A legal innovation making homeownership possible for most homebuyers in California is the mortgage. Mortgages in California provide significant benefit to real estate lenders and homeowners alike. A mortgage is a legal relationship that conveys title (legal ownership interest) to a buyer (the mortgagor) and gives the lender (the mortgagee, usually a bank) a security interest in the property being sold (collateral), which in turn guarantees the payment of the home loan debt.
Lenders may also charge a reasonable interest rate (financing charge separate from the principal debt) on monthly mortgage payments (according to the Tax Cuts and Jobs Act of 2017, the California mortgage interest deduction cap has recently been reduced to $750,000; property, sales, and income tax deductions have been capped at $10,000; and the standard deduction has been doubled). If a borrower fails to pay his or her monthly mortgage payments as dictated by the terms of the mortgage instrument (document), California mortgage law allows for the lender to take possession of the property (foreclosure) and conduct a forced sale (this may be supervised by a judge; however, most California forced sales are conducted outside of court) to the public in an attempt to satisfy the debt owed at the time of sale.
California has established an agency called the California Department of Business Oversight (CDBO), whose stated mission is to regulate financial services, products, and professionals by enforcing mortgage laws established in the California Financial Code. Californians with specific complaints relating to legal aspects of their mortgage may file complaints with the CDBO before filing a lawsuit relating to their mortgage. One example of a law specific to California mortgages includes the California Residential Mortgage Lending Act. This law established the state’s authority to authorize and regulate mortgage lending activity. Another example is the California Finance Lenders Law, which requires commercial mortgage lenders to be licensed by California.
Types of Mortgages
A mortgage with an interest rate that never changes throughout the loan is called a fixed-rate mortgage. Alternatively, a mortgage that is subject to an interest rate that varies is called an adjustable-rate mortgage. The mortgage rate is a major factor in determining the monthly payment owed on the home loan. The best mortgage available can save the buyer money over the long term. Most often, the conventional loan duration is a 30-year fixed mortgage.
The type of loan program that a buyer may be offered depends on factors like the home price (including closing costs), loan type, home values, and the borrower’s credit score. In California, first-time homebuyers may receive public assistance with making their down payment by taking advantage of certain government loan programs. The standards of all home loans and current mortgage rates are governed by a federal government agency called the Federal Housing Administration (FHA). Many lenders obtain licensing to grant mortgages through the Nationwide Multistate Licensing System and Registry (NMLS).
A mortgage that is granted to buy a home is also known as a purchase money security interest (PMSI) because the money is being loaned for the sole purpose of purchasing a home or property subject to a mortgage. This is important to note because if a homebuyer files for bankruptcy, a lender who granted this type of mortgage will be given priority when making a claim to satisfy the debt. The PMSI lender will be given the first opportunity to take possession and sell the property to satisfy the debt before all the other mortgages that were not granted for purchasing the property, regardless of whether the other mortgages were recorded in the applicable government property records. If multiple lenders make PMSI claims to the property, the first (oldest) PMSI will be considered to be a senior interest and will be granted priority to forced sale, and all other claims (junior interests) may be extinguished (discharged). This procedure is known as first in time, first in right.
Another type of mortgage that mortgage brokers and loan officers are permitted to grant in California is the future advance mortgage, which is more commonly referred to as a line of credit. This type of mortgage also allows the lender to acquire a financial interest in the home or property to secure the debt. The purpose of the mortgage loan is completely different from that of the PMSI in that the money being loaned will be loaned for a future purpose other than the purchase of a home or property (e.g., home improvements). As a result, future advance mortgages would be considered junior mortgages and could be extinguished by enforcement of superior PMSI claims to the property whether they were granted before the PMSI.
Regardless of mortgage type, each party to a mortgage (everyone who has signed the mortgage note) has obligations that flow from the mortgage. The mortgagor is generally required to make the monthly mortgage payments (including interest) and not commit waste that would impair the lender’s interest (intentionally or negligently destroying the property, making it unfit for sale, or substantially reducing property value) in selling the property. The mortgagee must lend the financing necessary to purchase the home, abide by all federal and California laws governing mortgage servicing, and convey title to the homeowner once the loan is completely satisfied.
Selling a Home With a Mortgage
Several laws effective in California govern the transfer of property ownership when mortgages are involved. For example, California has rules that determine the effect a mortgage has on property owned jointly by more than one party (e.g., spouses who both have the title to a home). This is generally known as joint tenancy or joint title. California considers a mortgage to be a lien, which does not sever a jointly held title. Rather, the lien must be satisfied at the time the property is sold. This is called lien theory. California follows the lien theory of mortgages and does not sever tenancies based on the existence of a related mortgage.
However, a common question that may arise at the time of sale is: Who is liable for an existing mortgage when a home is sold? The answer depends on the specific terms of each individual transaction, which are usually written in the sales contract. Two common types of situations apply here: The buyer will either assume the mortgage or be subject to the mortgage. This language is critically important for all parties to a mortgage to be aware of because it determines who will be liable for the satisfaction of the mortgage debt. If a buyer assumes a mortgage, then both the buyer and seller of the property are liable to the original lender. However, a lender may expressly agree to release the homebuyer from liability.
Alternatively, if a buyer is subject to a prior mortgage, then only the seller will be liable to the previous lender.
As mentioned earlier, a mortgage-holding lender may repossess and forcibly sell to satisfy the debt owed on the property. This procedure is called foreclosure. Foreclosure can terminate the homeowner/borrower’s ownership interest in the home or property. The most common type of foreclosure in California is the nonjudicial foreclosure. This type of foreclosure is not overseen by a judge but still involves many standard legal steps. For example, California homeowners are entitled to two forms of written notice: a notice of default and a notice of sale. A homeowner may hire an attorney of choice at his or her own expense to assist with defending against foreclosure or to ensure that the lender conducts the foreclosure lawfully. However, California does not provide attorney representation at no cost in foreclosure cases.
A mortgage is mostly based on its underlying obligation, but misplacing the original mortgage document can affect a lender’s ability to enforce a mortgage. Fortunately, California also provides what is called homestead protection. This means that up to $175,000 of the value of the homeowner’s primary residence may be protected from forced sale and liens from creditors, depending on the specific qualifications of each applicant. To qualify, the owner must be a natural person (no organizations or corporations) and the property must be located in California on which a California resident or his or her dependent primarily and permanently resides.
Before foreclosure begins, California homeowners are entitled to a right of redemption. This means that the borrower may pay the entire balance owed on the mortgage debt and obtain clear title to the property. Most mortgages contain language known as due on sale clauses, which detail the lender’s right to make the entire sum of the debt due immediately upon default. Also, many states provide a statutory right of redemption. This is a right to repay the loan in full after a foreclosure has begun. Rights of redemption may be exercised by anyone with a related interest in the borrower’s mortgage.
The borrower may waive his or her right of redemption, but courts frequently deny the lender’s attempts to execute such a waiver. In many instances, banks may agree to change the terms of the loan to assist the homeowner in avoiding default. This may be achieved by executing a new loan on the property (refinance or refinancing) or by changing the terms of the loan on its face (loan modification). The homeowner may also avoid the lengthy and complicated foreclosure process by providing the lender with a deed in lieu of foreclosure. In this situation, the borrower would convey the deed to the property to the lender, and the lender would immediately gain possession of the property and initiate a forced sale. However, if foreclosure does proceed, the court would decide the priority of each lender’s claim. In the majority of cases, the lender who holds the mortgage used to purchase the property would prevail over all other mortgages and interests.
Regardless of whether you live in Los Angeles, San Francisco, San Diego, or another California city, California lenders and homeowners currently enjoy a robust protection scheme established by the state, which affords them many rights in connection with mortgages and homeownership. These laws are changed each year to some extent. Thus, whether you are looking to purchase a new home or defend a foreclosure action, consulting with an attorney who is well-versed in the specific dynamics of California mortgage law could save you money and help you or your family stay in your home.