What is a foreclosure?
A foreclosure is the process by which a bank is allowed to force the sale of a home at a public auction after a borrower defaults on a home loan. The borrower’s home loan is secured by the home, and if the borrower fails to pay the home loan as agreed, the bank has the right to sell the home in an effort to pay off the outstanding balance of the loan.
Types of foreclosures
The bank can foreclose on the property in one of two ways: Either through a judicial foreclosure (through court action) or a non-judicial foreclosure (without court involvement at all). Judicial foreclosure is expensive and time consuming, but it allows the bank to seek damages (in the form of a deficiency judgment) against the borrower/homeowner for the amount left unpaid on the home loan. Non-judicial foreclosure is quicker, less expensive and can be concluded without involving the courts. However, banks are not allowed to seek a deficiency judgment against the borrower after a non-judicial foreclosure.
In California, almost all residential foreclosures are non-judicial. The process operates through a series of notices which are delivered to the property owner/borrower and recorded in the County records (as further described below). These non-judicial foreclosures conclude with a public foreclosure auction, usually in front of the local courthouse or civic center. Note that the sale does not occur INSIDE the court because this is a non-judicial foreclosure and not a legal court action.
Non-Judicial Foreclosure Process
Here is a brief description of the non-judicial foreclosure process:
1. INITIAL CONTACT FROM LENDER (Foreclosure Avoidance): The lender MUST contact you and anyone else on the home loan to assess your financial situation and explore your options to avoid foreclosure. The lender:
- Cannot start the foreclosure process until at least 30 days after contacting you to make this assessment (or after they have completed certain ‘due diligence’ steps to contact you); and
- Must advise you during the first contact that you have the right to request another meeting about how to avoid foreclosure. That meeting must be scheduled to take place within 14 days.
2. NOTICE OF DEFAULT AND ELECTION TO SELL: If you and the lender have not agreed on a plan to avoid foreclosure, the lender can record a “Notice of Default and Election to Sell” in the county where your home is located. This marks the beginning of the formal foreclosure process and puts the world on notice that the bank intends to sell the property at auction. The lender sends you a copy of this notice by regular AND certified mail within 10 business days of recording it.
PLEASE NOTE: Since the Notice of Default is recorded as a public document, it can be viewed by anyone and everyone. This can lead to an avalanche of letters, postcards and solicitations from unprincipled loan modification companies, unskilled brokers, unsavory investors and even unscrupulous lawyers all pitching you the “silver bullet” to cure your mortgage problems, for a price of course. Many of these people are violating the law and simply have no intention of helping the homeowner. Be very cautious about loan modifications, loan audits, class action and mass joinder scams. Contact us with questions or concerns.
3. NOTICE OF TRUSTEE SALE: Once 90 days have passed since the recording of the Notice of Default, the bank can take the next step by recording the “Notice of Trustee’s Sale,” which sets the actual date for the public foreclosure auction. That date can be no SOONER than the 20th day after the Notice of Trustee’s Sale is recorded.
The Notice of Sale must:
- Be sent to you by certified mail.
- Be published weekly in a newspaper of general circulation in the county where your home is located for 3 consecutive weeks before the sale date.
- Be posted on your property, as well as in a public place, usually at your local courthouse.
- Have the date, time, and location of the foreclosure sale; the property address; the trustee’s name, address, and phone number; and a statement that the property will be sold at a public auction.
4. PUBLIC FORECLOSURE AUCTION: On the date set forth in the Notice of Trustee Sale, the property can be sold at the public foreclosure auction. Potential purchasers at the auction (typically investor-buyers) must have cash or cashier’s checks for the amount they wish to bid. The high bidder becomes the owner of the property, and the amount paid at the auction goes to the bank that held the mortgage. If the high bid is MORE than the amount of the outstanding mortgage, the overage goes to any other mortgages or other liens on the property. If there is still money left over, it would go to the prior owner. If there is no bidder or if the bank is not willing to accept less than the full mortgage amount at the auction, the bank would be considered the high bidder (i.e. the bank gets to ‘bid’ the amount it is owed on the mortgage without having to bring cash to the auction). If that occurs, the bank takes ownership of the property itself and the property becomes an “REO” (real estate owned by the bank). This entire non-judicial process can take as little as 111 days – that’s less than four months from beginning to end. Please note, however, that this formal process doesn’t commence until after the borrower has been in default for at least a few months.
Non-Judicial Foreclosure Timeline
|Mortgage Default||Days 1 – 90||The borrower stops paying the mortgage. The bank sends letters, makes phone calls and tries to collect payments BEFORE initiating foreclosure.|
|Notice of Default; Redemption Period||Days 91 – 180||A Notice of Default is filed, recorded and mailed by the bank, giving the borrower statutory notice that foreclosure has commenced. The borrower has the right to cure the default and pay all past due amounts. This would stop the foreclosure immediately.|
|Notice of Trustee Sale||Day 181 – 201||After 90 days have passed since recording the Notice of Default above, the bank can issue (and record) a Notice of Trustee Sale, setting a date for the public auction of the property (sale must be on or after the 20th day following the recording of the Notice of Trustee Sale). The bank can delay issuance and recordation of the Notice of Trustee Sale for as long as they wish and they can set the sale date for any day they desire as long as it is 20 or more days after they record that notice, but they typically move forward as soon as possible.|
|Trustee Sale||On or after Day 201||On the date set in the Notice of Trustee Sale, the bank will conduct A Public Auction to sell the property to the highest bidder. If no one bids or if the bids do not exceed the bank’s demand, then the bank will become the new owner.|
Although this is the typical timeline for a non-judicial foreclosure, the actual process can take significantly longer. In some cases, homeowners may request a loan modification from the bank (typically not granted) or they may seek some other foreclosure alternatives (such as a short sale or deed-in-lieu).