Laws for Accountants

Real estate transactions normally have 3 documents-a Deed with Vendor's Lien, a promissory note and a Deed of Trust. The Deed transfers title from the Seller to the Buyer but the Vendor's lien allows the Seller to legally regain the property if the Buyer does not pay them per the terms of the Deed. (Any real estate deed must state the total consideration paid for the property transfer).

The promissory note is commercial paper and is purchased from the lender by a holder who should qualify as a HDC. The HDC does not own any interest in the real estate- they only own the right to be paid per the terms of the promissory note and only a real defense could prevent such payment. A Buyer defaulting on payment is on a real defense.

The third document is a Deed of Trust and it creates the right to non-judicial foreclosure for the Trustee for the Lender. In CA this is the sole remedy for the lender when the loan is for the initial purchase of the residential property and unless that loan is a VA or FHA loan, there is no deficiency judgment if the non-judicial foreclosure brings in less than the total amount owed. i that case, in CA, the lender cannot sue the Buyer/Borrower for the deficiency.

Let's apply these rules to an example.

Buyer buys a single family house (to live in) from Seller. Buyer borrows $400,000 from Lender and pays a cash down payment of $50,000. The total purchase price is $450,000. The Seller signs the Deed with Vendor's Lien and is paid for the transaction by the escrow company 3 days after the document is signed. This is the usual time period so that taxes, existing loan, etc can all be paid. Buyer also signs the Promissory Note for $400,000 and the Deed of Trust.

Buyer moves in to the house and lives there with his/her/their family. For the next 3 years, Buyer makes the mortgage payment on time every month. Right after the closing, Lender sells the Promissory Note to Investor #1 and Lender pays the Investor #1 every month as required since investor #1 is the HDC of this note.

Buyer is suddenly laid off from Buyer's job and does not make the May 1, 2020 mortgage payment.

What are the rights, obligations and duties of the parties?