Is there a lawyer in the house...Continued

NP: Hello, Gaylene. Thank you again for taking time to give us some generalities about foreclosures. We do want to make the point that you are talking in general, and laws that are applicable to Texas.

Answer: Yes, most definitely.

NP: Take us through the foreclosure process from beginning to end. Let's say the payors have not made their payment. What by Texas law is the first step for the mortgagee, or noteholder?

Answer:

Under Texas law, the note holder must give the debtor notice of its default under the mortgage and of the note holder's intent to accelerate the debt (i.e., to make the entire balance of the note then due and payable, rather than just the installment amounts). This notice of intent to accelerate is sent by certified mail to the debtor and, if the property is the debtor's homestead, the debtor must be provided with 20 days to cure the default before the debt is accelerated.

NP. After the letters have been sent, but no response what is the next step and time frame?

Answer: After the notice of intent to accelerate is sent, and there is no response within the twenty (20) day period, then several things happen at once:

1) a notice of acceleration is sent to the debtor by certified mail. This letter notifies the debtor that the entire indebtedness has been accelerated and that the entire amount of the note is now due;

2) a notice of Trustee's Sale is sent by certified mail to the debtor. This is a form which notifies the debtor in writing by mail that the property will be sold at public auction on the courthouse steps on the first Tuesday of the following month - this notice must be sent at least 21 days prior to the date of sale - which by statute is always on the first Tuesday of each month. If there is an IRS lien, the IRS must be given 24 days prior notice, not 21 days;

3) The same notice of Trustee's Sale is posted at the courthouse of the county in which the property is located in the location designated by the county commissioners for such postings;

4) The same notice of Trustee's sale is recorded in the real property records of the county in which the property is located;

5) On the first Tuesday of the month, then the Trustee (or a designated Substitute Trustee) holds a public auction of the property on the courthouse steps of the county in which the property is located and the property is sold to the highest bidder for cash or cash equivalent (cashier's check). The Trustee then records a Trustee's Deed in the real property records designating the purchaser as the owner of the property.

NP: Did I hear you correctly that the IRS must be given 24 days notice, not 21 days? If I understand you correctly, if the lender gave the IRS the same 21 day notice they give the mortgagor, the IRS may have action because they did not receive notification within their specified time. This could put a cloud on the title, could it not?

Answer: Most definitely. If the IRS was not given the required 24 days prior notice, any foreclosure is then done subject to the tax lien - it is not extinguished by the foreclosure sale. So in doing your due diligence when purchasing a property after foreclosure, you should ask not only if the IRS was notified, but when.

NP. If someone is the successful bidder at the courthouse steps, what type of title insurance and deed do they receive?

Answer: As I said above, the Trustee will give them a Trustee's Deed, which is a general warranty deed given by the Trustee on behalf of the debtor. Any warranties are made on behalf of the debtor and neither the lender nor the Trustee has any liability as to any such warranties. As such, any such purchase is made effectively without any warranty or recourse against the seller. As for title insurance, none is automatically issued; however, anyone considering purchasing a property at public auction should consider purchasing a title policy and having a title commitment issued prior to the sale. If insuring the property, the title company will want to examine the foreclosure documents to make sure the foreclosure is done according to law and is not subject to any legal challenge.

NP: Explain a deed in lieu of foreclosure. What are the advantages and what are the disadvantages. For example, suppose the payors, have some subordinate liens. How would this affect using a deed in lieu of foreclosure, as opposed to formally filing a foreclosure and going to the courthouse steps.

Answer: A deed in lieu of foreclosure is simply a warranty deed. If the borrower can negotiate with the lender to accept a deed rather than going to foreclosure, then the borrower will execute a deed to the lender. Some recite that it is for the consideration of payment in full of the outstanding indebtedness, but I do not recommend that a lender accept any such deed in most circumstances. If indeed there are subordinate lien holders, a deed in lieu of foreclosure will not wipe out any junior liens and a first lien holder could find that they have a property that is subject to outstanding liens. Where if they had gone through the foreclosure process, even though it is more time consuming, etc., then any junior liens would be wiped out by the foreclosure and they would own the property outright.

If anyone is considering accepting a deed in lieu of foreclosure, they should consult an attorney - there are ways to minimize this risk, but they would definitely need legal guidance.

NP. If the payor comes up with the back payments before the foreclosure date, must the note holder accept these payments, or can he demand payment in full?

Answer: Once the debt has been accelerated, the entire indebtedness is due. At that point, it becomes the lender's option whether to accept installment payments. If the lender does want to accept the past due installments, then a reinstatement agreement should be executed with the borrower, which essentially reinstates the installment nature of the loan.

NP: Please explain the legalities of a wrap, or all inclusive trust deed to both the mortgagee and mortgagor.

A "Wrap" deed of trust is essentially a second lien, generally for purchase money, which secures a debt which equals the original indebtedness amount, plus the additional amount necessary to equal the sales price. It keeps the original lien in place, and the original interest rate for the first lien note.

One concern for a purchaser/mortgagor is that the payments on the underlying debt be paid. A mortgagor should probably insist that they have the right to make these payments directly. For the mortgagee, the execution of the wrap deed of trust, as well as the conveyance of the property to a third party, probably is an event of default under the original deed of trust. If the original lien holder so chose, they could call the underlying debt due and foreclose its lien as a result of any such subsequent conveyance.

NP: A. Does not selling on a wrap note make it easier for the mortgagee to foreclose, than it would if the mortgagee were to take back a 2nd?

Answer: Yes, because the mortgagee would be making the payments on the underlying lien, and would be foreclosing on the mortgagee's note. Carrying a 2nd, especially if the underlying lien is in default, would mean the mortgagee would have to satisfy the underlying lender's requirement, which could be acceleration of the 1st lien.

NP:. If the underlying property has a due on sale lien, and all parties are aware that by transferring the property the underlying note could be called due, do title companies have a problem issuing title insurance?

Answer: The title company will expressly except to the first/underlying lien in the title policy, which would cover the title company from any claim. However, they may have a problem that knowing that such action could result in foreclosure; they may require execution of documentation from all parties acknowledging such possibility to avoid any future legal action on the part of the purchaser. Different underwriters treat this issue differently. It is a concern because the potential for problems with the transaction is fairly significant.

NP. Last but not least, I have received several requests to explain the difficulty of getting title insurance on property obtained from a sheriff's sale. In Texas we are aware that the redemption period is 2 years for homestead, and 6 months for non homestead, but how hard is it to sell property after the redemption period, and get title insurance?

Tom, there are several issues involved. First, any title company would need to confirm that the sheriff's sale and all required notices preceding the sale were done correctly, thereby negating any possible future legal action. This would mean that the title company would have to receive copies of all notices, evidence of proper mailing, etc. Second, the payoff following the redemption period is sometimes difficult to determine.

As a general rule, there are so many unknowns in connection with insuring a property which has been through a tax sale, that the title companies are reluctant to take on any such risks, particularly when you consider that the costs of defense, which are included when you purchase a title policy, could be quite expensive for a title company.

NP: Thank you, Gaylene. You have certainly made the case for having expert legal advice when dealing in real estate. I learned something today that I was not aware...the IRS requires 24 days notice, not just the 21 days as Texas laws require.

I want to reemphasize that this is general information, and not to be used for specific legal issues. You should consult a competent real estate attorney for any specific information. If you are in real estate, and do not have a real estate attorney, you need to be taken out of the gene pool.

Gaylene Rogers Lonergan is Board Certified in Commercial Real Estate Law by the Texas Board of Legal Specialization. She has practiced real estate law in the Dallas area for over 20 years. She is also a fee attorney and operates a closing office for LandAmerica Commonwealth Title of Dallas, Inc. If you would like to contact Gaylene, here is her contact information.

Phone: 214.503.7509
Email: rogersg@lonerganlaw.com