10 Warning Signs of a Bad Note

The article below has not been updated. For general information only and should not be considered to be legal advice.

Here are ten of the most common signs of a note that could go bad. If the purchaser of the note had known about these potential problems before buying the note, she could have saved herself a lot of aggravation and money.

  1. Multiple Beneficiaries of a Note: Because all beneficiaries must sign a Substitution of Trustee Mortgage document to start the foreclosure process, what will happen if the original trustee refuses to act or if one of the beneficiaries is deceased or refuses to sign the Substitution document? You need to get the names and addresses of all of the other beneficiaries and their percentage of ownership in the note.

  2. Partial Interest in the Security: A note on a half interest is hard to sell. You will probably end up with the property and a partner. A partition action may be necessary.

  3. No Title Insurance for The Note: When purchasing a note, how do you know that all owners of record have signed the deed of trust/mortgage? If they haven't signed, you will have a partial interest or no interest at all in that note.

  4. Servicing Agent Collects the Payments for You: What happens if the servicing agent fails to pass the money on to you? The payor can prove that the payment was made, so what are your options?

  5. Failure to Obtain Original Documents: The trustee will require the original note in order to start a foreclosure. Without the original documents, you will need an expensive "Lost Instrument Bond," and the cost of the bond cannot be charged to the payor.

  6. Senior Liens that are Larger or Mature Before Your Note: Can you cure or payoff a million dollar first trust deed or mortgage, even if there is plenty of equity in the property?

  7. Arranger of Credit Promises to Enhance the Interest Payment on the Note: This differential is not enforceable against the payor and depends on the Arranger staying in business.

  8. Out Of State Payers, Especially Corporations: What will you do when the payor files Chapter 11 Bankruptcy in Cleveland?

  9. High Rate of Return: Any rate of return in excess of about 10 means that there is some greater degree of risk with the loan.

  10. Failure To Use An Escrow Company When Funding A Loan: Would you send $100,000 to someone on the promise that they will later send you a note and the trust deed or mortgage?


Reprinted by Permission. The author has been a member of the California State Bar since 1975.He has lectured on foreclosure issues to various groups including the Beverly Hills Bar Association and the Association of Professional Mortgage Women. Mr. Witkin currently advises the foreclosure trustee firms of Witkin & Eisinger, LLC in Burbank, CA and Witkin & Neal in Van Nuys, CA Call (818) 845-8808 or email rwitkin@gmail.com. Visit www.witkinandeisinger.com

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