Today is the first in a three-day series on the foreclosure process. We will look at the legal aspects of home ownership and peek at a Northpark flip.
Irvine Home Address … 103 TERRA BELLA Irvine, CA 92602
Resale Home Price …… $449,000
{book1} 
It’s mine it’s mine it’s mine
I can do whatever ever
I can do whatever ever
Give me lots of toys
So it don’t matter to me
This property belongs to me
And only me, let me break it down baby
It’s mine
I can give it if I want it
It’s mine
It don’t matter if they want it
I can give it to them
I can take it back (back)
It don’t matter ’cause I got it like that
It’s Mine — Girlicious
Ownership is primal. The first two words children learn in any language are “no” and “mine.” People have an deep intuition of what is theirs and what is not. Emotionally, It’s Mine defines ownership; in the real world, it is not so black and white.
When people own real estate, what they really “own” is a bundle of property rights. What rights are the bundle, and how are these rights held? Today, I want to take a step back and review real estate law and outline property rights and vesting title. As I recently took the excellent Broker’s review course from Real Estate Trainers, much of the legalese comes from their study manual.
Foreclosure 101: Vesting Title
Foreclosure 101: Non-Judicial Foreclosure
Foreclosure 101: Mechanics of a Trustee Sale
Who or what is an Owner?
The Owner of Real Property can be (1) an individual owning in his or her own name; (2) a group owning together either as Community Property, Tenants in Common, or Joint Tenants; (3) an entity such as an LLC or a Corporation, (4) or a living trust.
Many people hold unshared title in their own name, and it is not limited to singles as many married owners in California are listed as either a man or a woman owning as “sole and separate property.” This distinction is important in a Community Property state like California where it is assumed that husband and wife act as a family unit with ownership apportioned equally between the two parties. In instances of inherited wealth, prenuptial agreements, or other business dealings, spouses often buy and sell property in their own name; however, these separations are tenuous in a marriage, and in hostile divorces, sole and separate can be anything but.
Tenants in Common is the most common form of multi-party ownership other than Community Property. Each Tenant in Common can dispose of their share of ownership as they see fit including passing it to descendants upon death. This stands in contrast to Joint Tenants where the death of one tenant causes their share of ownership to pass automatically to the other. Joint Tenancy is more common as a form of spousal ownership in states without Community Property laws.
Investors and others hoping to limit liability and remain somewhat anonymous often buy and sell real estate through special entities. These entities have the legal status of individuals capable of entering into contracts including owning real estate. There are advantages and disadvantages of using entities, and anyone considering doing so should consult an attorney and a tax advisor.
Another way people hold title is through a living trust. The trust itself holds title just as an individual or entity would, the main feature of living trusts, which make them a desirable method of holding real estate, is that property can transfer upon death directly to the heirs avoiding probate.
{book4}
What does an Owner Own?
An owner, to the exclusion of all others, has a bundle of rights: possess, use, sell, enter, give away, lease, encumber, dispose, exclude or, do nothing subject to governmental powers and claims of others, and the owner may dispose of the whole bundle or any one of these rights at any time. Ownership can be held in a number of ways known as Estates, of particular interest to us is the perpetual Freehold Estate; it has no termination date and no party to accept ownership after reversion as does the Less-Than-Freehold estate known as a lease.
Most homeowners possess a Freehold Estate known as a Fee Simple Estate or Fee Simple Absolute where the owner holds title without any qualifications. In my description of property rights above, I mention ownership is subject to claims of others, the most common being the mortgage encumbrance. Owners whose properties are encumbered by Trust Deed (similar to mortgage) also signed a Promissory Note with a lender stating they will pay back borrowed funds according with terms and conditions described in the Note. These owners still possess a Fee Simple Estate, but the mortgage lien is such an onerous encumbrance that an argument can be made that lenders are owners, and owners are money renters.
Trustee sale occurs because borrowers, for whatever reason, are not meeting their financial obligations. A process is set in motion when borrowers default leading often to a change in ownership either through (1) market sale, (2) short sale, (3) deed-in-lieu (legal abandonment) or (4) trustee sale.
Mortgage or Deed of Trust?
The legal system of Mortgages and Promissory Notes identifies the parties to the transaction and establishes rights and responsibilities. There are two basic systems from managing the complexities: Mortgage or Trust Deed. In California as in some other states, we have a Trust Deed system, but since it is the more complicated of the two, I will address the Mortgage system first.
The Mortgage system is simple; the borrower signs a Promissory Note and issues a Mortgage to the lender. The borrower is the Mortgagor, and the lender is the Mortgagee. The borrower still holds title, and if the lender desires to force foreclosure auction, they must petition in court as any other litigant would. I can only imagine the court system backlog in Florida where this system is in place. In reality, in the Mortgage system, all foreclosures become judicial foreclosures because they move through the judiciary, but the term Judicial Foreclosure has special meaning and entails obtaining a judgment against the borrower (a topic for tomorrow).
Courts are ill-equipped to handle several hundred thousand mortgage actions. What is ordinarily a rare occurrence courts can easily handle can become a crisis, and the Trust Deed system avoids the court backlogs.
In a Trust Deed system, a neutral third-party is involved similar to an escrow; in fact, the trust deed system functions just like an escrow lasting the term of the Promissory Note because legal title is actually held by the Trustee not by the Owner. The borrowers have a recorded interest in a property, and they possess all the rights of ownership subject to the Trust Deed encumbrance, but their interest is not unencumbered ownership, and it will not become true ownership until they pay off the Promissory Note; until the Note is paid off, legal title is held by a Trustee while Owners have Equitable Title with rights of possession and use.
The trustee is empowered to call a public auction without going to court — avoiding court being the main reason the system was developed. This gives lenders the option of forcing sale at minimal cost and minimal delay. The system is streamlined and capable of expanding and contracting to meet demand. Lately, the Trustee business has been a stellar growth industry.
A business transaction
First and foremost, the documents exchanged by borrowers and lenders are a business transaction as Henry Blodget recently informed borrowers:
“Specifically, when you borrowed money to buy your house, you engaged
in a business transaction. The bank or mortgage-lender evaluated the
risk of the transaction and concluded that it would was a risk worth
taking. To protect its money, the lender also required that you pledge
the house as collateral, and it required you to have some equity in the
house as an additional cushion. In the event that you didn’t pay, the
lender retained the right to seize the house, sell it, and pay itself
off before you got your equity. The lender loaned you the money because
it concluded that this was a smart business decision.
You, meanwhile, also made a business decision. You decided to
borrow money to buy your house even though it meant risking your
equity, home, and credit rating.
And now it turns out that both of you made a bad decision.
Fortunately, you don’t have to fight about what happens next.
The contract between you spells everything out: If you stop paying, the
lender gets the house. That’s it. Unless the contract specifically
differentiates between a failure to pay based on hardship (involuntary)
and a failure to pay based on a collapse in the value of the house
(voluntary), there’s no difference. If the lender thought at the
beginning that you had a “moral obligation to pay,” it would have
specified that in the contract.
Now, compare this to a situation in which you DO have a moral
obligation to pay: When you borrow money from a friend at no interest,
for example, and you promise that friend that you will give him or her
every penny back.
THAT is a moral obligation to pay. In this case, your friend did not
lend you money to make a profit. Your friend loaned you money to help
you out–with no collateral or contract other than your promise to pay.”
Many people persevere in business transactions throwing bad money after bad for vanity, entitlement or misplaced moral obligation.
The big bluff
Threat of calling a foreclosure auction is supposed to be a bluff. Neither the lender nor the borrower want an auction, but similar to Texas Hold-em, each party has cards to play, and where they are in the process and the relative strengths of their bargaining positions matter.
Ordinarily, threat of forcible eviction from the family home compels borrowers to do whatever is necessary to make payments, and the carrot (keep a home) and stick (threat of foreclosure) are enough to keep the system working. However, when people don’t have equity or when it is in their best interest financially to get out of a loan, lenders find the threat of forcible eviction less compelling; in fact, the more underwater a homeowner is, the less power lenders have. What possible threat can a lender hold over a money renter who is 30% underwater?
What property right does the 30% underwater homeowner particularly value that they don’t obtain as a renter?
The right to improve a lender’s property? Good luck getting a loan for that.
The right to lease out for less than the mortgage payment? Not a great deal for the owner.
The hope of appreciation years from now? Bring on the kool aid….
To be continued…
In tomorrow’s post, we explore judicial and non-judicial foreclosure and go step-by-step through the non-judicial foreclosure process. On Friday, we will go through the mechanics of a Trustee Sale auction and discuss the difficulties and opportunities this market offers.
Ideal Home Brokers Trustee Sale Service
If you are interested in learning how you can become active in the Trustee Sale market, review Ideal Home Brokers Trustee Sale Service or contact us at sales@idealhomebrokers.com.
Irvine Home Address … 103 TERRA BELLA Irvine, CA 92602
Resale Home Price … $449,000
Income Requirement ……. $95,848
Downpayment Needed … $89,800
20% Down Conventional
Home Purchase Price … $357,000
Home Purchase Date …. 12/24/2009
Net Gain (Loss) ………. $65,060
Percent Change ………. 25.8%
Annual Appreciation … 309.2%
Mortgage Interest Rate ………. 5.27%
Monthly Mortgage Payment … $1,988
Monthly Cash Outlays ………… $2,840
Monthly Cost of Ownership … $2,330
Property Details for 103 TERRA BELLA Irvine, CA 92602
Beds 2
Baths 2 full 1 part baths
Size 1,343 sq ft
($334 / sq ft)
Lot Size n/a
Year Built 1999
Days on Market 1
Listing Updated 1/7/2010
MLS Number P716608
Property Type Condominium, Residential
Community Northpark
Tract Othr
Private gated community of North Park with full time gate guard. Beautifully landscaped, well maintened community. New custom paint and new carpet and Travertine floor. 2 car side-by-side garage. Association offers pool, spa, parks, tennis courts, club house and more.
maintened?
This kind of transaction is common at Trustee Sales. The cash markets often see discounts of 15%-20%. I haven’t pulled comps, but I suspect this is priced to the high side of reasonable, and the seller will drop the price $25,000 to quickly close the deal. In and out in 30-60 days with a $40,000 profit (10%) makes for a nice annual rate of return — if you could repeat flips over and over.
If you are a family with cash looking to buy at a discount, the Trustee Sale market is where you should be house shopping.
{book2}
The video below is a children’s lesson on how long-term property disputes slow economic development and give rise to eminent domain legislation. There is probably also a lesson about a stubborn refusal of buyers and sellers to move the little bit necessary to please both parties.
HOA of 330, 2 bed, not Irvine Unified, (though it is Tustin Unified in a decent area,probably a decent school), ugh. I mean, the Irvine school is supposed to command that premium for a 2-bed. Doesn’t this place look like an east coast street? It could go for 400k flat.
You know it says Tustin SD but Northark is pretty well within Irvine I thought.
I hate Northpark. Of course as you point it the worst aspect is the fact that it is in the Tustin School district, though for High School age kids Beckman seems like a great facility.
Northpark to me feels as warm and inviting as North Korea. When I visit people there I feel like I am visiting a post apocalyptic compound.
I take exception with the phrase:
“for the lender to protect it’s money” (my idiotic web browser is automatically inserting apostrophes in “it’s” and I can’t seem to disable it)
Anyway –
It implies that the loan money is originating from some kind of a reserve fund and not being created out of thin air using fractional reserve Voodoo.
All the bank is protecting is it’s ‘liability’ against the borrower’s default which does wind up being the bank’s money which is what I am assuming you meant.
It’s a knitpick – but most people believe that bank loans are the result of a bank moving money from one account to the borrower’s as opposed to just magically writing the credit into the borrower’s account via sleight of hand that transforms the debt pledge into cold hard cash.
I also think this is relevant to the moral argument because when you borrow from a friend, they must give up something to give to you.
When ‘borrowing’ from the bank, the bank gives up practically nothing. It is just making a bet on your ability to service the debt pledge. In other words, the bank is just gambling using money it does not have using real property as collateral. Sounds like a pretty nice scheme as long as the value of the property does not decline. WHOOPS.
This is why morals go out the door when doing business with banks.
You should be held responsible by law to honor your debt pledge since real money is created by your pledge and spent into the economy. But if some states want to foolishly limit collection to the property only then that’s too bad for those states – their attempt to entice consumers into large sums of debt by hiding risks has backfired.
The morals argument comes in when you stop paying your debt but continue to live in the house rather than mail back the keys. AZDavidPhx pays his rent on time every month and receives no help from anyone so he is forced to survive by living within his means. When you stop payment and do not move out, you are cheating others who live within their means by not doing so yourself.
You are being knit picky. All fiat currency in a fractional reserve banking system is debt, even what you call cold hard cash. There is no difference in the federal reserve notes in your wallet and the electronic bits the banks and the federal reserve are creating. Sorry, but that is the truth and that is the real problem. It is not lack of regulation or greed or anything else. The problem is that our currency is not money. It is debt and wealth will continue to be transfered to the wealthy under this system because very few understand it and so live with it. You can not right a wrong by regulating the wrong.
But it is the problem – the bank gets to run a rigged lending game under the charade of ‘borrowing’.
I understand the relationship between fiat and bank credit and debt just fine. I also agree that it is the real problem, but by going along with the charade and pretending that banks actually loan their own money perpetuates the problem.
Which is why I am knitpicking because someone may read it the wrong way.
AZ, I’m sure you will be able to change the global banking system. Start by buying an iPhone with your credit card, pay your monthly bill with your federal reserve notes, then blog endlessly about it.
The important point is to be aware of it, understand the problem (inflation) it creates, and use your good judgement to decide where to put your money (probably not in a bank account at 2%)so as to not get slowly crushed financially.
The more people who understand and act can show banks a vote of “no confidence”.
Eventually they will be forced to offer you a higher return.
Off topic subject …
The AssHat of the decade, Jim Cramer, said that if the Republican won the special election in Mass, the stock market would be poised to rally. Well, this morning the market is getting crushed.
As I type …
Dow -173
S&P500; -17
NAS -43
I think I may know why …
This election marks the zenith of Democrats power in Washington. With only 40 senators, Republicans lacked the power of a collective “no” which left them utterly powerless in Washington. Prior to this election, no Republican thought carried weight in Washington as the Democrats had the ability to pass any legislation they wished without a single Republican vote cast in its favor.
When this new senator takes office, Republicans can now say “no” if they all band together. With some moderate Republican senators, it is still a tenuous coalition, but it gives them some small amount of power whereas before they had none.
Oh Boy! Those voters sure showed the Democrats! Now they have to go back to the front of the line and wait to be voted back in next election when the Republican incumbant is the one to blame! So, Take That!
As an independent I have to agree with David on this one. The Republicans are making a big mistake thinking that this is a vote a confidence in the GOP. This result is more a repudiation of the current federal overreach. It has happened many times before.
What I like most about this special election is that it gave independents a voice in this Senate race for the first time in 40+ years.
This was a vote against national health care, that’s all. It was the only way they knew how to stop it.
It’s my understanding that the new senator didn’t use the GOP tag in his campaign. I do not believe this had anything to do with republican v. democrat. This was purely a rejection of the good ol’ boy network, something Obama has participated in. If anything, Obama has become more of a whore to the banks/WS, than the monkey man before him.
I posted last week that Obama had better fire Geithner, and renominate another candidate to run the Fed … and then get serious about the bullshit going on with the banks. These are hard choices, but they must be done.
The American People are pissed off, not because the democrats can’t pass health care, but rather because Wall Street is STILL RIPPING US OFF, and Obama is in bed with those fu**ers.
Ok, but why would they think that this guy will be any different? Why would he not be part of the good ol’ boy network? They know he is not. But, the one difference he can and will make is to stop nationalized health care. And even the less than liberal dems are scared of nationalized health care. No?
Massachusetts wasn’t ready to elect another democratic senator for life on the basis of that weak democratic field and special election. Once elected Martha Coakley would become established in office and near impossible to unseat with another democrat. Brown will be one and done. So the liberal base didn’t show as strongly as it could have.
Massachusetts has lots of folks who think they’re conservative. Until they meet “real” conservatives from the republican base. And then they’re surprised when Mitt Romney acts totally contrary to everything MA holds dear, and they’ll be equally surprised if Brown turns out to be a national Republican rather than a good ol’ New England Republican like Lincoln Chaffe.
I think you are wrong on that. I’m sure for a sizable chunk of people that was an issue, but these same people would have voted against Coakley simple because they are staunch Republicans. Coakley lost the election because her base turned against her. This was state politics at work. Coakley used to be a DA and had some real baggage related to that position. Most notably, a child rape case that was politicized. She previously lost her DA reelection to a Republican. Why she was the Democratic candidate is beyond me… and is just one more reason I could never join that party.
As far as health insurance reform… It’s all in Nancy Pelosi’s hands now. Hopefully, she will get the House Democrats to pass the Senate bill by promising to fix the thing through budget reconciliation. That means getting rid of – or significantly reducing – the health insurance excise tax and moving the burden to the upper income earners that have been getting a free ride for the last two decades. (Pay your friggin taxes you deadbeats! The middle class aren’t your slaves.) And also putting the public option back in.
Doing this would get all the good regulatory reform that is in the Senate bill, while getting rid of the giveaway to the insurance companies. The hell if I want to be forced to give my money to the pricks that stalled my dad’s cancer treatment. Give me a public plan any day.
Passing the Senate bill and fixing it through budget reconciliation bypasses the filibuster in the Senate. Luckily, budgetary issues (if I remember right) must be initiated by the House. Since Pelosi has the biggest set of balls in the Democratic Party, I’m relatively confident this will happen.
Of course, it wouldn’t shock me to see the Democrats, once again, blow it. We need run-off elections and more political parties in this country. I’m sick of having two conservative parties running things. Well, I guess one of the parties isn’t really conservative… just insane.
BTW, that was supposed to be a reply to awgee.
No Republican “thought”? I haven’t seen one in years, aside from, let’s see, banking deregulation and tax cuts for the rich – bring ’em on!
“moderate Republican senators”? ROFL! Maybe, just maybe, Olympia Snow could make that statement in the singular.
Let the Republicans filibuster, then hang them with “the world’s best health care system” they’ve perpetuated.
You know I could be wrong here, but I believe most people are truly tired of the same old tricks used by political parties. Especially after the hell spin this country has gone through the last 2 years.
With that said, I hope Obama wakes up … I think he’s capable of getting some good things done, starting with mopping up all the bad financial deregulation that came from Clinton & Bush.
If I were Obama’s political advisory, these are the changes I would want to convey to the public starting today:
Progressive –> Populist
Wall Street Whore –> Pissed off tax payer
Ideologue –> Pragmatist
Democrat –> Independent
Obama is not going to wake up.
Nothing will change until Americans vote Independent. I do not believe this will happen in my lifetime so I am at peace with having a beer and watching these two groups of buffoons have at it.
Dude, this isn’t going to happen as long as there aren’t national run-off elections.
I think there is one thing most people can agree on. Both the Democratic and Republican parties suck. But, at least the Democrats just suck at getting good legislation passed – they truly are a bunch of pussies. The Republicans, on the other hand, are good at getting suck ass legislation passed. Whoo hoo Republicans! I’d admire the Republican Party for keeping their representatives unified, but they are only unified because the rank and file can’t think for their selves.
“Here’s your talking points, sir.”
“Death Panels? Sounds good.”
In Cramer’s defense, Lee, he did say “poise” according to your post. Healthcare had a nice rally yesterday and the selloff today may equal “buy on the rumor, sell on the news”. The 50 DMA of a health care index measured after Brown’s swearing-in might be a better gauge of Cramer’s prediction.
But yes, he is an a*s.
As for the election leading to the death of health care reform by a minority, you have the socialist Democrats stymied by the coalition Republicans, with both claiming tyranny by a small and greater, respectively, fractional block of legislators.
Strange times indeed.
IR, I really appreciate when you put on your educator cap to shed light on these processes that are so poorly understood by so many. (myself included). I look forward to the next two posts.
I’ve been hoping I’m saving up for something and that something just may be the trustee sale market.
Yes, IR does a great job educating his readers.
Funny thing is, I get the feeling many real estate agents barely understand many of the legal aspects of real estate. You are expected to learn much of this information to pass the licenses test, but many learn just enough to pass the test and then forget the info as time passes.
I admit to same. I have studied real estate and business law on more than half a dozen occasions between college classes, review courses and project specific need (I know much trivia about prescriptive easements and water rights). Each time I study, I learn new things and remember things I forgot. Much of this information is retained on a need-to-know basis, and unless these details impact the life of a typical agent — which they generally don’t — then the details slip away.
“AZDavidPhx: the bank is just gambling using money it does not have using real property as collateral”
Why do not you open own bank and get rich by gambling using money you do not have?
It will be the fastest way to understand why your theory does not work in real life.
😆
They are gambling using money they do not have. They have a theoretical liability on their balance sheet – but if the debtor defaults, the collateral is sold to eliminate the liability. This is exactly where the system becomes rigged against the debtor because the bank does not contribute anything but a phony promise to pay if the borrower defaults. They do not put up their own money – just the promise to put up money which they assume they will never have to do because selling the collateral will cover up the false promise. Why do you think the banking sector required a massive bailout after all the depreciating house prices revealed the phoney baloney promises backing the subprime loans.
Works great as long as the collateral fetches an amount equal to the liability on their balance sheet. If the collateral fetches less then the bank takes a hit and has to recognize the loss. This is the fundamental concept to all this fantasy asset evaluation the banks are using to pretend that they are solvent.
If you think it works differently, please explain.
Look at whole picture.
What about homebuyers? Many do not contribute anything but tiny downpayment and phony promises to pay mortgage. Then they walk away if underwater.
What about government? It does not contribute anything but freshly printed dollars, t-bills, bonds, etc. It seems that inflation is going to pay government debt.
What about AZDavidPhx? Perhaps AZDavidPhx is gambling by renting out and investing rest of money in reasonable place.
So, everybody is “gambling”.
You are rephrasing my argument to infer that I have some kind of a problem with the act of gambling; I do not.
Note that what I said was the act of gambling using money that one does not have.
The example would be going to Vegas and ploppling down an IOU on the table for 100.00. Do you think they would deal me in if I tried it? Yet banks get away with it every time they issue a ‘loan’. That’s the magic.
You made the claim that the borrower makes a phoney promise as well. So what happens to the borrower if he defaults? He loses the property giving him a great incentive to make good on his promise.
Your argument is hogwash.
“So what happens to the borrower if he defaults? He loses the property …”
Wrong. He can not lose what he does not own.
Underwater borrower has: 1). credit score, 2). responsibility to make payments 3). illusion of property ownership.
Wrong. He can not lose what he does not own.
Stop being ridiculous and playing games with language semantics.
When he stops paying, he will lose his privilege to live in the house; I thought that was the overly verbose way of saying “He will lose the house”.
I was curious to see what the crowd here thinks of this listing in TR. I am not sure how to post links, but the address is 111 Hillcrest.
http://www.redfin.com/CA/Irvine/111-Hillcrest-92603/home/4745577
Does the owner seriously think his house has appreciated by 45% in since May 2008? Or was the May 2008 sale some sort of auction or trustee sale that he is trying to flip?
Didn’t you read the description: “Recently completed remodel offering customized finishes and quality craftsmanship throughout”?
Didn’t you know that in TR a remodel means you ares supposed to get 10 * your remodel costs + appreciation and interest? Duh!
WTF!
Another 2010 FHA Bailout prediction being cast:
The Coming FHA Bailout
do we really need FHA loans? Does anybody still think this trainwreck is a good idea?
What’s that address? 103 Terrible LA? I would still prefer Turtle Rock over any area in Irvine….except maybe Shady Canyon and 90% of us reading here haven’t been through the gates. Actually, I think I could win the lotto and still not afford to move in the same area as major sports stars (yes Tiger Woods has played Shady Canyon, but only with Mac).
@ AZDavid, there are thousands of homes out here in SoCal that people moved out of but the banks still aren’t releasing them to the public. They sit empty. Wouldn’t it have been better for someone to live in there for a few months to gather the money for a nice rental and perhaps have some savings? The banks are screwing us royally, but yet you place blame on people living in their homes for free. Dude, honestly, if people weren’t going broke, or ARE broke, don’t you think they would pay for their own home?
@ Lee That was such powerful writing it made me clench my fist in anger. You could swear at me for the rest of both of our lives and you would still be my hero for that post.
@ Woodburyrenter I totally agree about Northpark. When I’m driving through there I get the feeling the walls are there to keep me IN. The houses are too close together, and that WALL. It’s too bad Reagan is gone…”Mr. Bren, tear down that wall!”.
@ IR Thanks for the blog. It’s informative AND entertaining 🙂