Risks Associated with Making Deed of Trust Secured Loans

CTP’s borrower defaults and stops paying CTP

CTP lends money to investors that purchase residential real estate in Arizona for investment. Their intent is to either make repairs to the property and then sells it to another investor or to a conventional borrower (aka, a “fix & flip”) or to rent the property.

CTP’s borrower may default. As long as the borrower has equity in the property he is motivated to not default. (The borrower’s equity in the property is the extent to which the value of the property exceeds what is owed on the property.) The most common reason for default would be the borrower’s inability to sell or rent the property.

CTP protects itself with conservative loan-to-value ratios. If CTP has loaned a sum of money equal to or less than 70% of the retail value of the property securing the loan, then CTP should be able to recover what is owed at the trustee sale or through the sale of the property itself if CTP purchases the property at the trustee sale. In order for CTP to recover less than the principal amount of its loan, one or both of two things would have had to have happened. Either the value of the property would have fallen by more than 30% from the time CTP made the loan to the time of the trustee sale, and/or CTP significantly over-valued the property during the underwriting process

Nevertheless, the instance of a borrower defaulting on a CTP loan does not mean CTP will in turn default on its loan from you. CTP is obligated to return the principal of your loan along with the interest owed as specified in the Promissory Note.

CTP defaults under its loan from you and stops paying you

Your rights are spelled out in the “Collateral Assignment of Beneficial Interest Under a Deed of Trust”. (This document is available for review.) The following explanation is general in nature, and in the event of a conflict in meaning between the following text and the text of the Collateral Assignment, the text of the Collateral Assignment controls.

In short, you have the right to step into the shoes of CTP and exercise all the rights that CTP has under its Promissory Note and Deed of Trust from its borrower. You may collect the payments from CTP’s borrower that CTP was previously entitled to and, if CTP’s borrower is in default, foreclose on the property under the Deed of Trust.

Nevertheless, the following risks should be carefully considered.

CTP Funding, LLC is a new company. CTP Funding received its mortgage bank license on Aug. 27, 2010 and therefore does not have a lengthy history upon which you could, in part, base your decision. Nevertheless, even if CTP Funding did have significant operating history, past performance is no guarantee of future performance.

CTP will not purchase an appraisal on the property securing its loans. CTP Funding performs its own underwriting analysis and determines what it believes is the real property sales value. It does not purchase independent third party appraisals.

There is no market for the resale of your Promissory Note. If after making a loan to CTP you wish to sell your Promissory Note, know there is not an established market for a sale. If you find a buyer, you may have to sell the Note at a principal discount.

There is no guarantee you will receive interest payments for the duration of the Promissory Note if you are a Single Deed of Trust Lender. When CTP makes a loan, its’ borrowers are free to repay the loan prior to maturity. In the event a loan CTP makes is repaid prior to maturity, CTP will repay you at the same time. Therefore, you need to know that CTP may return your principal before the stated maturity in the Note.

There is no guarantee you will receive interest payments for the duration of the Promissory Note if you extend CTP a Warehouse Line of Credit. CTP is obligated to pay you interest on the Adjusted Loan Amount during the term of the Warehouse Loan. CTP makes this commitment on the premise that when a CTP Borrower repays a loan, it will make a good, new loan in a reasonable amount of time. If market conditions are such that CTP is not able to make good loans in keeping with its’ Underwriting Policies, it has the right to return the Adjusted Loan Amount without penalty.

CTP’s success is dependent upon its ability to properly value property. CTP lends up to 70% of the value of a particular piece of property. In the event CTP forecloses on the property, as long as the property is sold for enough money to recover the principal amount of CTP’s loan along with any accumulated interest and other costs, then CTP will be made whole. Therefore, if CTP overestimates the value of the property securing a loan, and if that property is sold at a foreclosure sale it is less likely that CTP will recover enough money to pay back its loan principal and the accumulated interest and expenses. Therefore, CTP’s ability to properly value property is important to the success of its operations.

CTP’s success is affected by the real estate market in Arizona. If the value of real property in Arizona falls, then CTP’s borrowers will have a more difficult time repaying CTP which in turn will have a more difficult time repaying its lenders.

CTP may not be able to repay your loan in a timely manner if it does not have sufficient cash reserves. If a CTP Borrower defaults, CTP will make payments to you as it exercises its foreclosure rights. CTP will have to rely upon its cash reserves and ability to raise additional capital to continue to pay you until it is able to foreclose on the real property securing your loan and recover the principal amount of its loan to the default borrower along with any accumulated interest expenses and other costs.