Evaluating and underwriting real estate loan transactions to be funded by private party lenders/investors requires an understanding of issues relating to legal and regulatory compliance, securities and best underwriting practices. All the above must be considered when analyzing the risk associated with the borrower(s) and the security property. A time sensitive “prove-up” process always exist.
The mortgage broker who locates a prospective loan transaction has a fiduciary relationship to the borrower(s). The funding lender may fund the loan transaction themselves or match the loan investment with private investors who desire to invest capital into trust deeds. If the funding broker uses personal capital or a line of credit to fund the transaction, then no fiduciary exists. If the mortgage broker uses private investor capital to fund the transaction, then a fiduciary relationship exists between the broker and the private party investors. Mortgage brokers representing private lenders/investors are agents and owe fiduciary duties to such parties who wish to invest their capital into the trust deed loan transactions.
When funding loans as a principal, the mortgage broker must follow the real estate law and comply with applicable federal and state laws including completing and delivering required disclosures. The mortgage broker may decide later to resale his trust deed in part or all to private party/investor beneficiaries, thereby taking on the role as an agent and fiduciary to the intended investor purchaser(s).
Sometimes there is a failure to communicate between various interested parties. This failure may come from lack of knowledge, lack of understanding the requirements, conflicts about who the parties owe a fiduciary obligation toward, or just false and/or evasive representation(s) by the borrower or their mortgage broker.
The mortgage broker, whether acting on their own account as principal or representing private lender/investor(s) usually has many years of experience in processing, analyzing, underwriting, closing and servicing trust deed investments. Whether acting as a principal lender or on behalf of private party investors the funding mortgage broker is likely to be a highly trained skeptic. They have significant responsibility and legal liability on all aspects of the transaction. Sometimes the process can be frustrating and even irritating. No one enjoys the frustration of having to work for hours to decide whether the transaction is practical or just another dead-end journey with a non-doable loan request that ends up in the digital wastebasket.
- The borrower’s mortgage broker informs the funding broker/lender:
“ The husband and wife are going through a divorce and I’m sure that she will cooperate.”
The funding broker/lender responds:
“Yes, that may be true, but before we go through all the work required to process and fund this loan, we need a written verification from her or her attorney that she will cooperate in signing the proper documents for this transaction to be completed. Is there a completed settlement agreement where she has agreed to quit-claim her interest in the security property as part of the settlement? A petition to dissolve a marriage imposes a legally mandated stay requiring court approval to complete any loan transaction. The stay means that no action can be taken to encumber or sell a property without court approval. If a property settlement has not been approved by the court, neither party has the authority to act for the purpose of financing or selling any of the mutually owned assets. A title insurer will also need a court order or court approved settlement agreement before title insurance coverage will be provided.”
- The borrower’s mortgage broker says to the funding broker/lender:
“My client needs to borrow some cash and will agree to placing second trust deed on their property. They purchased the property 5 years ago ‘subject to’ a first lien which was made by an institutional lender to the prior property owner. The loan reflects the borrowing party as the old owner, not the current owner. There has been significant equity build up because the property has substantially increased in value.”
The funding lender/broker responds:
“The problem is that there may be a due-on-sale or further encumbrance clause in the first trust deed. Although the lender did not choose to call the loan due and payable upon transfer of title to the present owner, the first lien lender typically retains that option and may call the loan due and payable at a later date. The first lender may become motivated to free up the capital for the purpose of lending to another party at a higher interest rate. The Garn–St Germain Depository Institutions Act of 1982, became effective on October 15, 1982 provided for exemptions in which the lender cannot exercise the ‘due-on-transfer and due-on-encumbrance’ provisions if the collateral property is a single family one to four dwelling. The specific provisions can be found in 12 U.S. Code 1701J-3. Therefore, if a due-on-transfer clause is contained in the first trust deed the lender may be prohibited from exercising the due-on provisions, depending upon the type of collateral property.”
Mortgage brokers on both sides of the transaction are licensed professionals. The borrower’s broker works on behalf of the borrower to obtain the required information, verify facts, and overcome obstacles. Full disclosure is assumed, not hidden and treated as an avoidance game.
Understanding complex underwriting issues can make or break a transaction. Make sure that you work with knowledgeable and experienced mortgage brokers to assist you through the process. In most cases, you may need to engage the services of third-party specialists such as attorneys, accountants, appraisers, property inspectors, environmental engineers, escrows holders, and title insurers. Real estate brokers active in the community in which the security property is located may be helpful. The examples presented provide limited information for readability. Each transaction comes with a more complex set of facts that may alter the outcome of a transaction.
Business and Private Money Finance Consultant
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This article is intended for educational purposes only and is not a solicitation.