Foreclosure Bail-Outs The Legal Way
by Bill J. Gatten
Try this one on for Foreclosure Bailouts (where the intent is to leave
the defaulting party in the property while sharing in future
profits with an investor who brings his loan current):
Assumptions: 1) you have no money or credit to work with; 2) [or] you
know a would-be investor or two who have a few thousand dollars, but
whom may want you to do the all “hard” work; 3) the property in
question needs $8,475.22 to bring the loan current; the property is
worth somewhere between $185K and 200K ; 4) the defaulting party has a
good job, good income and is recovering from the specific financial
dilemma that put him behind the eight-ball; 5) you are well aware of the
civil code regulations in your state that restrict the actions of
so-called “Foreclosure Experts,” “Foreclosure Consultants” and
scam artists (i.e., CCC Sec. 1695..17 and 2945..11 in California).
If a property goes into a co-beneficiary land trust, that action
(assuming there are no pre-existing liens on the property other than the
mortgage itself) constitutes a protection (“shielding,” as it were)
of the property against future claims of other creditors (using an LLC
to hold one of the ‘sides’ of beneficiary interest further insures
the armor plating).
Now, the grantor (settlor homeowner) names the investor as a
co-beneficiary in the land trust, and creates an Assignment and
Beneficiary Agreement between the two of them. Next, since the 3rd party
trustee is the bona fide legal and equitable owner of the entire
property, and the property is set to be leased to someone, the resident
beneficiary (the defaulting mortgagor) becomes that someone and leases
it from the trust on a triple net basis (PITI and maintenance).
To avoid the obstacles of lending law (as in Texas) and/or civil code
regulation violation (as in California), the ‘investor’ who is
curing the default must assure that the documentation contains
absolutely nothing which could be construed as intent to deprive the
mortgagor in default of the equity in his home. Further, there must be
nothing implying that the contribution to be used to cure the default is
secured by the property. The investor should have only an agreement to
SHARE in “future” appreciation, IF there is to be any, and to
receive a return of his contribution, without a guaranty and without
security (and without interest consideration) for any moneys used to
cure the default.
Now…when the "contribution" that is to be used to cure
the default is made, it must be made only after determining a fair and
equitable (albeit, "low-side") assessment of the true property
value. For example, the property "could" be worth $195K; but
it "might" be worth as little as $185K; therefore, the parties
mutually agree that the value is $185K, less any anticipated
refurbishment costs...bringing the MAV down to, maybe, $175K. An
investor (or next door neighbor…or you) then brings in the $8,475.22
to cure the default and stop the foreclosure (cashier’s check only).
Thereafter, everything either goes swimmingly for the resident through
to termination, or until he defaults again partway through.
In the event of a subsequent default, the trustee (by irrevocable
direction of the beneficiaries at inception) removes the errant
“tenant” from the property as it is contractually bound to do by
simple eviction (i.e., the tenant, himself, made the rules by which he
is evicting himself…stops arguments un unlawful detainer court). The
non-defaulting party then purchases from the defaulted beneficiary all
of his interest in the trust for full fair-market-value (as determined
by an MAI appraisal, if the defaulting party would disagree with the
offer from the non-defaulting beneficiary). An UN-secured Promissory
Note is then used to effect the purchase of the defaulting party’s
beneficiary interest, which note’s balance is scheduled be paid only
upon the disposition of the property at the trust’s natural
termination. Note that such termination can pretty much be
‘anytime,’ in so much as the non-defaulting party is now the only
beneficiary, having full Power of Direction over the trustee, and making
all the rules).
Should the PACTrust go to full term, and the property be appraised
for, say, $300,000 the resident (mortgagor) would re-finance (or sell)
and gets back all of the equity he started with (the amount between the
loan encumbrance at inception, up to the $170,000 MAV), plus half of any
value gain by appreciation and equity build-up through principal
reduction over the term of the trust. The "investor" would
then receive a return of its $8,475.22, plus his half of all of the net
profit on sale.
In this scenario, whether there has been a default, or not, note that
the property was indeed acquired at Fair Market Value. The debtor was
not deprived of any of his equity. There has been no interest
consideration or loan of moneys. There is no forfeiture of equity upon
comprise of the terms of the agreement. And the investment was never
secured by the property (some of the elements within the regulations
designed to prohibit foreclosure scams).
The only caveats there might be: 1) Assure that the money to cure
comes from an individual, and not a company entity that could be
construed as an unlicensed lender; and 2). Be sure the loan is brought
current and is in good standing before opening any escrows or executing
any of the PACTrust documentation (i.e. hold everything in Escrow for a
while after brining the loan current in order to be as distant from the
NOD activity as possible, and 3) bring the loan current (prior to
opening Escrow) with a cashiers check only.
Is this all tried and true and tested? No. It’s just theory at this
point, but a pretty danged good one I think. Would you be the first to
test it? Yes, as far as I know (unless Bud Branstetter and/or I beat you
to it).
Think of it. You set up an LLC with someone with a few bucks to
spend, but who would prefer that you do the work; and you advertise
thusly:
Let me will cure your foreclosure at no cost to you, while you
continue to own and remain in your home.
One might (could) even consider adding another $1,200, or so to the
LLC‘s investment, to be used to reduce the tenant’s mortgage
payments by, say, $200 per month for six months (or $400 for 3 months)
in order to help ease him into getting back on track.
Bill Gatten
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