Tender Rule in California May Stop a Homeowner From Fighting Against Foreclosure

By: Ryan D. Miller
Riverside County Office

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Last July, our newsletter article focused on the Garcia case, where a lender promised not to foreclose, but did anyway.  The borrower was able to maintain a lawsuit against the lender because as the borrowers relied upon the lender’s promise, to their detriment.  In January of this year, our newsletter article focused on the landmark case in the Massachusetts Supreme Court, also related to overcoming foreclosure.  Recently there was another case in the California Courts of Appeal, 2nd District, Aceves v. U.S. Bank, N.A., Cal. App. 2d Dist. Jan. 27, 2011, where another homeowner was successful at maintaining a lawsuit against a lender for allegations of fraud and promissory estoppel.

While the cases illustrate that lenders often violate laws in pursuing non-judicial foreclosures, many do not know that in order to even bring a wrongful foreclosure case, the borrower likely must first offer to tender the full amount of the loan, where the trustee’s sale already occurred, or cure any default, where the trustee’s sale has not yet occurred, in order to get a court to set aside a foreclosure sale.  This “tender rule” is not limited to cases where the homeowner seeks to set aside a foreclosure sale, cancellation of a trustee’s deed or quiet title.  It is also applied to causes of action related to a foreclosure, including negligence and fraud.

The tender rule was set forth in Arnolds Management Corp. v. Eischen (1984) 158 Cal.App.3d 575,579-580.  It is based on the notion that one who seeks to set aside the foreclosure sale must first comply with any requirements they are obligated to first.  This rule tends to be the biggest hurdle for the wrongfully foreclosed to fight against wrongful foreclosures, and it is a big hurdle.  If borrowers had the money to tender to the lender, they would not need a loan in the first place.  Additionally, if a borrower could get a loan through another lender, they could use that money to tender.  However, once a borrower is in default, their credit is such that they can no longer obtain additional financing.

There are ways around the tender rule.  One of the most successful ways to avoid having to tender the entire amount of the loan is to show that because the lender lacked the authority to foreclose, the sale was void.  Dimock v. Emerald Properties (2000) 81 Cal.App.4th 868, 876.  That means the trustee’s sale was a complete nullity with no force or effect as opposed to one which may be set aside.  Indeed some cases have held that it is not “equitable” nor does it make sense to require a homeowner to tender the amounts owing because of a lender’s actions.  One can certainly see the problems that could arise with a rogue lender wrongfully foreclosing, where the borrowers were helpless to fight the foreclosure because they could not tender the full amount of the loan.

Other cases have held that notice defects void a trustee’s sale so tender would not be required.   Bank of America, N.A. v. La Jolla Group II (2005) 129 Cal.App.4th 706, 715-716 and Little v. CFS Service Corp. (1987) 188 Cal.App.3d

However, despite these decisions, local courts have sometimes been reluctant to entertain these arguments.  I speculate that the reason for this reluctance is that many homeowners filed wrongful foreclosure actions against the lender, when they had no basis for doing so, simply to stay in the home one more month.  It is possible that the courts want to discourage this type of behavior, and therefore require tender.

Additionally, I have seen that where a homeowner has the ability to pay all arrears, the court seems more likely to allow a wrongful foreclosure action.  And usually, it is more persuasive to the court if a homeowner can provide proof of their ability to pay all arrears, fees, etc.  Additionally, when an unlawful detainer is also pending, the court may ask that the homeowner provide a bond, in the event the homeowner loses and must pay the fair rental value of the foreclosed-upon home.

When a lender’s actions are egregious and fraudulent activity is apparent, a court may not focus so much on the tender rule.  However, when the facts come short of showing fraud, the tender rule may bar the average homeowner from pursuing a wrongful foreclosure case.

A foreclosed upon homeowner should consider the tender rule before committing to the time and expense associated with a lawsuit.  Additionally, if a lender is engaged in conduct that is obviously fraudulent, a foreclosed upon homeowner should know they should not have to tender the full amount of the loan.

New Rulings in Massachusetts Could Impact Foreclosure Cases in California

By: Kelly A. Neavel
Orange County Office

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Two new, pivotal foreclosure cases were decided this month by the Massachusetts Supreme Court that could have an impact on foreclosure cases here in California.

In U.S. Bank N.A. v. Ibanez and Wells Fargo Bank NA v. LaRace, the lenders foreclosed on the mortgages secured by the properties owned by Ibanez and the LaRaces.  Both properties reverted back to the lenders.  The lenders brought an action to perfect title in order to sell the properties.  Both Ibanez and the LaRaces argued that the lenders did not have the authority to foreclose.  Under Massachusetts foreclosure law (as in most states, including California) only the present holder of the mortgage is authorized to foreclose, and the statutory law must be strictly followed because there is no judicial oversight.  If the Notice of Sale does not identify the current holder of the note at the time of the notice and sale, the Notice of Sale is void.  In Ibanez and LaRace, the Court noted that this often occurs when the party is identified as the “beneficiary” in the Notice of Default or the Notice of Sale, but later it is learned through Fannie Mae and Freddie Mac that the beneficiary as stated is not the real owner of the loan.

The Massachusetts Supreme Court held that the lender must prove that it has authority to foreclose.  In both Ibanez and LaRace, U.S. Bank and Wells Fargo Bank were assignees of the original mortgages only.  Therefore, they had authority to exercise the power of sale contained in the original mortgages if they were the assignees at the time of the Notice of Sale and foreclosure sale.  The court went on to discuss what is required to prove ownership of securitized loans (loans that are pooled with other loans and assigned to a securitized trust), as was the case in Ibanez.  The court held that an executed agreement that assigns the pool of mortgages, and contains a schedule of the loans clearly identifying the mortgage at issue may be sufficient.  However, the court stressed that there must be proof that the assignment was made by a party that itself held the mortgage.  U.S. Bank and Wells Fargo argued that because they held the notes, they had sufficient financial interest in the mortgages to allow them to foreclose.  The Massachusetts Supreme Court rejected this argument stating, “Where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment.”  The court went onto note that in most cases there is never any proof that the securitized loan trustee ever has the original note properly endorsed and assigned.

Ultimately, in Ibanez and LaRace, the court held that, “the Plaintiffs (U.S. Bank and Wells Fargo Bank) did not demonstrate that they were the holders of the mortgages at the time they foreclosed on the properties and therefore, failed to demonstrate that they acquired fee simple title to these properties by purchasing them at a foreclosure sale.”  The court also held that the foreclosure sales were void.  To add insult to injury, the court further held that because U.S. Bank and Wells Fargo Bank failed to abide by well-established case law and statutes, this holding would apply retroactively to all previous foreclosures conducted by both banks.  This ruling could affect to thousands of properties foreclosed upon by U.S. Bank and Wells Fargo Bank.

Even though Massachusetts law is not controlling in California, California courts can look to this ruling when addressing similar issues, which may impact California foreclosure cases.  Here is the Massachusetts Supreme Court standard that may impact California law in the future:

  1. Foreclosures must be done by the real party in interest;
  2. Chain of title must be perfected, meaning all assignments of the mortgage must be in order;
  3. All documents have to be proper at the time of the foreclosure proceedings or the foreclosure can be deemed improper, and
  4. Mere possession of the Note is not enough – lenders must demonstrate that they have proper standing to foreclose.

It should be noted that currently in California, the courts have rejected the argument raised by borrowers that lenders have to produce the original note in order to have standing to foreclose.  However, it will be interesting to see how this new ruling by the Massachusetts Supreme Court, will affect future foreclosure cases in California and other states.

Application to REALTORS®:

  1. If this ruling is applied here in California, foreclosures will be harder to complete, which will impact the REO market with less inventory;
  2. REALTORS® may see an increase in short sales and loan modifications; and
  3. REALTORS® should always advise their buyers to obtain their own owner’s title insurance policy to protect themselves in the event it is later proven that the property had defective title at the time of the foreclosure sale.


This month we provide a brief overview of whether a property owner facing foreclosure should consider giving the property back to the lender through a deed in lieu of foreclosure.  If the property owner is willing to let go of the property, the lender may be willing to accept a deed for the property from the owner instead of going through with a foreclosure sale.  This is known as a “deed in lieu of foreclosure.”  Property owners facing foreclosure should be aware that it may be possible for them to avoid some negative consequences of foreclosure if they are willing to give the property to the lender before the foreclosure sale.

A deed in lieu of foreclosure is a transfer of title in real property from the property owner/borrower to the lender in order to avoid foreclosure entirely or to stop the foreclosure process.  The deed in lieu of foreclosure consists of an agreement between the borrower and lender that is negotiated after the possibility of a foreclosure arises.  Such an agreement cannot be part of the original loan documents.  That is, the lender cannot agree in advance that it will accept a deed in lieu of foreclosure.  Thus, borrowers cannot create a contractual obligation at the time they borrow money that would allow them to force a lender to accept the property instead of going through the foreclosure process.

Lenders cannot force borrowers to surrender a deed in lieu of foreclosure, as this would infringe on a borrower’s rights.  An agreement to accept a deed in lieu of foreclosure must be negotiated between the borrower and the lender.  The HAFA program provides for a deed in lieu process if a loan modification fails.  However, a borrower faced with losing property through foreclosure cannot simply execute and record a deed granting the property to the lender.  If a borrower attempts to do this, the lender will record a “Notice of Nonacceptance,” which provides legal notice that it has not accepted the deed in lieu of foreclosure.

A senior lienholder may not want to accept a deed in lieu of foreclosure.  If the property owner has other liens against the property, such as a second mortgage or judgment liens, a senior lender who accepts a deed in lieu of foreclosure accepts the property subject to those other liens.  A foreclosure, on the other hand, will wipe out any junior liens (a junior lien is one that is recorded after the lien foreclosed upon).  It may be more economically advantageous, therefore, for the lender to go through the foreclosure process.  Other reasons that a lender may not wish to accept a deed in lieu of foreclosure include the risk that the borrower may seek to set the deed aside and the risk that a borrower’s creditors may claim that the deed constitutes a fraudulent conveyance.  Lenders generally do not face these risks if they proceed with the foreclosure.

Even if the lender is willing to accept a deed in lieu of foreclosure, it may not be in the borrower’s best interest to execute the deed.  If the property is worth more than the amount owed to the lender, a deed in lieu of foreclosure results in the borrower waiving any right to the excess proceeds from the sale of the property.  It is rare in this economic climate that a property is worth more than what is owed on it, but there is another situation where a borrower may benefit from a foreclosure.  If a borrower has more than one loan against the property, for example, a foreclosure sale may result in a junior lien holder receiving part of the money owed. In some situations, payment through foreclosure of part of the money owed to a junior lien holder may prevent that lien holder from seeking a deficiency judgment.

To illustrate, assume that a borrower owes $150,000.00 on a first mortgage and $50,000.00 on a second mortgage.  Assume also that the property that secures these mortgages is worth $175,000.00.  If the property sells for $175,000.00 at the foreclosure sale, the second mortgage holder will receive $25,000.00 (for purposes of this illustration, assume that foreclosure costs are negligible).  The fact that the second mortgage holder receives some payment through the foreclosure will prevent it from obtaining a deficiency judgment.  Of course, if the second mortgage is a purchase-money mortgage no deficiency judgment is available anyway.  (See the September 2009 Courtside Newsletter for further discussion of purchase-money and non-purchase-money loans at www.glawgroupapc.com.)  Nonetheless, there may be circumstances under which the borrower benefits from a foreclosure sale.

A deed in lieu of foreclosure, however, may create a significant benefit to a borrower.  If the lender agrees to accept a deed in lieu of foreclosure, a borrower can minimize the injury to his or her credit.  Further, a lender may agree to cancel the debt and forego any claims to recover a deficiency in exchange for a deed in lieu of foreclosure.  The lender benefits by avoiding the costs of foreclosure, including costs associated with a delay in recovering the property.  Under the right circumstances, a deed in lieu of foreclosure can be a win-win situation for both the borrower and the lender.

As discussed above, a number of factors must be considered in determining whether to execute a deed in lieu of foreclosure.  As with all legal issues, it is important to consult a qualified legal professional in order to understand all of the risks and benefits associated with such action.

The author of this month’s newsletter is J Niswonger, an attorney with The GIARDINELLI LAW GROUP, apc.  Mr. Niswonger may be reached at jniswonger@glawgroupapc.com or 951/ 245-9163.

SPECIAL REPORT: SHORT SALE NEGOTIATORS: Fiduciary Duties / Contractual Relationships / MLS Issues

In the current real estate market, a significant number of transactions are short sales.  The enactment of federal legislation (HAFA) to streamline and provide rules for short sales is expected to further increase the number of attempted short sale closings.  The increase in short sale transactions has caused changes in how buyers, sellers, real estate brokers, agents and lenders conduct business.  The traditional ways of handling a transaction do not always fit in a short sale, nor, in many instances, do traditional rules.  New business models are being created, and opportunities for fraud schemes and ambiguities are abundant.  Many agents are using the services of short sale negotiators.  Real estate professionals are faced with multiple and complicated legal and ethical issues and new rules and regulations that have been enacted to address these changes.

The Giardinelli Law Group, APC has prepared this Special Report to discuss some of the duties and obligations of agents and the contractual relationships involved in the use of short sale negotiators, and MLS listing issues.  Subsequent reports should be available soon covering other topics related to short sales (flipping schemes, additional MLS Rules issues, DRE Regulations, legislation and reporting violations).  We acknowledge and thank the California Department of Real Estate (“DRE”) for permission to use material from the recent short sale article by Wayne Bell and Mark Tutera published in the DRE California RealEstateBulletin, Spring 2010.

Short Sale Defined

A short sale is a transasction where title transfers and the sale price is insufficient to pay the total of all liens and costs of sale, and where the seller does not bring sufficient liquid assets to the closing to cure all deficiencies.  Before foreclosure by the lender or lienholder that holds the trust deed on a residential property (referred to in this article as the “Lender”), the Lender agrees to allow the homeowner to “sell short” — sell the property for less than the outstanding amount owed on the mortgage loans — and release the property from the trust deed the lender holds.  The lender benefits by removing the non-performing loan asset from its financial books, avoiding the costs and time delays of foreclosure, and incuring the holding costs associated with owning the property after foreclosure (such as taxes, maintenance, insurance, eviction, and listing and selling).  The homeowner benefits by avoiding the forclosure action which severely damages a credit rating and ability to obtain financing for a replacement residence in a shorter time frame.  However, an undesirable factor for the homeowner is that the “shortage” may be treated as “debt forgiveness” by the lender and in some circumstances may be taxable as “phantom income.”  There are both federal and state laws that govern tax issues.  In some circumstances where the lender has recourse, the lender may even have a potential claim for damages for the “deficiency” (shortfall).

Use of Short Sale Negotiators

Completing a successful short sale often requires time-consuming negotiations with the lender or lender’s representative.  Many agents or offices are inexperienced, unskilled, or just too busy to efficiency and effectively conduct such negotiations.  They prefer to utilize the services of a third-party negotiator who often has an established relationship with a person in the lender’s loss mitigation department.  Use of such a third-party negotiator, particularly one who is not “in‑house,” may raise a multitude of legal and ethical issues, including questions relating to fiduciary and ethical duties, license requirements, contractual relationships, compensation, disclosure, confidentiality, compliance with MLS Rules and civil and criminal law, insurance coverage and liability.  Some brokerages bring the negotiators in-house and under the umbrella of the supervision of the broker and the company’s insurance coverage.

DRE License Required for Negotiators

Real estate licensees who take short sale listings must ensure that the third party conducting the negotiations is properly licensed.  The DRE has made it clear that a real estate broker or salesperson license is mandatory to represent the parties to a short sale, unless negotiations are conducted by an attorney or the party.  If the negotiator is a licensee, then he or she must have a supervising broker.  Careful consideration must be given to whom the fiduciary duty is owed.  Is the negotiator an agent of the seller, a dual agent, or an employee/agent of the listing broker, the cooperating broker or both?

If the transaction involves a loan secured directly or collaterally by liens on real property, California Business and Professions Code section 10131(a) and (d) requires a person to be licensed who negotiates as a representative of another for the purchase, sale or exchange of real property, or who, for or in expectation of compensation, acts in a representative capacity for another to negotiate loans or perform services for borrowers or lenders.  (Narrow exceptions exist for attorneys acting in the course and scope of their law practice and a person or entity acting solely on his or its own behalf).

A license is required regardless of the title used by the negotiator.  For example, none of the following are exempt from the license requirement:  debt negotiator, debt resolution expert, loss mitigation practitioner, foreclosure rescue negotiator, short sale procesor, short sale factilitator, short sale coordinator, or short sale expeditor.  Persons who engage in short sale negotiations without a DRE license are in violation of California law and could be fined and/or imprisoned under section 10139 of the Business and Professions Code.  Persons who knowingly hire them may also be in serious difficulty.

Obligations of Listing and Selling Brokers and Agents

Seller’s Written Agreement and Disclosure

The listing broker/agent must have the seller’s written agreement for the negotiator to provide services.  This is required for several reasons:

  1. The listing broker/agent must disclose to the seller that the negotiator’s services will be used.
  2. The negotiator must have authority from the seller (borrower) to communicate on the seller’s behalf with Lender.
  3. The agreement of the seller is required regarding compensation to be paid to the negotiator.
  4. Use of the negotiator must be disclosed to the buyer’s agent.

These requirements may be met by completing the appropriate C.A.R. Form – Short Sale Addendum and providing the buyer’s agent a copy of the form.  In addition, it is this author’s opinion that an agency disclosure form may often be required.  If the licensed negotiator is acting on behalf of the seller (and/or buyer) in a principal/agency capacity, an Agency Disclosure form is mandatory.

Relationships between Listing Broker or Agent and Negotiator and/or Outside Broker

The listing agent generally has an independent contractor relationship with the listing broker.  The negotiator may be an employee, an affiliated independent contractor, or an outside vendor of either the listing broker or the listing agent.  If the negotiator is not an affiliated licensee of the listing broker, he must himself be a broker or be affiliated with another “outside” broker.  The listing broker/agent should have a clear written agreement establishing the relationship with the negotiator.

If the negotiator is affiliated with an outside broker, there should be a written agreement between the listing broker and the outside broker confirming that the outside broker will meet the fiduciary and legal duties to supervise the negotiator’s activities, not delegate tasks requiring a license to unlicensed persons, and provide insurance coverage for worker’s compensation and liability coverage for negligence or unintentional misprerensetations by the negotiator to the lender, buyer, seller or others.  The agreement between the brokers should also establish their rights regarding commission splits and method for compensating the negotiator for his services.  Providing for mediation or arbitration and attorney fees in the brokers’ agreement is also advisable.

Additional issues arise if the lender requires or designates a negotiator or if the listing broker/agent is also the buyer’s agent (dual agency) and uses a negotiator who is an employee or independent contractor of the lender.  In a dual agency transaction, the agent has a fiduciary duty to the seller to negotiate the best terms for the seller, not obtain the highest price for the Lender.  All appropriate disclosures regarding affiliate business relationships and referrals must be made to comply with the Real Estate Settlement Procedures Act (“RESPA”).

Compensation to Negotiator

The negotiator must comply with all DRE regulations and California law for advance fees.  Disclosure of all fees, including short sale negotiator compensation, must be made on the HUD 1 Statement.  Payment to the negotiator must be made through escrow. Conditions for valid payment to a short sale negotiator include the following:

  • Seller consent (written),
  • Agency Disclosure,
  • DRE license affiliated with licensed broker,
  • Performance of licensed activities,
  • Entitlement to compensation as an agreed commission split, a flat fee, or hourly rate as an independent contractor or employee of the listing agent, listing broker, or outside broker.

Will the fees still be due if the transaction fails to close or if the lender fails to grant approval?

Listing Broker/Agent Liability

Claims for breach of fiduciary duty, failure to disclose, or failure to supervise may be brought by a seller or buyer.  DRE discipline and criminal and/or civil liability may attach even if the listing broker/agent is unaware that the negotiator is engaged in mortgage fraud.

MLS Listing Re Short Sale Negotiator Fees

Short sales present a special problem with conditional compensation being offered to a cooperating broker.  The listing agent may not be entirely sure what the commission will be until the terms of a short sale are approved by the lender.  The Multiple Listing Service (MLS) has adopted NAR-approved language giving participants in the MLS the ability to disclose or may require disclosure to other participants that there is a potential for a short sale.  If the property is being listed as a short sale, that should be disclosed in the private agent remarks section.

A listing that requires the buyer’s agent to pay a portion of the negotiator’s fee may be a prohibited contingent offer of compensation.  To avoid an MLS Rule violation, rather than requiring the cooperating broker to pay a stated amount of the negotiator’s fee, the listing agent may lower the percentage of the commission offered to the cooperating broker, subject to discussion with the seller and full written disclosure.

The purpose of the MLS is to exchange information regarding available properties for sale or lease and to establish legal relationships with other participants by making blanket unilateral offers of compensation.  The MLS Rules govern the behavior of the participants.  However, it must be abundantly clear that the Rules do not alter California law, including the DRE regulations, Statutory Law, and Case Law.

MLS Rule 7.12 sets forth the criteria for an offer of compensation as being a specific dollar or percentage amount.  The Rule states, “… The amount of compensation … may not contain any provision that varies the amount of compensation offered based on conditions precedent or subsequent or on any performance, activity or event.”  Rule 7.16 limits the manner by which compensation may be altered.

There are a number of rules relating to the rights of brokers who present offers that may also impact this issue and will be a topic of the next report.  In the next report, we will discuss these issues and the Code of Ethics, particularly Articles 1, 2, 3, 7, 9, 12, and 16, as they apply to this subject matter.  See for example MLS Rules 7.16, 9.4, 9.5, 9.6 and 9.7.

As with all real estate communications, all statements in the MLS must be accurate and truthful.  (For example, see Rule 12.10)


In our next article we will discuss the impact of the Code of Ethics, other MLS rules, flipping, and several fraud schemes.


  • A real estate licensee’s fiduciary duty is to his client and CANNOT be signed away.
  • A listing agent’s duties cannot be delegated to an unlicensed third party.
  • A dual agency disclosure does not eliminate the listing agent’s duty to the seller which may conflict with getting the best price for the investor.
  • A real estate licensee who is collecting an advance fee for performing the short sale MUST follow the federal law, DRE guidelines and California law for advance or other fees.
  • Not getting the best offer for the seller may expose the seller to a higher potential deficiency judgment and a greater tax liability.

The authors of this month’s newsletter are John V. Giardinelli and Sylvia J. Simmons, Attorneys with The GIARDINELLI LAW GROUP, apc.  They can be reached at jvg@glawgroupapc.com and Sylvia@glawgroupapc.com or 951/ 245-9163.


Riverside County Office                                                                                   Orange County Office

31772 Casino Drive, Suite C                                                                            1601 East Orangewood Avenue, Suite 175

Lake Elsinore, CA  92530                                                                                 Anaheim, CA 92805

951 / 245-9163                                                                                                   714 / 978-2060

This article is a copyrighted publication and may not be reproduced or transmitted in any form or by any means without written permission.  This article does not necessarily reflect the point of view of the Association or other person or entity who publishes it.  This article provides legal information abridged from statutes, court decisions, and administrative rulings and contains opinions of the writers.  Legal information is not the same as legal advice, which is the application of law to an individual’s specific circumstances.  Although every effort is made to ensure the information is accurate and useful, it is recommended that you consult with a lawyer to obtain professional assurance that the information provided and your interpretation of it is appropriate for a particular situation. To request further information or to comment on this article, contact The Giardinelli Law Group, apc, at jvg@glawgroupapc.com, or 951/ 245-9163 and visit our website at www.glawgroupapc.com

Courtside Newsletter: May 2010

Despite various reports that the economic crisis may be improving, many property owners face the continuing problem of owing thousands if not hundreds of thousands of dollars more than their properties are currently worth. Many of these owners have chosen to allow their properties to go into foreclosure rather than continue to pay on loans that far exceed the value of the property. For many property owners, however, there may be an alternative to foreclosure. This month we provide a brief overview of the potential benefits of a Chapter 13 Bankruptcy proceeding when a real property owner owes more than the property is worth.


While many economic reports note that foreclosures have been gradually decreasing, a significant number of real property owners struggle to make payments on loans that exceed the value of their properties. A Chapter 13 bankruptcy proceeding may offer relief to such property owners who are “under water.” In certain situations, Chapter 13 bankruptcy can eliminate a second or third lien against real property. In bankruptcy parlance, this is known as “lien-stripping.”

In order to qualify for this benefit, the property owner must be eligible for a discharge in bankruptcy under the provisions of Chapter 13 of the Bankruptcy Code (lien-stripping is also available in Chapter 11 bankruptcies, but that discussion exceeds the scope of this article). If a person has been discharged in a Chapter 7 bankruptcy within four years of filing the Chapter 13 petition, for example, then he or she is not eligible for discharge under Chapter 13. Additionally, if the property is the debtor’s personal residence (the “debtor” is the person who files for the bankruptcy), the lien cannot be stripped unless it is completely unsecured. This means that the homeowner must owe more on a senior lien than the property is worth.

To understand how this is applied, assume that a person’s home is worth $200,000.00, and that the person owes $236,000.00 to Wells Fargo Bank (the “first” mortgage). Assume also that this person obtained a second loan from Bank of America in the amount of $75,000.00 that is secured by the property (the “second” mortgage). In this situation, the second mortgage is considered completely unsecured because the value of the home is not enough to pay the first mortgage if the property went into foreclosure. If the homeowner is otherwise eligible for discharge in bankruptcy, a Chapter 13 proceeding will allow him or her to “strip” the second mortgage. Thus, following completion of the Chapter 13 proceedings, this person will not have to pay back any part of the second mortgage.

If, on the other hand, the home is worth $250,000.00, the second mortgage is not completely unsecured because there is a $14,000.00 difference between the value of the home and the amount owed on the first mortgage. The second mortgage is therefore partially secured by that $14,000.00 in value. In this situation, the homeowner cannot strip the second mortgage through a Chapter 13 bankruptcy.

In order to receive the benefit of a Chapter 13 lien-strip, a homeowner must observe certain other formalities required by the bankruptcy court. For example, a formal appraisal must be performed on the property, and the appraiser must verify the appraisal under penalty of perjury. The homeowner will have to prove the amount owed under the first mortgage, and must follow certain procedures designed to give proper notice of the intent to strip the lien. Finally, the homeowner must remain current on all payments required by the first mortgage after the Chapter 13 petition has been filed.

If the bankruptcy court approves the lien-strip, and the debtor completes all of the requirements of the Chapter 13 bankruptcy (which involves payments to the bankruptcy trustee for three or five years), then the second mortgage is “discharged.” This means that the debtor does not have to pay it back. Once the debtor obtains the discharge, then the second mortgage lender must re-convey title to the property back to the debtor. This re-conveyance will show that the property is free and clear of any lien by the second mortgage holder.

Chapter 13 bankruptcy is a powerful tool that can provide significant relief to homeowners who are struggling to pay multiple mortgages against their homes. Chapter 13 bankruptcy relief may also be available to owners of investment properties that are “under water.” As noted above, however, not all property owners will be able to obtain the lien-stripping benefits of a Chapter 13 bankruptcy. As with all legal issues, it is important to consult a qualified legal professional in order to understand all of the risks and benefits of filing for bankruptcy.

The author of this month’s newsletter is J Niswonger, an attorney with The GIARDINELLI LAW GROUP, apc.  Mr. Niswonger may be reached at jniswonger@glawgroupapc.com or 951/ 245-9163.


Riverside County Office
31772 Casino Drive, Suite C
Lake Elsinore, CA  92530
951 / 245-9163

Orange County Office
1601 East Orangewood Avenue, Suite 175
Anaheim, CA 92805
714 / 978-2060

This article is a copyrighted publication and may not be reproduced or transmitted in any form or by any means without written permission.  This article does not necessarily reflect the point of view of the Association or other person or entity who publishes it.  This article provides legal information abridged from statutes, court decisions, and administrative rulings and contains opinions of the writers.  Legal information is not the same as legal advice, which is the application of law to an individual’s specific circumstances.  Although every effort is made to ensure the information is accurate and useful, it is recommended that you consult with a lawyer to obtain professional assurance that the information provided and your interpretation of it is appropriate for a particular situation. To request further information or to comment on this article, contact The Giardinelli Law Group, apc, at jvg@glawgroupapc.com, or 951/ 245-9163 and visit our website at www.glawgroupapc.com

Courtside Newsletter: April 2010

Courtside Newsletter

This month we provide a brief overview of two recent acts which impact the real estate industry:  (1) the SAFE Act which must be complied with by January 1, 2011, and (2) HAFA which was recently enacted.



The Secure and Fair Enforcement Mortgage Licensing Act of 2008 (“SAFE Act”) became federal law on July 30, 2008, and California law in October 2009.  The California law requires all DRE real estate licensees who conduct residential mortgage loan originator (MLO) activities to meet certain requirements to qualify for a MLO real estate license endorsement by January 1, 2011.  The SAFE Act requires completion of 20 hours of pre-licensing education and passing a written qualified test.  Currently licensed MLOs must pass both the National component and the California State component of the examination with a test score of not less than 75 percent.  Existing MLOs must pass the National and the State component by September 15, 2010 in order to be issued an MLO license endorsement by January 1, 2011.

Besides passing the written qualified test, the SAFE Act requires licensees to submit a set of fingerprints and to pay a $39.00 fee to have a criminal background check performed. Furthermore, MLOs must demonstrate financial responsibility by authorizing a credit report to be obtained.   Finally, MLO endorsements will be issued annually and will expire each year on December 31st.  A licensee must  complete 8 hours of continuing education each year to renew his or her license.

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