Understanding the Foreclosure Process

Foreclosure Process

In the state of California there are two types of foreclosures: judicial foreclosures and non-judicial foreclosures. The judicial process involves filing a law suit to obtain a court order to foreclose.

1.  This is the only process available to a lender when he holds a mortgage that does not contain a power of sale. The lender may additionally seek a deficiency judgment should the lender incur losses that exceed the proceeds from the foreclosure sale.

2.  If the deed of trust or mortgage does contain a power of sale it is unnecessary for the lender to go to court to regain the property. The lenders' recourse is to institute a non judicial foreclosure with the trustee named in the deed of trust securing the note.

However, it's important to note that the non-judicial foreclosure is limited to the property and does not allow the lender to also seek a deficiency judgment.

The Process and Timetable

1. Once the borrower is delinquent on just one payment the lender can contact the trustee to commence foreclosure proceedings. Generally it is several months before the lender will request the trustee to start the foreclosure process.

2. The trustee will prepare and record a Notice of Default (NOD) in the county where the real property is located. The NOD must contain the balance due, the reason for the default and the street address or other common designation of the property. No basis of default may be asserted that is not contained in the recorded NOD. The date of recordation of the NOD is called day 1 and this when the clock starts ticking.

3. The trustor now has a 3 month reinstatement period (not 90 days) which begins on the date the NOD was recorded. If the trustor fully reinstates the loan during this period all proceedings shall cease and a Recession of the Notice of Default will be recorded by the trustee. The reinstatement would include not only payments in arrears and accrued interest and late charges due the beneficiary, but also all costs and fees incurred by trustee to the date of reinstatement.

4. During the reinstatement period the trustee will obtain a report from the public records from a title company in the form of a Trustee's Sale Guarantee. This report will inform the trustee of information affecting the real property such as any other liens on the property, bankruptcy proceedings, IRS liens and/or delinquent property taxes.

5.  Within 10 business day of the date of recording the NOD the trustee must send copies of it by certified mail with return receipt requested, or by personal service, or by publication, as appropriate, upon the following persons:

a) the trustor, or trustors who executed the trust deed
b) all persons who recorded a Request for Copy of Notice of Default

6. Within 30 days following the day of recording the NOD, copies of it must be mailed by certified mail, return receipt requested, to such other additional personas required by Section 2924b, to include the following:

a)  successors interest to the trustor as of the recording date of the NOD

b)  beneficiary of any trust deed or mortgage recorded subsequent to the one being foreclosed on, or recorded prior to or concurrently with the trust deed being foreclosed on and subject to a recorded subordination to the trust deed being foreclosed on

c)  the assignee of any interest of the beneficiary under (b) above

d)  any other entities who have a recorded interest in the property or those who have a successor interest

7.  If the loan has not been reinstated during the 3 month period the trustee's next step is to prepare a Notice of Sale (NOS). The NOS must be recorded in the county where the property is located at least 14 days prior to the sale date and the document must contain the following information:

a) the estimated total amount of the unpaid obligation

b) name and address of the trustee

c) phone number of the trustee or other person conducting the sale

d) name, address and phone number of any substituted trustee

e) date, time and location of the sale

8. The trustee will then arrange for publication of the sale in an adjudicated newspaper in the city where the property is located. This notice is published for 3consecutive weeks prior to the sale date.

9.  Within 20 days before the sale the trustee sends a copy of the recorded notice (by certified mail return receipt requested) to the borrower, anyone who had a recorded Request for Copy of Notice of Default and anyone who holds a recorded lien on the property.

10. The NOS must also be posted on the property and also must be posted in a public place within the city for at least 20 days prior to the sale.

11.  The trustees' sale may take place any time after the 21st day after the recordation of the document in a public location. On the date of the sale the trustee confirms with the beneficiary that the default still exists. Civil Code Section 2924cprovides for curing of the default and reinstating the loan at any time until 5business days prior to the sale set forth in the NOS. However, the beneficiary does have the right, at this time only, to refuse the reinstatement and insist on payment in full instead.

12. There may be bidders at the trustee's sale and they will come prepared with a cashier's check for the amount of their bid. If there is more than one bidder the property will e sole to the highest one and the trustee will accept his funds and record a Trustee's Deed to transfer title to the bidder subject to any prior liens of record on the property.

13. If the property is not sold to a third party at the trustees' sale the trustee will issue a Trustees' Deed and transfer title to the lender.

14. Trustee's sales may be postponed because of:

a) an injunction

b) restraining order

c) stay of any court of competent jurisdiction, including the U. S. Bankruptcy Court

15. The new sale date must be conducted no sooner than 7 days after the earlier dismissal and termination of the previous action.

16. Trustee's sales may also be postponed on approval of the beneficiary in the event there is a valid contract for the sale of the property to a bona fide purchaser.

Options for a Borrower Facing Foreclosure

Workout Plans:
The first option a borrower should consider when attempting to keep a home is a workout.  Under a workout scenario the lender will assist the borrower in keeping the property.  One of the plans usually offered to the borrower is "forbearance."  Under a forbearance plan the lender will allow the borrower to continue for a certain period of time, such as six months, without making a payment.  When the borrower is able to catch up, the borrower resumes making payments plus an additional amount to bring the loan current.  Loan modification can also involve rewriting the terms of the loan to make the loan affordable for the borrower.  This might consist of changing an adjustable rate mortgage to a fixed rate mortgage, for example.  The objective is to work out the default with the borrower to allow the borrower to remain in the home and avoid foreclosure. 
 
Short Sales:
"Short sales" may occur once a home is in foreclosure or prior, but before the property goes to sale.  In a short sale, the lender accepts an offer from a third party buyer for less than the outstanding loan on the property and forgives the deficiency owed by the borrower.  This arrangement may be appealing to lenders because it saves time and money by stopping the legal foreclosure process and by taking the property off the lender´s books.  However, recently it has come to light that some lenders agreeing to short sales are including language in the release which allows them to sue on the note even though they are releasing the security in the property.
 
Until December 21, 2007, if the lender accepted less than the balance owed and cancelled the debt, that amount would be considered debt forgiveness, and tax would be due on the amount forgiven.  This forgiven amount was called "phantom income."   According to the IRS it is the same as if you received that amount of income.  On December 21, 2007 President Bush signed H.R.3648: Mortgage Forgiveness Debt Relief Act of 2007 which provides relief to homeowners facing foreclosure from the phantom income realized from debt forgiveness or foreclosure.  The benefit to the borrower of a short sale is that the credit report will show that the loan settled for less than full value as opposed to a foreclosure.    Those who are most interested in the short sale opportunity are those who would like to preserve their credit by avoiding the foreclosure. 

Deed in Lieu of Foreclosure:
In a "deed in lieu of foreclosure" plan the borrower returns the deed on the property to the lender in exchange for a release of the security interest and a cancellation of the note.  As in the case of foreclosures and short sales, the borrower may be able to claim relief under the Mortgage Forgiveness Debt Relief Act.

Caution: A number of lenders have been offering a deed in lieu of foreclosure.   However, when the borrower reads the fine print on the release of claims, he discovers that the lender is reserving the right to proceed against the borrower for breach of contract on the loan.   REALTORS® are strongly recommended to advise their clients to request an attorney to review the documents received from a lender before entering into a deed in lieu of foreclosure transaction to assure that the documents express the true intent and understanding of the borrower.
 
Bankruptcy:

Bankruptcy is another option that defaulting borrowers may sometimes consider.  Generally, bankruptcy will be attractive where the borrower is in debt with no feasible way of recovering.   The most common scenario is where the borrower is in default on a loan where the lender is seeking judicial foreclosure or where the lender is suing on a note where the underlying security has been "wiped out" by a senior creditor.  Again, whenever a borrower is facing possible foreclosure it is prudent to refer them to an attorney who is qualified to address all of the available options.