Real Estate: Using Deeds to Secure Your First, Second, Equity Line or Refinance Home Loans

     In prior blogs, we began a discussion of the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this edition, we will review the benefits of securing your first, second, equity line or refinance home loans with a deed of trust.

     Real estate liens provide important security for your debt. Since real estate is the largest investment and asset for most individuals, they will usually make every effort to pay debts secured by their real estate first. However, you need to know the chain of title in order to make an informed decision about your loan.
     Specifically, in what position will your lien be? Are there any “clouds” on the title? You will not know the answer to these questions without a proper title search and review.
     Once you know your position you will need to examine the available equity to cover your loan. What is the value? What are the balances due on the liens ahead of your anticipated position? Beyond the business decision of determining when the equity is sufficient for your risk tolerance, in order to take advantage of the “$1.00 rule” in the bankruptcy code for Chapter 13 cases (should your debtor decide to later file bankruptcy), you need to ensure that there is at least $1.00 in equity to cover the loan. You should take into consideration that property values may go down (e.g., 2008 to present).
     If the deal is made and the real estate closing occurs, immediate and proper recording of your deed of trust is essential to preserve your position. If the debtor defaults, foreclosure on the property can occur. If the debtor seeks reorganization of his debt in Chapter 13, you can seek full payment of the debt.
     We have experienced attorneys and staff who can examine title and properly represent your interests in real estate closings.

Bankruptcy: Debtors Retaining Collateral

     The Fourth Circuit Court of Appeals case of Home Owners Funding v. Belanger stands for the proposition that Chapter 7 bankruptcy debtors may retain their collateral after discharge if they are current in their consumer loan installment payments.

     In Belanger the debtors, who had remained current on their payments, filed for Chapter 7 relief and filed a statement of intent under Bankruptcy Code §521 (2) (a) indicating that they wanted to retain possession of their mobile home. The creditor moved the Bankruptcy Court to compel the debtors to reaffirm the debt, redeem the collateral, or surrender it. The creditor, relying on Bankruptcy Code §522 (2) (a), was obviously concerned that the collateral would depreciate to a value less than the balance due, and would be barred from recovering the deficiency. The Court noted that the creditor is presumed to have structured the risk of depreciation into its loan.
     The Court noted that it has held (in the case of Riggs National Bank v. Perry) that a "default-on-filing clause" in an installment loan contract was unenforceable as a matter of law. Therefore, the creditor could not ask for the collateral merely based on the filing. Note, however, that not all courts take this position; see Dominion Bank v. Koons.
     The Court in Belanger denied the creditor's motion and discharged the debtors, holding that the debtor's had complied with Bankruptcy Code §521 (2) (a) by giving notice of their intent to retain the property while continuing to make payments in accordance with their contract with the creditor.
     Attorneys representing debtors can use this opinion against creditors by urging them to remain current with their loans, but not to sign reaffirmation agreements. Many of you have already run into this problem with debtor's counsel.

Collections: Perfection of Vehicle Liens

     In almost all circumstances, courts will recognize a lien as being valid only when it has been "perfected". Perfected means registered with the appropriate governmental agency - DMV, Board of Inland Game and Fisheries, etc.; language on a promissory note that the loan is secured by the vehicle is not enough. Although the result of failed perfection could be harsh (a lost lien), it makes sense; without a registration, no one could ever know who has liens. Understanding this, it is important to have someone in your creditor organization be designated to follow-up on lien perfection to ensure that it is done, to ensure that it is done promptly, and to ensure that it is done right.

     What happens when your debtor moves to another state? As long as the creditor holds the original certificate of title reflecting the lien, the creditor will usually be protected. If the vehicle is taken to another state but is never re-registered or re-titled, the original secured creditor who is listed as lienholder on the original certificate of title maintains its perfection. The original secured creditor also maintains its lien if the debtor moves and obtains a new certificate of title with the creditor's name on it. However, what happens if the debtor moves, obtains a new certificate without the lien recorded? There could be a problem. To avoid the possible problem, follow up on your transient debtors like you do your new liens.

Foreclosure: Deed in Lieu of Foreclosure

     In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt.

     Considerations. Before accepting the deed in lieu of foreclosure, the lender must consider many matters:
· Value of the property vs. the amount of the debt.
· Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens.