The legal framework for foreclosures is often complicated and requires a great deal of specialized knowledge, as rules and regulations can vary significantly from state to state. In California the foreclosure framework is defined by civil code 2924, and allows for both judicial and non-judicial foreclosures. However, judicial foreclosures are rare in California, since they allow for right of redemption for delinquent borrowers, whereas non-judicial foreclosures do not have this borrower-friendly option.
Another characteristic of California foreclosures is its “one-action” rule, which allows lenders to pursue only one specific avenue against defaulting borrowers. Overall, California is considered a consumer-friendly state due to an extensive set of rules and laws that govern the foreclosure process.
When a property is purchased in a sale that is not all-cash, buyers generally have two avenues of financing – either through a mortgage or a deed of trust. In general, both mortgages and deeds of trust will include a power of sale clause, which gives the lender the right to put a property attached to a delinquent loan on the market to recoup losses incurred by defaulted loans.
In the state of California, the power of sale clause can be activated only after a borrower misses 4 monthly loan payments, known as defaulting. When a deed of trust is signed, a trustee will be appointed who will act as the lender’s representative during a foreclosure sale. While in many states lenders appoint trustees themselves, in California title companies generally act as trustees. As a title theory state, properties purchased via loans remain in trust until the full amount of loan is repaid.
Most borrowers will try to exhaust all other avenues to avoid a foreclosure, as this will not only mean the loss of the delinquent property, but will also bring on severe damage to a borrower’s credit score. This in turn limits a potential homebuyer’s ability to qualify for a loan for a significant amount of time after going through a foreclosure.
Another potential avenue to avoid foreclosure is a short sale. A short sale entails the borrower selling the property attached to the delinquent mortgage in an attempt to make up the outstanding balance. However, this will often be possible only for a lower amount than the outstanding mortgage balance. As a result, to carry out a short sale, the borrower always needs approval from the lender in the state of California.
Furthermore, borrower and lender must agree that the short sale has now satisfied the delinquency and the loan is paid in full, meaning the borrower has no further legal obligations to contribute any additional finances towards the lender. This process can be quite lengthy as both parties need to reach complete agreement. Moreover, the borrower has to advertise the property for a set period of time – usually around 2 to 3 months – and the lender has to approve a potential buyer’s offer.
To avoid foreclosure and the credit drawbacks it brings, a borrower and lender may agree to solve the issue of delinquency through the means of a deed-in-lieu of foreclosure. Through this process, the borrower agrees to give up any claims towards the property attached to the delinquent loan and relinquishes the property to the lender. This option will usually take 2 to 3 months.
The main difference between a judicial and non-judicial foreclosure, as the name suggests, is the involvement or lack thereof of the court system. Non-judicial foreclosures are the most common type of foreclosures in California. From a lender’s point of view, this is the preferred option as it is much faster than a judicial foreclosure. The lender is not required to ask permission from the courts to sell a property to recover losses incurred by a delinquent loan, since in California the power of sale clause is controlled by the state’s contract law.
If a lender chooses a non-judicial foreclosure, they give up the right to pursue a deficiency judgement against the borrower. This means that if a foreclosure auction happens, and the property’s sale price is lower than the outstanding loan, the lender cannot pursue legal action against the borrower for the difference between sale price and loan balance. Despite this risk, most lenders prefer this course of action, as it is more time- and cost-efficient overall.
In the state of California, the foreclosure process can legally start no sooner than 30 days after the lender has made first contact to explore ways of avoiding foreclosure. If borrower and lender cannot reach an agreement on how to avoid the foreclosure process, the lender may record a notice of default with the county clerk’s office, marking the official start of foreclosure proceedings.
Following this, the lender must provide the borrower with a copy of the notice of default by mail within 10 business days of recording it with the county. From the time a delinquent borrower receives a notice of default from the lender, they have 3 months to balance out their mortgage defaults before the lender sets a date for the foreclosure sale.
Since notices of default are a matter of public record, California courts have issued a warning that delinquent borrowers may be contacted by third parties offering to resolve the dispute for a fee. Borrowers must proceed with caution, as most often such third parties engage in fraudulent practices that will result in financial loss for the borrower without resolving the issue of foreclosure. Borrowers facing foreclosure can contact nonprofit organizations or government services that provide advice and help free of charge.
If the borrower does not balance out the outstanding loan payments, the lender may record a notice of sale – but no sooner than 90 days after the notice of default was recorded. The notice of sale must be sent to the delinquent borrower via certified mail and will contain the time and date of the upcoming foreclosure auction, the property’s full address, the name, address and phone number of the trustee, as well as a statement that the property in question will be sold via public auction. The notice of sale must also be posted on the affected property, and in a public place – this will usually be the county courthouse. The notice must also be shared in a general circulation newspaper at least once a week for three consecutive weeks before the sale is scheduled to take place.
According to California foreclosure law, the borrower may still balance out the default up to 5 days before the foreclosure sale is set to take place, thus reinstating the loan. Moreover, during the 21-day period while the notice of sale is in circulation, the affected property may be redeemed by an entity or person interested in it by paying the full loan amount.
Foreclosure auctions are usually held at the County Courthouse of the county the delinquent property is located in. Most often they take place on business days, during typical business hours – from 9 A.M. to 5 P.M. However, the foreclosure auction can be moved to another location and time by the foreclosure trustee. Anyone can bid on a foreclosed property, but interested buyers cannot view the property beforehand. Potential buyers should also make sure they have readily available financing for their intended purchase.
Rules and regulations wary somewhat from county to county in California, so extensive research is necessary by a potential buyer to be certain of compliance with local county laws. For example, some counties may require bidders to bring their bids in cash or cashier’s checks to the auction, while others will enforce a sealed-envelope bid rule. In the case of non-judicial foreclosure – the most common type in California – all sales are final. Successful foreclosure buyers also assume outstanding liens against the property such as tax liens.
Due to California’s status as a “one-action” state, lenders can choose only one method to recoup losses incurred by defaulted loans. This means that if the sale price of a property at the foreclosure auction is below the outstanding loan balance, the lender has no legal recourse to sue the borrower for the remaining balance of the defaulted loan.
To avoid incurring such losses, most lenders will also bid on foreclosed properties, offering a price equal to the outstanding balance plus foreclosure costs. Such a move provides the most advantages for a lender – on one hand an interested buyer will have to outbid the lender’s offer, ensuring a price higher than the outstanding balance and foreclosure costs. On the other hand, if no buyers come forward with a higher offer, or no offer is made at all, the property will revert to the ownership of the lender and become real estate owned or REO. The lender can then proceed to list the property on the free market for a price of their choosing – although barring the lender being in possession of a large inventory of REO properties, these real estate assets will usually be listed at market value, or just below that.
In the case of judicial foreclosures, California law allows the lender to get a deficiency judgement against the delinquent borrower – however, the process also gives the delinquent borrower the “right of redemption”. Under California state law, this means the delinquent borrower has the right to buy back foreclosed property from the successful bidder up to one year after the foreclosure sale. To successfully redeem a property, a former owner who lost it via foreclosure must pay the foreclosure sale plus interest, as well as all additional expenses the lender incurred.
According to California foreclosure laws, the timeframe allotted for redemption depends on whether or not a delinquency was recorded at the foreclosure sale. If a delinquency wasn’t recorded, i.e. the foreclosed property sold for a price equal to or higher than the outstanding loan balance, the borrower has up to three months to regain ownership of the property after paying all legally required amounts and fees. If a delinquency was recorded, the redemption period jumps to one year. However, this avenue is not open to borrowers whose properties have been sold through non-judicial foreclosures.
In the case of properties purchased through foreclosure auctions following a judicial foreclosure, the new owner does not have full ownership of the property until the redemption period expires. In fact, if the delinquent borrower successfully follows through on all redemption requirements in the legal time limit, the new owner’s ownership rights will be waived in favor of the previous owner.
Following a foreclosure sale, the new owner cannot instantly evict the former owner or change the locks on the property. They must serve the previous owner with a 3-day notice to quit, meaning the former owner has 3 days to move out. However, if the former owner does not vacate the property, the new owner is still not legally allowed to remove them, but will have to start the formal eviction process through the courts to gain full possession of the home.
Court-mandated evictions will usually take several weeks to go into effect. If the foreclosed property is rented out, the new owner must honor the existing lease agreement. If the property is also occupied by the former owner or is leased on a month-to-month basis, the new owner may evict the former owner and/or tenants, but not before providing current tenants with a 90-day notice. The new owner may also offer a new lease agreement to current tenants.
For more detailed information on California’s foreclosures process, visit the following sources:
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