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Investment Process

Whether an investment in a trust deed is for the entire deed, or a portion of it, the investor is the (an) owner, and thus must become familiar with certain attributes of the loan purchased.

Every investor receives a loan summary that includes:

• Loan terms
• Property serving as collateral
• Details about the borrower/guarantor

Checklist of Required Documents to Secure the Loan

A real estate trust deed investment is a secured investment because it is collateralized by real estate equity; the security then is in the value of the property.

The trust deed secures the repayment of the loan according to the amount, terms and conditions written in the promissory note, backed by the property identified in the deed of trust.

As an investor, you receive the following documents:

• Recorded assignment of the note or deed of trust
• Original Promissory Note
• Relevant information about the borrower, such as loan application, credit report and any other related documentation
• Escrow information
• Policy of Title Insurance which guarantees title
• Fire insurance and a hazard insurance policy with a Loss Payable Endorsement Clause in favor of the investor
• Appraisal Report
• Loan Servicing Agreement

Information about the above listed documents follows.

What is a Deed of Trust?

A trust deed is a signed, notarized legal document, which secures the note and loan made on a particular real estate property.

The trust deed shows the names of the borrower (the "Trustor") and the lender (the "Beneficiary"), the loan amount, and the property that secures the loan. The trust deed contains a "power of sale clause" which gives the title company (the "Trustee") the power to sell the property for the lender/investor in the event that the borrower does not repay the loan as agreed.

The trust deed is recorded and made a matter of record in the County (public records) where the property is located. It is signed by the borrower(s) and notarized, and specifies the parties, the amount, and a legal description of the real estate securing the loan.

Accompanying the trust deed is a promissory note, or a written promise to pay a certain sum of money to a certain person on a certain date. The note also states the interest rate and other terms of the loan. The note is signed by the borrower(s).

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Borrower's Financial Capacity and Creditworthiness

A borrower's ability to repay the loan involves the capacity and commitment to make the loan payments. The borrower's capacity is measured by income, job position and stability, as well as overall financial standing.

This information is reflected in the borrower's Loan Application, which may be accompanied by a Financial Statement if the borrower is either self-employed or involved with significant business or investment activity.

The following is examined to verify the borrower's representations about capacity to pay:

1. Verification of employment
2. Income tax records
3. Verification of cash deposits or other assets
4. Statements from existing lenders reporting amounts owed (beneficiary or payoff demand statements)

The commitment to repay is based on the borrower's past performance in handling credit. To verify the borrower's representations about desire to pay, the following is examined:

1. Credit report
2. Reports providing payment history on existing loans, including the number of late payments
3. Credit references

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Escrow

Escrow is a specific process in which a title transfer and a funds transfer take place through a neutral third party during a real estate transaction.

Each escrow is handled by an independent title company which also handles the recording of the assignment of the trust deed under your name.

An escrow is considered opened when money, documents, and written instructions (escrow instructions) for the transaction are delivered by the lender and borrower to an escrow agent who acts as the third party.

The company providing escrow acts as the middleman in the transaction, and the escrow agent is the one who will process the transaction in accordance to the initial escrow instructions agreed to by the lender and the borrower.

The instructions provided by escrow determine the conditions that need to be met or waived before the escrow officer can take action and disburse your money to either the note holder or the borrower.

Some of these conditions include:

1. Delinquent taxes must be paid
2. Certain liens must be removed
3. Selection of title coverage
4. Completion and handing over of the trust deed or promissory note
5. Completion and handing over of the endorsement or assignment of the promissory note

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Escrow Instructions

The following is a list of requirements for the escrow instructions:

1. Name of the escrow agent, third party or depository
2. Names of the buyer and seller as well as their proper vesting (e.g., joint partnership, corporation, individual person, etc.)
3. A legal description of the property that is to be transferred
4. The price at which the property was purchased
5. Set conditions in regards to transfer and payment
6. Distribution of cost, insurance costs, taxes and assessment
7. The signature of both the seller and buyer

Closing Escrow

Escrow "closes" or "settles" when every condition of the escrow instructions have been waived or met, the instruments have been recorded, and the funds have been disbursed.

The escrow officer informs the title company to record the trust deed and then deliver all the executed loan documents to the lender. As soon as the lender is in possession of these documents, loan proceeds are released to the escrow agent.

The escrow agent ensures a smooth exchange of documents and funds. You will receive a closing statement describing to whom and how the funds and the documents were distributed.

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Title Insurance

Each trust deed is title insured and recorded by a title company. This insures that the title holder/owner has a valid title to the property and against any title defects. A copy of the preliminary title report can be provided for your records.

The Preliminary Title Report should provide the following information regarding the property:

1. The name(s) of the owner(s)
2. Legal description, street address (if available), and the assessor's parcel number
3. Assessor's plat map, which illustrates the configuration, dimensions, and general location of the property
4. Assessed valuation
5. Existence and priority of liens and encumbrances
6. The name of the owner (s) of existing lien (s); i.e., the owner of record of any deed of trust (lien) which you may be purchasing
7. Requests for notices concerning status of the liens, notices of default (NOD), and notices of trustee's sale (NOS)
8. Notice of a lawsuit or bankruptcy affecting the property
9. A potential off-record interest of a spouse or other party

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Appraisal

Each trust deed is secured by real estate. We obtain a professional and independent appraisal on the subject property from one of our group of authorized appraisers, each of whom is an expert in the particular region where the property exists.

A copy of the appraisal is included for your review in the trust deed information package.

Payments

Our subservicer services the loan and mails your interest check to you every month when paid by the borrower.

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Requirements of the loan servicing process

Loan servicing includes collecting payments from borrowers, disbursing payments to lenders or note holders, mailing appropriate notices, monitoring the status of senior liens and encumbrances, maintaining adequate insurance coverage, and coordinating foreclosure proceedings if necessary.

Benefits of a Trust Deed Loan Servicing Agreement

A loan servicing agreement provides a great value to investors because it allows Capital Alliance and our subservicer to collect on a trust deed on their behalf. Not only is this an effective means of collecting on a trust deed, but it brings more peace of mind to the investor when there is an expert third party involved.

When an investor makes the decision to involve a well established, reputable third party, the investor has no direct involvement in enforcement of the agreement. The borrower benefits by needing to send only a single payment to the servicing firm instead of multiple payees.

A loan servicing agreement is beneficial because it:

• Relieves investor from responsibility for monthly billing and maintenance to get regular payments
• Eliminates the need for the investor to directly enforce loan agreement terms
• Leverages the experience of loan servicing officers to resolve customer service issues for borrowers

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Understanding the Loan Servicing Process

Depending on the agreement, basic responsibilities and duties fulfilled by the loan servicing officer might include:

• Bills the borrower, collects monthly payment, deposits funds received into investor's escrow account
• Issues the appropriate checks to the investor
• Mails monthly statements and an interest earned check to the investor
• Maintains the payments records and issues 1099 form for tax purposes
• Makes all telephone and written communication to borrowers and investors
• Starts foreclosure in the event of a default by borrower
• Schedules in-house legal counsel available to assist investor during foreclosure process

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