Methods of Foreclosure in California
California law provides for two types of foreclosure: judicial (court involvement) and nonjudicial (no court involvement; this is the most commonly utilized method). Nonjudicial foreclosures are utilized in situations where the deed of trust securing the mortgage loan includes a power-of-sale clause. This clause grants the trustee power to sell the property in order to satisfy the outstanding loan if the lender requests him to do so, in the event the debtor fails to submit timely payments. Incorporating a power of sale clause in a deed of trust or mortgage necessitates the borrower to pre-authorize the sale of their property to pay off the loan balance if they default.
Lending organizations who utilize the nonjudicial foreclosure option against debtors who do not meet their loan repayment obligations forfeit their right to collect a deficiency judgment against the defaulting party. A deficiency judgement is where lenders obtain monetary awards from the court covering the difference between the total amount the borrower owed (including penalties, fees, and costs) and the amount that the property was sold for at the auction. The majority of lenders choose the nonjudicial foreclosure process even though they give up the possibility of deficiency judgement, because the overall nonjudicial route is more expedient and can be completed at a lower cost.
The California Foreclosure Timeline at a Glance
If the loan is a consumer purpose loan, the lender must take the following initial step:
- The lender is required to first establish contact with the party or parties listed on the mortgage agreement to conduct a foreclosure avoidance assessment. This contact must be established to analyze the debtor’s financial standing and determine if there are any viable alternatives to initiating foreclosure. The lending entity cannot begin foreclosure until at least 30 days following the initial contact with the borrower. The lending entity is also required to advise the borrower that they are entitled to request another meeting about how to avoid the foreclosure process.
If the loan is for business purposes or if the lender and borrower cannot avoid foreclosure of a consumer loan, the following steps apply:
- The lender records a Notice of Default in the local jurisdiction of the property. The lending entity then sends the borrower a copy of the notice via certified mail within 10 business days of formally recording it. The borrower is then afforded 90 days to cure the default.
- If the borrower fails to cure the outstanding loan balance within 90 days, a Notice of Sale is recorded announcing that the trustee will auction the property in 21 days. The Notice of Sale must be sent via certified mail, be published weekly in a local periodical, be posted on the affiliated property in addition to a public place such as the Town Hall, and must include details such as the date, time, and location of the foreclosure auction.
- At least 21 days following the recording of the Notice of Sale, the property can be auctioned publicly. The highest bidder is required to pay the full amount immediately with cash or certified check and receives a trustee’s deed.
Borrowers have up to five days preceding the auction to cure the default and halt the entire process. If the maturity date has not passed and the borrower cures the default, this is referred to as the loan being “reinstated.” If the default is due to the maturity date passing or is the result of some other non-monetary default, the borrower’s only option is to repay the loan (and all outstanding amounts) in full in order to stop the sale.
A new owner after a foreclosure sale cannot simply enter the property, change the locks, and move in if the borrower was living at the property. The new owner will need to evict the resident through an unlawful detainer process. Additionally, if the property has commercial or residential tenants, unless the leases were subordinated to the deed of trust, those tenants will retain rights after the foreclosure sale.