ADDITIONAL CHARACTERISTICS OF PROMISSORY NOTES AND DEEDS OF TRUST OR MORTGAGES

ADDITIONAL CHARACTERISTICS OF PROMISSORY NOTES AND DEEDS OF TRUST OR MORTGAGES

In General

The parties and the property must be adequately identified in the instruments, and the instruments must be
signed by, delivered to and accepted by the appropriate parties. The parties should be named in the security
instrument in the same manner they are named in the promissory note, unless additional parties have been
added as co-signors or have provided additional or separate collateral secured by separate security instruments.

Further, in spousal circumstances where title is held in joint tenancy or as tenants in common, it is possible for
the name of one spouse who is the borrower to appear on the promissory note and the deed of trust or
mortgage, or for one borrower to appear on the promissory note and both to appear on the deed of trust or
mortgage. Needless to say, the foregoing deviations from the customary practice of the same parties being
identified in both the promissory note and deed of trust or mortgage should be reviewed by knowledgeable
legal counsel in advance of their use.

Notary acknowledgment of the security instrument is necessary for recording purposes. Subsequent to
acknowledgement, no changes may be made to the parties of the instruments without a subsequent
acknowledgement.

A valid deed of trust or mortgage must have a valid underlying debt/loan or obligation (whether present or
future), otherwise the security instrument secures nothing. Without a debt/loan or an obligation to secure, the
security instrument has no meaning and no lien attaches to the intended security property.

One security instrument can secure several debts/loans or obligations (whether present or future), and one debt
or obligation can be secured by several security instruments on several parcels of land. Further, a single security
instrument may describe several parcels of land as the security for the debt/loan or obligations the promissory
note evidenced.

Unless prohibited by law, fractional interests in the fee title to real property as well as the entire fee interest
may be hypothecated or pledged, but lenders/creditors or beneficiaries/mortgagees are generally reluctant to
lend on partial estates. No requirement exists that the trustor/mortgagor be the debtor. One person may give a
deed of trust or a mortgage to secure the debt/loan or obligations of another, or as a surety or guarantor. As
previously discussed, the debtor/trustor/mortgagor is usually the same person.

A transaction which is a “hidden security device” (a mortgage transaction disguised to appear otherwise)
established by the use of a grant deed as a “deed absolute” to secure a debt/loan or the performance of an
obligation will typically be characterized as a mortgage without power of sale subject to judicial foreclosure,
including the reinstatement, redemption, and anti-deficiency rules discussed in this Chapter (Civil Code
Sections 2925 and 2950). Such transactions are not to be structured by MLBs. Hidden security devices are for
legal counsel to consider, if at all appropriate for the fact situation.

A beneficiary/lender/mortgagee of a security instrument with power of sale will usually prefer the publicly
held, privately conducted foreclosure sale (trustee’s sale) if the real property is valuable enough to satisfy the
debt/loan and expenses of the sale. Since the power of sale eliminates subsequent to the sale the
debtor’s/trustor’s/mortgagor’s right of redemption, the trustee’s sale is generally absolute. If the security
property’s sale is expected to be insufficient to satisfy the debt/loan, the beneficiary/lender/mortgagee will
generally initiate a judicial sale and seek a deficiency judgment following such foreclosure sale when the
security instrument is a non-purchase money deed of trust or mortgage. The election of the remedy is the choice
of the lender/creditor or beneficiary/mortgagee. This election of remedy is to be made with the advice of
knowledgeable legal counsel before proceeding.

Interest-Only Promissory Notes

As previously indicated, an interest-only promissory note is characterized as a straight note in which the
monthly payments cover the accruing interest. The unpaid principal balance, which remains constant, is due and
payable on an agreed date in the form of a balloon payment. Balloon payments are discussed further in this
Chapter.

Depending upon the facts, balloon payments in loans secured by 1 to 4 dwelling units are typically required at
the end of periods as short as one to as long as seven years. Most commonly, the balloon payment will be due at
the end of a five year period. Shorter periods should be limited to bridge loans such as construction loans or
loans where a reasonable method of repayment has been established and assuming the short period for the
maturity date does not violate applicable federal or state law.

Balloon Payment Loans

In California, when a private investor/lender makes or funds a loan or when a seller extends credit to the buyer
(a “carry back”) in the form of a purchase money note and junior deed of trust or mortgage, often the monthly
payments to service the debt are either interest only or do not fully amortize the loan or extension of credit.
These transactions are typically subject to a due date, e.g., three to five years, at which time payment in full of
the principal amount owing plus any interest accrued thereon is required (the “maturity date”). This last
payment is called a balloon payment, and the amount owing is generally substantial.

Section 2924i of the Civil Code requires the holder of a balloon payment loan or forbearance with a term in
excess of one year secured by an owner-occupied dwelling of four or fewer units to give 90 to 150 days notice
in advance of the due date of the balloon payment. Seller “carry backs” are subject to a similar advance balloon
payment notice pursuant to 2966 of the Civil Code. Foreclosure of the loan or forbearance or seller “carry
back” may not commence without the required balloon payment notice being first given.

Real property loans negotiated by MLBs, junior loans under $20,000, or first loans under $30,000 (“sheltered”
loans) are subject to specific controls on broker compensation and to prohibited loan terms, as defined. For
example, loans or forbearances secured by non-owner-occupied real property with a term of less than three
years require substantially equal installment payments over the period of the loan with the final payment due at
the maturity date (the balloon payment). This means the balloon payment may not occur before the 36th month
of the loan term. During the period of the loan, no installment shall be greater than twice the amount of the
smallest installment.

If the loan or forbearance is secured by owner-occupied real property, the term of the loan must be more than
six years to include a balloon payment. Loans or forbearances for six years and less (when the security property
is owner-occupied) are subject to limitations regarding the installment payments, whether providing for interest
and principal or for interest only. No installment payment during the loan term may be in amount greater than
twice the amount of the smallest installment, i.e., no balloon payment until the final payment is to be no sooner
than the 73rd month.

The balloon payments that may occur when the loan is “sheltered” must be disclosed in accordance with
Business and Professions Code Section 10241.4. The notice is also to contain a statement whether any
refinancing, renegotiation or extension of the loan term has been agreed to by the parties, or whether the MLB
has undertaken to use his or her best efforts to obtain a future refinancing, renegotiation or extension of the loan
described in the disclosure. The outcome of such efforts may well be limited by market conditions operative at
the time and to the then credit worthiness and financial standing of the borrower.

A further discussion of the balloon payments described above are included in this Chapter in the Section
regarding Article 7 of the Business and Professions Code. The foregoing requirements do not apply to a
purchase money note given back to a seller for part payment of the purchase price, a seller “carry back”.

Piggybacks or Combo Financing

Piggyback or combo financing is a financing arrangement whereby two conventional loans, one secured by a
first deed of trust or mortgage and a second secured by a junior deed of trust or mortgage, are made by the same
creditor/lender or by two different lenders to purchase or refinance a residential security property. In a typical
scenario, the first conventional loan may provide sufficient funds up to 80% of the purchase price or appraised
value of the security property (whichever is less), and the junior loan funds up to an additional 10% for a
combined loan-to-value ratio (CLTV) of 90%. Typically, depository institutions and licensed lenders will
reduce the LTV or the CLTV for commercial security properties, i.e., other than residential property consisting
of 1 to 4 dwelling units.

Since mortgage insurance is normally only required by creditors/lenders on first conventional loans exceeding
80% LTV, piggyback financing has the advantage of avoiding the (non-tax deductible) cost of mortgage
insurance in favor of (tax deductible) interest expense on the junior deed of trust or mortgage.

Swing or Bridge Loans

In residential loan transactions, a swing or bridge loan is a temporary loan made against the equity in the
borrower’s home (which is to be sold), or against the equity in both the present and the “contemplated” home
(which is being purchased). The loan funds are used for the down payment on the contemplated residence. In
addition, swing or bridge loans are used to finance the construction of the borrower’s intended residence.

Where the security property is or is intended to become the residence of the borrower (owner-occupied), the use
of swing or bridge loans requires special consideration. For example, a bridge loan for the purposes of
applicable California law is defined as a temporary loan having a maturity of one year or less for the purpose of
acquisition or the construction of a dwelling intended to become the consumer’s (borrower’s) principal
dwelling (Financial Code Section 4970(d)). Because loans with short maturity dates are subject to extensive
regulation, these products should not be offered to private investors/lenders by MLBs without the advice of
knowledgeable legal counsel prior to proceeding with such loan transactions.