Part II of IV
Part I: I will discuss real property borrower defaults and legal procedures.
Part II: I will discuss reasons that constitute a default on loan obligations. Monetary and Non-monetary.
Part III: I will discuss potential actions a defaulting borrower can take, empowering them to take control of the situation.
Part IV: I will discuss possible actions the lender may take to recover their security, ensuring the audience is well-informed about the procedures.
Summary:
When a borrower fails to fulfill their contractual obligations, it is considered a default or failure to perform. The primary reason for defaults are monetary, or failure to make payments, including paying the loan in full when it becomes due. These defaults can have significant consequences, such as foreclosure or legal action, making it crucial for all parties involved to be aware and cautious.
Understanding the representations and warranties in the loan documents is not just crucial but empowering. Whether it's a deed of trust or mortgage instrument in residential transactions, or the mortgage instrument or the loan agreement in commercial transactions, this knowledge puts all parties in the driver's seat, ensuring they stay in control of the transaction.
Article:
A default on an obligation is a failure to fulfill the obligation. In many phases of life, defaults, otherwise known as failures to perform, occur. A non-married couple lives together, and the gentleman tells the significant other she will share his estate when he passes. When it happens, there is evidence that he defaulted because his other greedy heirs (who earned nothing and are entitled to nothing) jumped on the confiscation trail to scoop up anything of value, leaving the lady with nothing but a devastating memory and a false promise, or default.
In real property lending, a default occurs when a borrower fails to fulfill the contractual obligations they agreed to upon signing and recording.
Representations and Warranties:
Representations are statements of fact made to another party to induce them into a contractual agreement. A false representation is untrue, or inaccurate,
Warranties are promises or guarantees that specific facts are accurate. If some facts turn out to be false, there are legal remedies. A false warranty is breached.
https://www.jdsupra.com/legalnews/representations-warranties-and-covenants-99335/
https://legittai.com/blog/warranties-and-representations
https://www.linkedin.com/pulse/representations-warranties-nature-difference-bhumesh-verma-uu6ic/
https://selling-guide.fanniemae.com/sel/a2-2-01/representations-and-warranties-overview
https://www.fhfa.gov/policy/representation-and-warranty-framework
https://www.lawinsider.com/clause/representations-and-warranties-by-the-borrower
Monetary defaults are easy to understand. You don't pay, you're in default.
Non-monetary defaults are less easy to understand. A non-monetary default occurs when the borrower fails to comply with the terms of the loan agreement, excluding the loan payments.
Examples:
- Failure to maintain the property in good condition
- Failure to use the property for lawful purposes
- Failure to pay property taxes, insurance premiums, and association fees.
Borrower representations: signed and agreed to as part of the loan agreement.
Examples:
- The borrower is not currently in default
- The borrower has the legal right to transfer the title
- The property is free and clear of liens, encumbrances, and outstanding claims other than those stated in the preliminary title report.
- The borrower is not currently contemplating filing for bankruptcy.
Borrower's warrenties: signed and agreed to as part of the loan agreement.
Examples:
- Confirmation that the borrower has the authority and the capacity to enter into a loan agreement.
- All obligations in the loan agreement are legal, valid, binding, and enforceable.
- All obligations are consistent with applicable laws and regulations.
- All facts in the documents are actual, complete, and accurate.
- No defaults of this obligation are expected or contemplated.
https://www.ecfr.gov/current/title-7/subtitle-B/chapter-XXXV/part-3560/subpart-J/section-3560.452
https://www.investopedia.com/terms/t/technical-default.asp
https://www.firstfoundation.ca/mortgage-glossary/default/
When a lender discovers a breach of the covenants or a monetary default, they immediately notify the borrower and give a very short time to remedy the problem; otherwise, a foreclosure procedure will begin. Of course, this is subject to federal, state, and local laws that protect consumers even in default status, such as providing grace periods or requiring specific notification procedures.