Loans Etc

LOANS & TRUST DEEDS….

Trust Deed

  •  In real estate, an agreement in which the title to the property is held in a trust until the mortgage is paid. A trust deed is not given to the homeowner in order to provide an extra amount of security for the lender; the trustee for a trust deed does nothing except in the event of default, in which case the trustee sells the real estate.2. An agreement stating the terms of a trust. A trust deed is most common when mutual funds are held in trust, and outlines the responsibilities and restrictions on the fund.

 

Depending on where you live, you either signed a mortgage or a deed of trust when you took out the loan to purchase your home. Keep reading to learn the difference between these two documents and how they relate to the foreclosure process.

 

Promissory Notes

To fully understand the difference between a mortgage and a deed of trust, you must first understand promissory notes.

Homebuyers usually think of the mortgage or deed of trust as the contract they are signing with the lender to borrow money to purchase a house. But that’s actually not the case. It’s the promissory note that contains the promise to repay the amount borrowed.

While a promissory note is basically an IOU that contains the promise to repay the loan, the mortgage or deed of trust is the document that pledges the property as security for the loan. It is the mortgage or deed of trust that permits a lender to foreclosure if you fail to make the monthly payments.

Mortgages

Often, people refer to a home loan as a “mortgage,” but a mortgage is not actually a loan. The mortgage is a document that you give to the lender that creates a lien on the property. Certain states use mortgages, while others use deeds of trust.

Mortgage Terminology

There are two parties to a mortgage:

  • the mortgagor (the borrower) and
  • the mortgagee (the lender).

 

Mortgage Transfers

Mortgage transfers between banks are common. When a mortgage is transferred from one party to another, it must be documented and recorded in the county records. The document used to transfer a mortgage from one mortgagee to another is called an assignment of mortgage.

Mortgage Foreclosures

The mortgage gives the mortgagee the right to sell the secured property through foreclosure if the mortgagor does not pay the debt. Judicial foreclosures (where the foreclosure must go through the state court system) are typical in states that have mortgages as the security instrument.

 

Deeds of Trust

A deed of trust, like a mortgage, pledges real property to secure a loan. It is used instead of a mortgage in certain states. (Find out which states typically use deeds of trust.)

Deed of Trust Terminology

A deed of trust involves three parties:

  • the trustor (the borrower)
  • the beneficiary (the lender), and
  • the trustee. (The trustee is an independent third party that holds “bare” or “legal” title to the property. The main function of a trustee is to sell the property at public auction if the trustor defaults on payments.)

Deed of Trust Transfers

Like mortgages, when a deed of trust is transferred from one party to another, it must be documented and recorded in the county records. The document used to transfer a deed of trust from one beneficiary to another is called an assignment of deed of trust. (Transfers of mortgages and deeds of trust are both commonly referred to simply as “assignments.”)

Deed of Trust Foreclosures

A nonjudicial foreclosure process is typically used in states that use deeds of trust. In a nonjudicial foreclosure, the lender can foreclose without going to court so long as the deed of trust contains a power of sale clause.

State law lays out the requirements for nonjudicial foreclosures.

Nonjudicial foreclosures tend to be much quicker than judicial foreclosures.

How to Determine if You Have a Mortgage or a Deed of Trust

The differences between a mortgage and a deed of trust affect homeowners only when foreclosure is an issue. To find out whether a mortgage or deed of trust was used to secure your home loan, you can:

  • look at the documents you received when you closed escrow on your house
  • contact your mortgage servicer (the company to whom you make your payments), or
  • go to your local land records office and pull up the recorded document. (Sometimes these records are available online.)

 

WHY trust deed investing SO attractive?

If structured properly, trust deed investments offer an attractive current yield with relatively low risk. Trust deed investors usually earn high single-digit annual returns, paid monthly. In some cases, returns above 10% are possible. These returns are very favorable relative to other investment options with similar risk profiles. The risk of losing money in a trust deed investment is mitigated by a built in “margin of safety.”

Never make any loan extensions, additional advances, modifications or other changes of any kind no matter how small to an existing real estate loan without first obtaining written approval from any junior lien holders of record. in loss your investment. It sounds a little scary but it’s also a lot like saying don’t jump off the bay bridge either. There’s no good reason for anyone to alter or modify a note.

Always make all your investment funding checks payable directly to the title company handling the escrow because if investors never let their broker handle their money their broker can never mishandle their money. Now this is not to say that brokers who handle funds or process escrows are anything but honest. I am only saying that if you never allow your broker to handle your money AT ANY STAGE OF THE INVESTMENT PROCESS, then your funds will “NEVER” be mishandled even accidentally. RIGHT?

 

Take time to read and familiarize yourself with each item contained in the pre-lim (preliminary title report) issued by the title co. on each property shortly after escrow is opened. The pre-lim is a snapshot of the condition of the title to the subject property today before escrow closes so it will always contain items that will have to be removed as a condition of your funding of the new trust deed loan investment to be recorded there. Do you want read and familiarize yourself with the specific items of record that are not to remain as well as those that are? Even though the loan is very well secured and the thought of taking back a $200K home for $100K might even appeal to you many investors like to read the pre-lim to become familiar with the properties easements, assessments, mineral rights, assessed valuation and so on which is all right there in black and white in the preliminary title report.

Why do trust deeds yield more than bonds?

Individual trust deed investments are relatively small when compared to government or corporate bond issuance. For this reason it would be difficult for large institutional investors to put a lot of money to work into trust deeds. Therefore, the trust deed market is left to smaller investors who also have the expertise to distinguish good trust deed investments from bad ones. It turns out that the universe of such investors is fairly small compared to the universe of borrowers who are seeking private money loans.

The combination of limited supply and high demand results in a high price‚ in other words, a high yield for trust deed investors.

Additionally, many investors place a high value on liquidity — being able to sell investments quickly and convert them into cash. Corporate and government bonds are some of the most liquid investments in the world. Trust deed investments on the other hand cannot be converted into cash quickly. This lack of liquidity contributes to the higher yield of trust deed investments.

Trust deed investing seems too good to be true. What is the catch? The risk adjusted returns of trust deed investments are very attractive. That being said, there is no such thing as a free lunch. First of all these investments are not liquid and therefore cannot be converted into cash quickly. Secondly, there is real risk involved, the most obvious of which being that the borrower defaults and the lender cannot sell the home for more than the amount of the loan. To a great extent this risk can be mitigated by properly valuing the property and structuring the deal with a high enough margin of safety.

 

WHAT CAN GO WRONG

What can go wrong investing in real estate loans?

Trust deed investing results in one of two outcomes: (1) the borrower performs, or makes all interest and principal payments stipulated in the loan agreement; or (2) the borrower defaults. In the case of a default, the lender has a clear pathway, called foreclosure, to taking over the property that is the security for the loan. Once the foreclosure is done, the investor can sell the property to recover the investment. I had an illustrator create the cartoon below to show the two possible paths. As with any investment, there are risks and in case of a default by the borrower, there are several things that could create challenges. Some examples include the following:

a sharp drop in real estate values; a mistake in estimating the property’s true value; bankruptcy by the borrower; litigation affecting title to the property; and mortgage fraud or other defects on title. These five situations are discussed in their own respective FAQs.

IN THE EVENT OF A DEFAULT

What happens if the borrower doesn’t perform?

A default occurs when the borrower fails to make an interest or principal payment, or fails to live up to some other provision of the loan agreement. At this point, the lender instructs the loan servicer (an independent company that deals with the borrower) to file a notice of default. This is the first step in a series of events that culminates in a foreclosure sale. It takes about four to 6 months to hold a foreclosure sale after the notice of default is filed.

Occasionally a borrower will file for bankruptcy in order to avoid foreclosure. Once the petition is filed in court, the trustee is ordered to halt the foreclosure until such a time as it can be determnined what the outcome for the borrower will be. It is in your best interest to respond immediately if a borrower files for bankruptcy to ensure you receive what you are due. this would include any legal fees incurred and other costs associated with processing the foreclosure. also included should be any fees endured that relate directly to the response made to the bankruptcy as well.

Trust Deeds: Private Money Lending

Private money lending is a non-institutionalized, short-term real estate funding opportunity that uses the protective equity of the property as collateral for the loan.There are a number of professional companies that specialize in providing loans that may not be available through traditional lenders. In other words, they obtain money from a variety of sources for trust deed investments. Sometimes the funds for “hard money lending” as it is sometimes called come from individual investors. Other times the money is obtained through hedge funds, IRAs, trusts, pension plans and REITs among others.

Borrowers who fail to qualify for the guidelines of a conventional loan from a bank require private money lending. Although an investor’s credit and income may be sufficient according to traditional guidelines, the classification of a trust deed loan as “sub prime” prevents the lender from granting the loan. Thus private money lending provides an attractive and reasonable solution with more lending options.

Companies who handle the specific needs of a private loan solicit, underwrite, process and fund private money lending and are safe and reliable. Naturally you would be wise to choose a company with a sterling reputation, possibly recommended by other investors.

Not all lenders will offer the same services but all understand the complexities of a trust deed transaction and creative financing. In general they provide underwritten, direct loans for borrowers. Therefore, they fund the loan internally after assessing the risks personally, instead of outsourcing to retrieve information. In this manner the terms of the loan can be adjusted accordingly and the loan granted within hours instead of days or weeks once the application has been submitted.

Private money lending companies offer unique opportunities for investors. The loan is first secured with a deed of trust on real estate and supported with the borrower’s personal guarantee. A Title Insurance Company that is known nationwide with a good reputation is responsible for insuring the deed of trust. The borrower pays for any costs incurred in the process of underwriting, documenting or servicing the loan.

The decision to fund the loan is based on the amount of equity in the property. This is the first assessment an asset-based lender will make and if that requirement is met, then the borrower is analyzed—his integrity, ability to repay the loan and whether the project is a viable one.

An officer of the lending company will personally inspect the property before a final decision to grant the loan will be made. Property values and appraisals are often confirmed in house by using sales analysis through interviews by real estate brokers who know the area.

Individual investors comprise by far, the funds for the majority of loans granted by most non-institutional lending companies. Each investor is provided with details of the loan summary including the terms of the loan, property to be used as collateral and information about the borrower.

We offer  support  and assistance  through every stage of the loan process; another attractive feature of trust deed investing.

Real Estate-Bridge Loans

Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long-term financing.  Bridge loans on a property are typically paid back when the property is sold, refinanced with a traditional lender, the borrower’s creditworthiness improves, the property is improved or completed, or there is a specific improvement or change that allows a permanent or subsequent round of mortgage financing to occur. The timing issue may arise from project phases with different cash needs and risk profiles as much as ability to secure funding.

A bridge loan is similar to and overlaps with a hard money loan. Both are non-standard loans obtained due to short-term, or unusual, circumstances. The difference is that hard money refers to the lending source, usually an individual, investment pool, or private company that is not a bank in the business of making high risk, high interest loans, whereas a bridge loan is a short term loan that “bridges the gap” between longer term loans.

Description

A bridge loan is interim financing for an individual or business until permanent financing or the next stage of financing is obtained. Money from the new financing is generally used to “take out” (i.e. to pay back) the bridge loan, as well as other capitalization needs.

Bridge loans are typically more expensive than conventional financing, to compensate for the additional risk. Bridge loans typically have a higher interest rate, points (points are essentially fees, 1 point equals 1% of loan amount), and other costs that are amortized over a shorter period, and various fees and other “sweeteners” (such as equity participation by the lender in some loans). The lender also may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.

Real estate

Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long-term financing. Bridge loans on a property are typically paid back when the property is sold, refinanced with a traditional lender, the borrower’s creditworthiness improves, the property is improved or completed, or there is a specific improvement or change that allows a permanent or subsequent round of mortgage financing to occur. The timing issue may arise from project phases with different cash needs and risk profiles as much as ability to secure funding.

A bridge loan is similar to and overlaps with a hard money loan. Both are non-standard loans obtained due to short-term, or unusual, circumstances. The difference is that hard money refers to the lending source, usually an individual, investment pool, or private company that is not a bank in the business of making high risk, high interest loans, whereas a bridge loan is a short term loan that “bridges the gap” between longer term loans.