awesome. Thank you, Kyle. I will bring us home with some of the alternative ways of dealing with defaults. Kyle talked about some of the agreements in place and now we're going to talk about other enforcement actions. So first one is enforcing the assignment of rents. So when you make a loan to a borrower, you're getting a deed of trust on the property, but also what's typically included within that deed of trust, it can be a separate agreement, but it's usually in the deed of trust or mortgage is this concept called an assignment of rents. And what that means is upon a default, the lender can go through and request that any tenants at the property pay the rents directly to the lender versus the borrower or the landlord of the company, or sorry, the property. But there's usually a process to do that. You can't just knock on the door of the tenants and be like, "Hey, pay me.

" It usually doesn't work. There's usually a formal letter and notice that has to be sent to each tenant. Depending on the state, there's usually a statutory process that you can use for guidance. Sometimes you have to have a notice of default recorded, just little steps to think about there. Another consideration though, it's pretty easy in general to send these notices. So people usually like to try to do them right away. But if you think about it, if say you're a tenant and you get this random letter from a lender you don't know saying, "Hey, pay your rent to me. " Sometimes it might just ignore that. They might just not pay you directly. I mean, just thinking about it yourself, would you necessarily automatically start making your rent payments to that new party? So it might be, they might get their lawyers involved, they might ignore the letter, they might stop paying the borrower too.

So there's a lot that can happen from these. Usually the assignment of rents is most effective when you combine it with getting a receiver appointed at the property, meaning that's a court appointed person that goes through manages the property and it's very formalized and clear that we're going to go through and collect the rent payments and that sort of thing. It can work and it is a strategy to try to also get the borrower to comply because now you're talking to their tenants and now the tenants are aware that the borrower's in default on this loan. So it can be helpful, but it's not kind of a theme that Kyle has talked about here is like these options that are available to you are awesome options, but they might not be as easy or as clear cut as they seem. So you can definitely take this, but it might not be that you just all of a sudden on the first of the month are getting a bunch of rent payments.

Another option available here, demand letters. So this is actually something that I do probably, this came a little bit later in the presentation. I would probably think about this very early on even before you're talking about a mod or a forbearance or a deed in lieu or foreclosure or anything like that, I would send a demand letter. So if the borrower's in default, sometimes the loan documents waive the requirement to do this and you don't have to tell the borrower, "Hey, you're in default, deal with it. " But I think a lot of times that this is best practice because sometimes the borrower might not be aware. For example, what if the account's on ACH and something happened with the ACH? What if they though they mailed the check in to the right address they didn't? There could be a lot of things that happen.

It could be a life issue. Maybe they were in the hospital and they missed that payment and they intend to pay it. There could be all sorts of reasons why somebody's not making the timely payment. So for me, I always prefer to send that demand letter initially. It gives that borrower a chance to be like, "Oh, I'm so sorry. Let me fix this thing I didn't realize." Sometimes that does happen. And then on the other side is assuming it is either nefarious or the borrower can't bring the loan current, it's a good practice to get into to set the stage of what's happening. And so I have here it sets that record for litigation. So if down the line this becomes a contested thing, you can show the judge just how Kyle is talking about it with recitals and these agreements. It sets the stage of, how did we get here?

We made you this loan, you were supposed to do this under the loan, you didn't do this and it's a default and here's the time that we're giving you to get it up to speed before we take action. Usually about 10 days is what I would say we give people to try to bring payments current or whatever it is. I just think it's a best practice and something again, you might not be required to do it under your loan documents, but it looks best as you're starting these default processes, just painting you in a good light.

Another option available to you is foreclosure. Usually what I like to say to people is it'll require a monetary default and other loss mitigation options aren't working. So you can obviously start foreclosure for things like transferring the property, just like breach of covenants in the loan documents, things like that. You can absolutely do that. But usually when you're seeing this, it's because missed payments are happening or mismaturity date. That's usually what's happening and not just that, but you've sent a demand letter, you've tried talking to the borrower, you've tried to modify the loan or enter into a forbearance, you tried to work with that borrower and those things aren't working. And so now you're resorting to foreclosure. Depending on the state that you're in, you might have both a judicial and non-judicial process that you can follow for foreclosure, but some states will only have judicial foreclosure, so you'll need to look where your loan is to figure that out.

In some states like California, you can proceed with both at the same time and just before you finalize that you'll ultimately make a determination of which one you'll follow through on. So you can be strategic in that sense as well.

Little bit of a breakdown of the foreclosure process. So first non-judicial foreclosure, again, this will vary state by state, but generally you will do a notice of default, which is different from a demand letter, but it would be a notice of default that's recorded against the property. Some states do not have this California does, but that would be the first step. It puts the world on notice that there is a default under that loan and that the foreclosure process has started. Otherwise, there will be a notice of sale. So it's letting people know that you've moved along and a foreclosure sale date has been set at the property. Then it'll go to sale, it'll go to auction and that will occur. And then as Kyle was referring to earlier, there's usually a trustee's deed upon sale or something similar where after the sale concludes, property is transferred over to either the lender or the winning bidder at the auction.

This is just a very general breakdown. We have gone in detail in other webinars about the California foreclosure process, for example, is very in depth. There are a lot of rules that apply different steps. So this is just a general overview. If you have specific questions about foreclosure, happy to chat with you about that. And then the alternative to non-judicial foreclosure is judicial foreclosure and what that means is you must file a lawsuit to start that. Borrower has a certain time period to answer that lawsuit. You could, in theory, get a default judgment if the borrower doesn't respond to your lawsuit, but usually they're going to respond and it's litigation like any other that you would go through with the result being that you obtained the property or that you're able to go to a sale on the property. And so what the judgment would be at the end of that litigation is you would get a judgment that the foreclosure is entered, sheriff's auction is permitted and then the sale occurs just like it does with a non-judicial.

The difference is in non-judicial foreclosure, there's no right of redemption, or at least on business purpose loans. Borrower can't come in after the sale and pay a bunch of money and get the property back. For judicial foreclosures, sometimes that's permitted. So that's something to be aware of. Your counsel can talk to you about that if you have questions, but that is a consideration for judicial foreclosure.

Some other things too for the foreclosure process and specifically judicial foreclosure. So you can usually combine that with other actions. So for example, you might want to combine it with a quiet title action, meaning say a borrower has transferred the property or there are intervening liens on the property that weren't showing on your title policy, things have popped up. You can combine it with a quiet title action. So you're completing the sale, but then you're also cleaning up title in the process. You can usually be very helpful. And then we talked about a receivership earlier when we were talking about assignment of rent. This is something that you can definitely do, especially if it's a large property, commercial buildings with many, many tenants or maybe multifamily property, that sort of thing. If it makes sense, receiverships can be very costly, but it's something that you might consider doing alongside the judicial foreclosure action.

And then as I mentioned before, you might be able to run it the same time as the trustee sale, the non-judicial foreclosures, depending on the state, if that's permitted.

Eviction. So assuming and all of these things in general, judicial foreclosure, eviction, several others that we'll talk about on the next page, you need good litigation counsel. Our partner, Steve, is here. Feel free to reach out to him. He's a great resource, but for eviction or also known as an unlawful detainer action, say you do foreclose on a property and you as a lender take that property back and you own it, you can't just go in and change the locks, enter the property, even if the borrower is being really destructive or the tenants are being really destructive, you have to formally evict people. And so you do that via an unlawful detainer action and that takes time to get people out, but then once that happens and you have that judgment, then you can go and enter the property and all of that. So if you need help with that sort of thing, my partner's fee is available to do that for you.

Another consideration for you in these default situations, it's called a breach of guarantee lawsuit. Usually you'll consider this if there is a deficiency when you complete a foreclosure sale and in comparison to the amount that the property has sold for and what you are actually owed. So say you end up not winning the property, your maximum bid is $100,000 less than what your total owed amount is on the property and so somebody else takes it. So you're paid all but that $100,000 or even if you take it back for that lower amount, but there's still that delta. You can then proceed against the guarantor for the deficiency there based on the amount that the property sold for at sale. So that's something that's helpful. In addition, you can also do this earlier on, even if you're doing the trustee sale at the same time because there are other defaults, the guarantor is a different party liable under the loan.

But something that you might want to consider when you do these is retaining a private investigator to conduct an asset sale to make sure it's even worth it. So as Kyle was mentioning in some of the other things, there are things you should do to make sure that you're okay proceeding. Checking title, for example, is really important early on for modifications and forbearances and deeds in lieu to make sure that those are real options for you and it's not a mess. Well, here you also want to make sure if Kyle is my guarantor on a loan, I want to make sure Kyle even has anything. Otherwise, is it worth it to go through that time and money and expense to sue Kyle for a breach of guarantee lawsuit when he has nothing. So that's usually a good first step for you to do before you proceed with something like this.

And then last but not least, call it extraordinary relief. We talked about receivership. The economics usually don't make sense to do this and courts can be reticent to provide the receivership just because it is very involved. That said, it might make sense. Like I was saying, depending on the property type, how much volume of rents are available if you can prove that the borrower is just taking the rents and not improving the property, not paying debts on all of that. Depending on the facts, it might make more sense, but it usually has to be something where there are a lot of rents available to do this because it is very, very costly to pay the receiver. So you have to make that judgment as, is it actually worth it to do that? And then there are other options available to you as well. Again, Steve can help with all of these and talk about them much better than I can, but you can do a free judgment attachment of assets, free bank accounts, things like that to just secure up things that you think you might need to go after to prevent losses to you.

So you have a bunch of options to you there and depending on the nature of the situation, the facts, do a consult with Steve and he can kind of walk you through what he thinks is the best option for you. And that's that. So a lot that we went over today. First, before we get into the Q&A, we have this very cute little bird here advertising our

Newport conference. It is this August 25th to 26th. It's at the Veah in Newport Beach. There's also a golf tournament the day before. That'll be super fun. So if you're into that as well, feel free to sign up for that. But Early Bird gets the view. There's a code here, Web 100. You can use it today through, I think it's a week, so through the 22nd and you've used that code and you get some sort of discount. I don't actually know what the discount. Maybe it's $100 off. That would make sense. I did not ask that question when I saw the slide, but you'll get a discount and I'll be there. Maybe I can get Kyle some who knows, but I'll be there to come to the conference, get some free legal advice. It'll be a lot of fun and it'll be great to see you all.

So with that, here's our contact information. I will leave this up on the screen and we will go through and do some of the Q&As here. Let me pop these up. Oh gosh, I made it too big on my screen. Okay. First Q&A here is just a comment from somebody getting estoppel as part of underwriting. I don't know what this estoppel is in relation to, Kyle. I don't know if you have a thought about what this means. You can use this estoppel of anything. I don't know. I don't know what this means. So happy to chat with you about it if you'd like. I'll jump on this one. Do you have any

Case law where the second lien holder did judicial foreclosure in California after AB 130 came into the picture and then what was the end result? I don't do judicial foreclosures. I only do the non-judicial side. So I don't know on the judicial side of that. So AB 130, just to get everybody up to speed, it's specific to California and it talks about junior lien holders and the steps that they have to take to foreclose, but then also things that they would've had to include in their loan package at origination in order to foreclose properly. There's like a declaration that you have to do, talks about servicing, things like that. We are still foreclosing. We follow the steps. We do the declarations here as far as for the non-judicial side so you can still proceed. But as far as case law and AB 130, I have not seen anything new.

And again, I don't do the judicial foreclosure, it's just the non-judicial. So I'm not sure exactly what the question is here, but you can still proceed with foreclosure in California, even if you're a junior leave holder.

Kyle Niewoehner, Esq.:

Well, the receivership one, okay. During foreclosure, we were told that the water was off and all the plants were dying. That is sad. We would turn the water on and maintain the product, but we aren't really allowed until the foreclosure is done. Is there a way to handle this? I mean, unfortunately, that's very difficult. I don't know if this was some type of agriculture facility or whatever, but as Melissa mentioned, a receivership is going to be very expensive and also it takes some time to get that set up. And this is generally not the type of situation where receivership comes into play. Usually receivers are managing, like Melissa said, a property where you've got a lot of rent coming in, whether from people who live there or commercial tenants or whatever it is.

I guess that'd be a question for Steve potentially, but I think generally you're just out of luck in that type of situation because you really can't enter until the foreclosure is done and also potentially after an unlawful detainer action is done. And so what is happening on the property just during the middle of a foreclosure? I mean, unless there are crimes being committed where you can call the police and say, "Hey, there's..." I mean, yeah, that's just difficult. If it's simply stuff like that where plants are dying, as far as I'm aware, there's really not a good way for you to get relief from that.

Melissa C. Martorella, Esq.:

Yeah. I'd say potentially, to Kyle's point, if this is an agricultural property, like a farm or something, so it's really important that this is happening, maybe you could get some sort of TRO or injunctive relief for something that requires that to be put on at least temporarily while it's resolved. But I mean, I don't know, I'm not sure that that's something that you can really do. Steve, again, his contact information was in here earlier. He's the guy that would be able to help you on that one. With regards to changing the locks, we can give them 24 hour written notice to access the property. If they're not there, we can change the locks as long as we give the occupant a key, correct? Again, don't know on that one. I would say probably not. Again, maybe if you're in agreement with the tenant and you want the tenant to stay, for example, potentially that's something that you could do.

So if you don't want to evict them and you're okay with that tenant remaining, but you don't want the borrower to still have access, that could be something that you do, but there may be an issue where you need to also give notice to the borrower or formally evict the borrower from the property as well. Steve should be in here for all of our Q&A.

Kyle Niewoehner, Esq.:

Yeah. I feel like I've heard from litigation before though that you don't just go in and change the locks even after foreclosure. That's generally a bad idea. What about when foreclosing on property when we're a second? Is there a strategy to do with the first outside of completely paying them off? In our experience, first lenders never want to work with us in any way, shape, or form. Well, that's unfortunate. There are some different strategies. I mean, one of the things, and that's not about foreclosing, but upfront, is this is why we always ask our clients when they're doing a second if they want to get an intercreditor agreement upfront because that would give you a framework with which to work with them if there is a default later on, that's the big advantage of doing an inter credit agreement upfront. And if you don't have an inter credit agreement, then you are to some extent at their mercy later on when you're foreclosing, because at that point you are just in junior position and you can of course offer different things.

Then generally, they're going to want something, especially if they're in default too. You can offer to make their payments, which is not completely paying them off. I mean, in my experience, if the junior lender comes to the first lender and offers to make the payments for the borrower, they can be receptive to that. Now, if you're going to them and you're just kind of saying, "Just give us time to work with this, " then yeah, I mean, they're not getting anything out of that. So generally they're not going to be very amenable, you're going to have to offer them something. And so sometimes they're willing to just to keep accepting monthly payments. And if you're willing to keep their payments current, they may be willing to let you have time to complete your foreclosure, complete the sale process after that, et cetera, to get them paid off.

But I mean, if you're not paying them off, you're not going to offer them payments or anything like that and you don't have an intercreditor agreement with them or anything, then it is probably going to just be not cooperation. So yeah, you're going to probably have to offer them something.

Melissa C. Martorella, Esq.:

Agreed with that. And I would think about yourself in this situation as if you were the owner of the property that is struggling with paying the first and think about you're basically entering

Melissa C. Martorella, Esq.:

A form of forbearance agreement with that first to let you do

Kyle Niewoehner, Esq.:

Something.

Melissa C. Martorella, Esq.:

And so think about the options that you would be willing to give to that first so that you can get what you want, which is time and things like that. And so like Kyle's mentioning, usually some form of payments are helpful there and maybe property cleanup, that sort of thing. Maybe it's a construction project and you're saying, "Hey, I'll finish the construction on this thing and get it to sale," entering into some sort of agreement with that first because ultimately you're likely to take the property back if you foreclose and then you'd be dealing with them as the owner of the property anyways. And then up to that point, it's just really helpful to put yourself in those shoes and how you would manage with them.

Kyle Niewoehner, Esq.:

Yeah, I have actually seen, it's rare, but I have seen forbearance agreements between lenders where the first lender gives a forbearance to the junior lender. But again, you have to work something out with them, you have to offer them something, but sometimes you can work that out.

Melissa C. Martorella, Esq.:

Can you talk about the single action rule? Yes. So basically I can talk about it in California. Basically it says that before you proceed against the borrower, you have to try to extinguish all options related to collateral first. So you have to foreclose first before you can go after the borrower. It just prevents you from just attacking the borrower at all angle, but But that's specific to the borrower, the debtor. So that's why we say you can dual track things with breach of guarantee suits and all of that because those are different parties from the borrower. So that's why when you complete a foreclosure and there's a deficiency, your recourse against the borrower is extinguished. You have nothing else there. You've gone against the borrower. But then you can use a breach of guarantee suit to go against the guarantor. So you just have to think about who the parties are, but it prevents you from doing multiple actions against the borrower to collect the same debt.

That's even why when we're talking about doing a regular or doing a non-judicial foreclosure and a judicial foreclosure at the same time, that's technically two things against the borrower. You just have to choose which one you want to finalize up at that moment. So you can dual track them and then just determine which one you're ultimately going to proceed with.

Kyle Niewoehner, Esq.:

If a foreclosure is not likely to get all our money back, would you recommend going after the guarantor first via a personal guarantee lawsuit? Well, as Melissa just mentioned, you can dual track these, but keep in mind that in order to actually collect from the guarantor, you need to establish the amount of the deficiency, which generally requires the foreclosure to be completed because once that's completed, that number at the foreclosure sale is going to be used to offset the amount of the outstanding debt and then the amount left is a deficiency that the guarantor is liable for. So I think litigation usually recommends you can get it started just so that you can get the original filings and get it done. But keep in mind that you're not going to be able to collect from the guarantor before you've finished the foreclosure end of it.

So it's not that you can do that first, but you can at least try to save time by dual tracking it.

Melissa C. Martorella, Esq.:

Next. Oh, clarification. The demand to pay rent letter from the deed of trust is more effective. You get an estoppel from the tenant prior to making the loan. Understood. So that earlier comment, that is helpful. If you have tenants at the property, you should absolutely be doing this at origination. Likely you're going to want some form of SNDA subordination agreement with that tenant, whether it's a straight subordination or a non-disturbance one. You'll want some sort of agreement in place about what happens with that tenant upon a foreclosure. And combined with that, you'll want an estoppel in place with that tenant that talks about, here's what I pay for rent, here's the debt state of my lease, any issues, et cetera, under the lease. And so to this point, if you are enforcing the rents later on, you aren't an unknown party to this tenant, especially with commercial tenants, this makes a lot of sense to do.

So if they get that demand from you to pay the rent to you directly because of the default, they're more likely to do that. Thank you. That was helpful.

Kyle Niewoehner, Esq.:

Yeah, that is a good comment. That's a good reason to get stuff from the tenant upfront. Is pre-judgment attachment of assets limited to judicial states or can this be done in non-judicial states as well? Say a borrower's refusing to pay, we know he's spending on vacations, et cetera. Would that be grounds to feed? This is another great Steve question, but I'm pretty sure that this is not state specific. Yeah, I think

Melissa C. Martorella, Esq.:

It's anywhere. You can definitely do this in California, which is a non-judicial state.

Kyle Niewoehner, Esq.:

Yeah, I wouldn't think that that's state specific. I think it's more situation specific in terms of what ... I'm sure there's a criteria that you have to meet to do that. We don't know that. I guess we need to litigate. We need Steve to do a webinar on all of this stuff. Exactly. But yeah, talk to litigation about it because I think you can do it across states.

Melissa C. Martorella, Esq.:

Next one. If the broker originated the loan, would they be required to be part of the modification or can the lender do the modification themselves? So again, this is going to depend on the state. So California, you would need a broker on the loan for usery purposes and that whole thing. So definitely it's important to pay attention to that. I feel like they amended this, Kyle, you probably remember even better. It doesn't have to be the original broker at this point if I'm remembering.

Kyle Niewoehner, Esq.:

Yes. Yeah. We had that whole issue in California and it was resolved not by saying you don't need a broker, but just by saying that it can be any broker. So we had that whole ... I'm sure some of you remember that from a few years ago because it was a big pain. But yes, if you're relying on a broker exemption for the original loan, you do need a broker, but it can be any DRE licens broker. If the borrower is in default due to loan maturity but is continuing to make payments, is loan modification required or can the lender continually accepting payments without any modification letter? Can default interest be collected at payoff in this case? Okay, a couple of questions really.

You can just keep accepting payments without a modification, that's actually pretty common, especially if it's just a few months after maturity, that's pretty common that they just keep making payments and you keep accepting payments. However, we would highly recommend that you document this because this goes to one of the first things we talked about of trying to make sure that there's a clear trail if the borrower later wants to say, "Hey, the lender said they were going to give me another nine months and look, they've been continuing to accept payments from me. See, we had this agreement, this is what they told me, this is what's been happening. There's a pattern of conduct that shows that this is a case." And you're like, "Well, I didn't actually agree to that. I'm just trying to give them a little bit more time." You don't want there to be a misunderstanding about that.

Even if you're doing, I guess we would call this more of a forbearance, kind of an informal thing here, you would want to be very clear, even if it's just an email in this situation of I'll give you another month or something like that if you make me a payment, you do not want to leave it up to an ambiguity of a phone call or maybe some type of, maybe you had a few text messages and it was kind of ambiguous. You just don't want to put yourself in a situation later where the borrower is saying like, "Hey, we had this understanding." And you're like, "No, that was not what I was thinking when I just kept accepting payments." And with the default interest especially, you want to communicate generally right away when you're starting to collect default interest. Now, if you're using our loan documents, you don't actually have a requirement.

In the documents, it kicks in automatically when there's a default that the default interest starts accruing, but that is a really common thing that borrowers want to push back on and argue about. I've seen so many situations where the borrowers want to say, "Well, they shouldn't be collecting the default interest or this is too much or the way that they're calculating it. " And so even if you don't technically need to give immediate notice in order to start collecting it, that is best practice because it again leaves this trail and it makes it clear when it started and then if the borrower wants to protest it, they should protest it immediately. And then if they don't, then the shoe is on the other foot where the lender can say, "I told them this is what was happening, they didn't protest, and we've continued on from there." So that's what it is.

So yeah, you can continue to just accept payments, but if that goes on, especially if it goes on more than a month or two, we would really recommend that you get something in writing so that you don't get pigeonholed into some type of informal understanding that you didn't want or that you didn't intend.

Melissa C. Martorella, Esq.:

I would add a minimum to send a letter if you're going to do that if say you're not going to enter into that formal agreement and sending, we call it a default no waiver letter where you're saying, "Hey, you sent in this monthly payment, just FYI, your loan is in default. We'll accept this monthly payment, but you need to make the maturity date payment and also we're reserving our rights to foreclose, collect default interest, anything like that. " And it can just be a little form letter and you just send it every month if they're doing this. But again, to Kyle's point, if you do that two, three times, okay, but if you're doing this every single month, you want to enter into something formal after a while it's almost like, is this even helpful because this is now the process you want to enter into a formal arrangement with them.

Kyle Niewoehner, Esq.:

Yeah, because if you're really in a position where you're like, "I don't need to get this money back, I'm just happy to keep collecting payments on it, " then it probably does just make sense to do a modification of like, "Hey, we'll give you another year. We're just happy with these payments." Yeah.

Melissa C. Martorella, Esq.:

Awesome. Well, those are all the Q&A questions we have. If you guys have any other questions that pop up later on, feel free you have our contact information here. If you need an introduction to Steve, feel free to reach out. Happy to do that. Otherwise, I hope you all have a wonderful Wednesday. Thank you.