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A bill is currently being debated in the California Senate that would significantly increase the cost to record a real estate document.
Basically any document related to real estate must be recorded with the applicable county recorder's office. For example, a deed of trust involving a home in Gilroy would need to be recorded with the Santa Clara County Recorder's Office. Since thousands of documents are recorded each day in California, California is a large state geographically and very populated, the revenue that can be generated by a recording fee increase is immense. In particular, analysis by the California Senate Transportation and Housing Committee stated that between $300M and $750M could be generated each year if the bill passes. The range is due to the fact that in some years more documents are recorded than in others.
SB-391 (Saulnier) would add a $75 fee to every recordable real estate instrument. These funds would be allocated to principally support affordable housing programs for modest income individuals. The fee would apply to the following instruments: deed, grant deed, trustee’s deed, deed of trust, reconveyance, quit
claim deed, fictitious deed of trust, assignment of deed of trust,
request for notice of default, abstract of judgment, subordination
agreement, declaration of homestead, abandonment of homestead, notice of
default, release or discharge, easement, notice of trustee sale, notice
of completion, UCC
financing statement, mechanic’s lien, maps, and covenants,
conditions, and restriction.
The typical cost to record a 1-page document is between $10-25. The reason for the variance is that each county sets its own recording fee. Santa Clara County charges $25 for the first page to record a document whereas Modoc County charges $10. Yes Modoc County is a California county. This bill would significantly increase the cost to record a document. For example, if SB-391 passes, to record a 1-page affidavit of death of a joint tenant in Santa Clara County would cost $100 instead of $25.
Still, the bill does exempt the $75 fee from documents where the documentary transfer tax is in effect. For example, if a person purchases a home, the $75 fee would not apply.
The bill's author previously attempted to pass a similar bill in 2012 but fell 2 votes shy on the Senate floor. Since the bill amounts to a tax increase, at least a 2/3 vote is required in both chambers of the California legislature.
To be clear, this is just proposed bill. It is not California law unless it passes both chambers of the California legislature, Senate and Assembly, and signed by Gov. Brown.
I express no approval or disapproval of the proposed bill whatsoever. This a legal blog, not a political blog.
Many clients own real property which are encumbered with a deed of trust. In other words, a person owns a home that was purchased with the assistance of a bank-issued loan. The following are some basic questions that address the rudimentary features of a deed of trust.
1. What is a deed of trust?
A deed of trust is a financing instrument where the borrower pledges real property, the security, in exchange for a loan from the lender in order for the borrower to satisfy the unpaid purchase price of the real property. Yes it sounds confusing at first blush, but conceptually it is not that difficult to grasp.
For example, Bobby wants to purchase 1348 Shawn Drive # 4 San Jose, CA 95118 from Samuel. The listing price for the condo is $175,000. Bobby is unable to make an all-cash offer for the home as he can only come up with $50,000. Therefore Bobby must obtain financing in order to purchase the home. Bobby decides to ask a local credit union for a loan to purchase the home. The local credit union approves Bobby for a loan of $125,000 that will be secured by the condo. This means that if Bobby is unable to repay the loan, the credit union may foreclose on Bobby's condo in what is known as a trustee sale. Bobby then submits his offer and is successful in purchasing the home. Samuel transfers title to Bobby via a grant deed and Bobby executes a deed of trust in favor of the credit union.
2. What about mortgages? All I ever hear is talk about mortgages rather than a deed of trust?
For reasons that scream "boring" I will spare you the legal history of California's preference for the deed of trust instead of the mortgage.
The key takeaway is that a mortgage and deed a trust create essentially the same legal obligations. It is just that in California, a loan secured by real property is referred to as a "deed of trust" instead of a "mortgage."
3. What is the difference between a mortgage and a deed of trust?
Structurally a deed of trust has 3 parties whereas a mortgage has 2 parties. In a deed of trust, there is a trustor, trustee and beneficiary. The trustor is the debtor or borrower. The trustee is the party entrusted to reconvey the property to the trustor if the loan is repaid or to
foreclose at the beneficiary's election, if a default
occurs. It should be noted that the trustee is not a trustee in the usual legal sense. For instance, a trustee of a trust is held to certain fiduciary standards and a bankruptcy trustee is also held to certain legal standards. A trustee in a deed of trust is not held to such legal standards and serves a passive administrative role. The beneficiary is the lender.
In a mortgage, there is the mortgagor and mortgagee, i.e. the borrower and lender.
Legally speaking though, there is little distinction between the two.
4. How does a deed of trust relate to a revocable trust?
Since many clients own property that is encumbered with a deed of trust, they are concerned about transferring property into a trust. The reason being is that a deed of trust has, or should have, an acceleration clause which says that the lender has the right to accelerate the loan if certain transfers are made. This is known as a due-on-sale clause. This clause is present to prevent the borrower, the homeowner that is, from transferring the property to another person without first paying off the loan.
The good news is that federal law carves out a rather large exception to the general rule that a lender can enforce a due-on-sale clause. The law, the Garn–St. Germain Depository Institutions Act of 1982, says that a due-on-sale clause cannot be enforced on "a transfer into an inter
vivos trust in which the borrower is and remains a beneficiary and
which does not relate to a transfer of rights of occupancy in the
property." 12 USC §1701j-3(d)(8). Hence, even if a person has encumbered real property, they are free to transfer the property into their trust without concern about their entire loan being due immediately.
In response to the Great Depression of the 1930s, the California legislature passed a series of borrower-friendly laws that severely restricted the remedies available to lenders in case of foreclosure.
These laws bar deficiency judgments in the case of non-judicial foreclosure, Civil Code Section 580d, and purchase money mortgages, Civil Code Section 580b. The focus of this post is to show the relationship between the anti-deficiency laws and estate planning. Yes, there is a connection.
In short, Civil Code Section 580d and Civil Code Section 580b say that in the case of a (1) non-judicial foreclosure sale of real property or (2) a property secured by purchase money mortgage, a deficiency judgment will be prohibited in both instances. Now that I have given the lawyer's definition of the anti-deficiency law I can proceed with the everyday language explanation.
1. Non-judicial Foreclosure
A non-judicial foreclosure is a transaction done outside of court supervision. The sale usually occurs on the courthouse steps. For example, in Santa Clara County, non-judicial foreclosure sales happen routinely at 10:00 am on the backside of the Superior Court located at 191 N First Street San Jose, CA 95113.
2. Purchase money mortgage
A purchase money mortgage is a mortgage in which the loan proceeds are applied to the purchase of home itself. For example, borrower obtains a loan from lender to purchase his residential home. This would qualify as a purchase money mortgage.
3. Deficiency judgment
A deficiency judgment occurs in a foreclosure sale when the asset securing the loan is sold for less than the value of the loan. For example, borrower obtains a $400k loan on a $500k home in 2005. In 2010, the loan has been paid down to $375k but the home is now $200k. Borrower, unable to make the payments due to financial hardship, losses the home to a foreclosure sale in 2010. At this foreclosure sale, the house is sold for $200k. Since the lender cannot recoup its money from the foreclosure sale, the bank would like to pursue a deficiency judgment against the borrower for $175k.
Civil Code Section 580(b), (d) and Estate Planning
Now that you have a decent understanding of the nuances of the anti-deficiency laws, you should be able to apply these laws to estate planning.
Assume that you are either the successor trustee of your parents' living trust or you are the executor of your parents' probate estate. Your parents purchased their family home a few years during the boom years of the 2000s. Now in 2010 however, the house is under water in that the value of the home is eclipsed by the value of the loan. The loan is $500k and the home is worth $350k for instance. Furthermore, your parents' estate lacks the necessary liquidity to pay off the mortgage, namely your parents' estate is cash poor. You are concerned that the bank will foreclose on the property and seek a deficiency judgment against the other assets of your parents' estate, presumably your inheritance. However, Civil Code Section 580b explicitly bars such an action by the bank because the mortgage was a purchase money mortgage. Thus, the deficiency incurred as a result of the foreclosure sale of your parents' home will not affect the other assets of the estate.
