This subject is one that we have pointed out at The Texas Note Company time and again. It is imperative that you keep the note documents in a safe and retrievable place. If you can’t produce the Original Promissory Note, then you will have a difficult time selling your note and in this case have difficulty foreclosing on the property when the borrower’s don’t pay. It is refreshing that our legal system is finally listening to the home owner and investor and not just taking what the banks says as gospel.
This is a must read article for all of you who are receiving monthly payments on sold real estate. For those of you that are considering creating an owner finance note it is also the reason why it is important to seek the expertise of a note professional, Texas Note Company are experts in this field..
When you buy a note as an investment, you essentially become ‘the bank.’ If the note is performing, your role is fairly simple: you’ll process your monthly payments, issue end-of-year interest statements to the borrower, and maybe consider selling the note.
If, however, the borrower defaults in his payments, things get a lot more interesting…
In the event of a default, if the borrower is cooperative, an investor has several options, including working out a win-win loan mod, helping the borrower with a short payoff or re-fi in order to get cashed out, doing a “deed-in-lieu” deal to get the property back
(sometimes called “cash for keys” since the investor may compensate the borrower for moving out and signing over the deed), or possibly selling the note to another investor who specializes in defaulted notes.
If the borrower is uncooperative, an investor will probably need to sell the note or foreclose in order to take back the property.
These days, the foreclosure process is where it can get sticky because big banks aren’t the only ones who need to worry about the negative fallout of Foreclosure-gate. There is mounting evidence that judges are now more sympathetic to homeowners when they are being foreclosed upon.
For example, last month U.S. Bankruptcy Judge Judith Wizmur dismissed on procedural grounds Bank of America’s foreclosure proceeding against a New Jersey borrower, resulting in the entire $211,000 mortgage getting wiped out.
Likewise, a Minnesota couple has successfully fought off foreclosure for three years because they claim that the investor who is attempting to foreclose on them has no proof that it actually owns the mortgage note.
And in Ohio, a judge this month also nullified a foreclosure when he said that there was no evidence that the allonge — a document transferring ownership of the mortgage — was properly attached to the note. According to the judge in the case, this sort of sloppiness leaves the legal ownership of the note in question.(To read more about three three cases, as reported in USA Today, click here. Also check out the hundreds of angry comments the article generated. This issue is turning into a real flashpoint for people…)
The big takeaway here for note investors is that having proper documentation is more critical than ever. Be very careful when buying a note that the allonge is correctly filled out and that you have the original note in your possession. Contact a professional at The Texas Note Company we can assist you to help avoid these pit falls.
If you ever have to foreclose on a defaulted borrower, make sure that your attorney double-checks all of your documents before filing. If everything is in order, you shouldn’t have a problem. Just understand that you will face more scrutiny than ever because of all the bad press the big banks have generated over “robo-signing” and other questionable practices.
Note investing can be a profitable, rewarding way to build wealth and generate cashflow, but like anything else, you need to know the risks so you can protect yourself.
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