their protection as evidence for their
borrowers were quick to refinance.
loan]. When the borrower pays the
One investor tells the story of how
loan off, each investor is required to
a 12%, $1.2M loan was trying to be
reconvey their interest in the loan
refinanced by the borrower at 9%
[notarized signature] in a timely
with a new lender. The fractionalized
manner [California requires this be
note had 5 owners. 4 of the 5 had
done within 21 days of the request].
their reconveyances notarized and
The reconveyances are deposited in
delivered to the escrow company in
escrow, and each lender is paid off in
a timely manner. The last investor
escrow as well.
had $500,000 in the note and did not want to lose his 12% rate; he
If everything goes smoothly, no one
was under the misconception that
complains; however, what happens
he could just keep coming up with
if things don’t go according to plan?
excuses as to why he was not able
What if a lender is unavailable to
to get to a notary [he was a busy
sign off in a timely manner? What
surgeon]. After more than a month
if a lender refuses to sign? What
went by, the borrower sued all of the
happens if the borrower defaults on
lenders for the difference in the rates
a fractionalized loan? What happens
[3%] plus attorney fees. Although
if you have a minority interest
the lone holdout was ultimately
[less than 50% ownership] in a fractionalized loan? These are just a few instances where a fractionalized lender faces challenges, and these challenges can be monumental. First, let’s look at a simple situation where a $900,000 loan has been fractionalized into 9 different lenders [each having $100,000 ownership in Most note brokers [in California; other states may vary] are licensed to fractionalize a deed of trust [notes] with up to 10 owners [beneficiaries]. Other brokers have licenses from the Department of Corporations to have more than 10 beneficiaries. The reason brokers fractionalize notes is usually because they are too big for one investor. A $40,000 note may be able to find a home with
the loan] and 8 of the 9 lenders signs the reconveyance paperwork in a timely manner but one chooses not to sign [in time, or not at all]. Why would the lone lender choose not sign? What if the loan was very well secured and the note was yielding a higher than market rate of interest? A naïve lender may think that they can enjoy the higher interest for longer than allowed [not signing in a timely manner]. This situation is not
one investor, but a $700,000 note
as far fetched as one might think. In
may need more than one investor
the 1990s, first deed of trust notes
in order to be funded. Each investor
yielding 12% were not uncommon.
receives a recorded deed of trust [for
When rates dropped dramatically,
responsible, all of the other lenders had to defend themselves, which put undue burdens upon the innocent 4 lenders. Next, let’s look at a situation where a majority [over 50%] lender chooses to extend a loan when it matures, and a minority lender does not. Unless the minority lender requests a partition action so as to separate himself from the majority lender, the majority lender is in control of the fate of that loan. Dealing with foreclosures by the lenders introduces an entirely new set of challenges; first, who is going to front the money to pay the trustee fees for the filing and publishing of the foreclosure notices? What if there are no majority owners of the note? Even where there is a majority owner, most title companies are not The Pitfalls: Continues on pg. 20
November 2020 Originate Report 19
