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Second Trust Deeds

August 09, 1992

Donald M. Fenmore's article "Court Ruling Puts Second Trust Deeds in Doubt" (Speaking Out, June 28) raised two issues that I thought merited additional comment.

Fenmore noted that investors who buy fractionated interests in trust deeds may become unsecured in a subsequent bankruptcy of the broker who negotiated and "guaranteed" the loan.

What potential trust deed investors should understand is that no California mortgage loan broker is permitted to guarantee loans without a special Article 6 Permit from the California Department of Real Estate. To my knowledge, there are only two such active permits in the state today and no others are being issued at this time.

Thus, if a potential investor/lender is advised by a broker that he/she is "guaranteeing" a loan, they should ask to see evidence of a current in-force Article 6 Permit and might even take the additional step of calling the Department of Real Estate to verify the validity of the permit.

If the investors of Property Mortgage Co. had taken these steps, they would have discovered that the company was operating under an expired and invalid permit for several years.

Fenmore also indicated that there could be problems for investors who are participants in fractionated transactions because they need to have physical possession of the note to be considered secured creditors in the event of the broker's bankruptcy.

Until now this has been a gray area in which the courts have ruled in several different ways. To clarify the issue, the Mortgage Institute of California, as a member of the California Real Estate commissioner's Real Estate Finance Advisory Committee (REFAC), has co-sponsored a bill in Sacramento.

This bill, (SB 1520-Johnson), which was signed into law July 10, stipulates that when a broker arranges or sells a promissory note and then undertakes to service the note on behalf of a lender, "delivery, transfer, and perfection of the lender's security interest are deemed to be complete, even if the broker retains possession of the note or collateral documents."

The proviso is that the deed of trust in favor of the lender must have been recorded and the note made payable to the lender or endorsed or assigned to the purchaser.

Investing in trust deeds isn't for everyone. But it has and will continue to provide an important investment opportunity for many Californians. It also provides a critical source of alternative real estate finance for those who, for whatever reason, cannot qualify for conventional loans. The important thing for lenders to remember is to check out the potential investment carefully and to deal with a reputable broker with a track record of prior success for other lenders.


Executive Director

Mortgage Institute of California

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