Q: We are selling our house and have decided to take back a second mortgage. Our real estate agent suggested that she could be one of the trustees on this mortgage, and we have a question as to whether this is legal. Can you advise?
A: When you take back a second mortgage, it means you are lending your buyer a sum of money, and of course you want to make sure that this money is secured.
The best way to secure it is to have a lien filed against the property, so that if your buyer cannot make the necessary and required payments on time, you will have the right to foreclose on the property.
For purposes of this discussion, a mortgage is similar to a deed of trust. In this area, we use deeds of trust, since it is easier to foreclose on property with the deed of trust instrument rather than the mortgage instrument. p
When you lend money to be secured by a piece of property, the borrower signs two documents. The first is the promissory note, where by your borrower agrees to pay you the sum of money lent, with the agreed-upon interest, over a period of years.
All of the terms of this loan are negotiable, and you have the right to insist on terms acceptable to you. After all, you are lending the money.
It is important, however, to assure yourself that there are no usury restrictions in the jurisdiction where your property is located that would affect your ability to collect on the entire note.
The second document that is signed is a deed of trust. Under this instrument, the owners of the property (your borrowers) will sign over the property to at least two trustees, who will hold the property in trust to assure you that the promissory note will be paid in full.
If this note is paid up, the trustees will be obligated to release the property back to the borrower. There are archaic procedures in Washington area for releasing these deeds of trust, and the recorder of deeds or your attorney will be able to assit you in filing these release forms.
More importantly, if your borrower does not pay the note in accordance with its terms, you have the right to direct the trustees to sell the property at an auction sale. In each of the local jurisdictions, the foreclosure procedres vary, and again your attorney will be able to assist you.
It should be noted, however, that the trustees have the legal power to sell the property, if they are satisfied that the borrower is in default.
The role of the trustee is often misunderstood. You, the lender, have the absolute right to select a trustee of your choice. It can be your real estate agent, or a relative, friend, business advisor, bank or other financial institution, or your attorney.
It is important to remember that the deed of trust must contain language permitting you to substitute trustees at your discretion. For example, one of the trustees may die or be otherwise incapacitated, or you may have a falling out with that person. The right of substitution is critical.
Additionally, you should be aware of the fact that a trustee has a fiduciary relationship to both the borrower and the lender. Failure to perform the duties of trustee may subject the trustee to liability.
Here are some hints for dealing with the secondary note and deed of trust:
Do an independent credit search of your borrowers. You want to satisfy yourself that your borrowers will be able to meet the terms of the monthly payment. Although foreclosure is a legal and possible remedy, it is time-consuming and may be expensive for you.
Obtain a copy of the first deed of trust, and insist that a cross-default provision be included in your second deed of trust. This language would state that, in the event of a default on the first trust, it will also be considered a default on the second trust.
Make sure that the insurance policy your borrower takes out will cover you as the beneficiary under the second trust.
Obtain the original promissory note from the title attorney conducting settlement, and keep it in a safe place. When the obligation is paid in full, you, the lender, will have to sign the note across its face indicating "paid in full and cancelled" so that the trustee will be able to release the trust from the land records.