MReport Jan 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link:

Contents of this Issue


Page 29 of 67

28 | TH E M R EP O RT FEATURE R ecently, multiple wildfires swept across California leaving a wake of destruction in their path. The fires destroyed a multitude of residential proper- ties and the entire Northern California city of Paradise. While foreclosure moratoriums will temporarily stop all foreclosure activity, they will eventually be lifted, giving lenders the option to foreclose on affected proper- ties that serve as security for de- faulted loans. Before going to sale on a fire damaged property, lend- ers should understand the risks created by their foreclosure bids, including, but not limited to, the potential loss of the lender's right to insurance proceeds. Rather than show up with cash at its own sale, a foreclosing lender can make a "credit bid" up to the full amount of the borrow- er's indebtedness, "since it would be useless to require [the lender] to tender cash which would only be immediately returned to [it]." While the foreclosing lender has the option of bidding up to the full amount of the debt (i.e., a full credit bid), doing so can limit the lender's right to recover additional amounts due to any impairment of the security. Indeed, a success- ful full credit bid establishes the value of the real property and prevents the lender from claiming that the property is worth less than the amount of the bid. This concept, created through case law, has become known as the Full Credit Bid Rule. Knowing the Stakes U nder this rigid rule, a full credit bid extinguishes the debt entirely and precludes the lender from recovering any additional amounts to satisfy the debt. If the lender makes a successful full credit bid, it "can- not pursue any other remedy based upon the recovery of any part of the secured debt, or recover from any other security, regardless of the actual value of the property on the date of the sale." Accordingly, the lender is prohibited from recovering fire or other insurance proceeds payable for pre-sale damage to the property, pre-sale rent proceeds, or even damages for the borrower's waste. The Full Credit Bid Rule also bars the foreclosing lender from recover- ing a condemnation award, as well as any amounts that may have been payable from a guar- antor of the debt prior to the foreclosure sale. The rule also prohibits a lender from recov- ering title insurance proceeds. This is because the lender's only interest in the property (i.e. the repayment of the debt) has been satisfied and extinguished by the full credit bid; the presump- tion is that any further payment would necessarily result in a double recovery or windfall to the lender. Due to the preceding, a lender making a credit bid at a foreclosure sale must be consci- entious of its potential rights to rents, additional or supplemental security, insurance proceeds, and/or any damages caused by the bor- rower's waste. As stated best by the California Supreme Court, "[t]he lender, perhaps more than a third party purchaser with fewer resources with which to gain insight into the prop- erty's value, generally bears the burden and risk of making an informed bid." California courts have consistently held that the purchaser at a foreclosure sale has the duty to assess the value of property correctly. The Full Credit Bid Rule can result in harsh consequences for a lender who makes a successful full credit bid on real property with a substantially lower fair market value. It is well established that a lender who purchases an encumbered property at a foreclo- sure sale by making a full credit bid is not entitled to insurance proceeds payable for pre-foreclo- sure damage. What the Case Law Shows I n Altus Bank v. State Farm Fire & Cas. Co., the court relied on the Full Credit Bid Rule to prohibit the lender from recovering any insurance proceeds resulting from a pre-sale fire that destroyed the residence on the property. Despite the fact that the lender made a claim under the insurance poli- cy prior to the sale and maintained that the full credit bid was a mistake, the court held that the lender was wholly barred from recovering anything based on the diminution of value of the property that secured the loan because the credit bid estab- lished the value of the property and extinguished the debt in full. The court further noted that it was unreasonable for the lender to "acquire the mortgaged property by choking-off any offers in the range of the true value of the property with a preemptive bid and then . . . assert that its insurance loss was measured by anything other than the price which it bid at auction to acquire the property." Similarly, in Bank of America When the Smoke Clears California lenders must brush up on the impact of the Full Credit Bid Rule in light of recent wildfires. By Kathryn A. Moorer, Esq. and T. Robert Finlay, Esq.

Articles in this issue

Archives of this issue

view archives of TheMReport - MReport Jan 2019