What is a foreclosure?
"Foreclosure" is a common term used to describe a trustee's sale
proceeding- the correct terminology to use when describing the
procedure for enforcing a lender's rights once an obligation
secured by a Deed Of Trust (or similar instrument) is in
default.
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What constitutes a breach or a
default?
A breach exists when the
borrower fails to make the payments of principal and interest
when due pursuant to the note secured by deed of trust. If the
balance of the note is due, the breach would be the failure to
make the principal payment due plus interest, by the maturity
date. Most deeds of trust have provisions for default being
declared when a senior lien, insurance, taxes and assessments
have not been paid, or if the property is transferred without
the lenders approval.
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Should I
forego a foreclosure and take a deed in lieu?
Before you can even consider an alternative, the
borrower must be willing to offer a deed in lieu. There are
advantages to taking a deed in lieu. It could save you time and
money. You should order a preliminary title report and review it
carefully to determine if there are any junior liens that would
survive the deed in lieu. If you are satisfied with the title
report, you would take the deed in lieu subject to a title
insurance policy being issued in your favor as reflected in the
preliminary report. This procedure would take a lot less time
than the approximate four months of foreclosure. The main
disadvantages to taking a deed in lieu of foreclosure are the
junior liens will not be extinguished and that the borrower may
later have a change of heart and seek to have the courts set the
deed in lieu aside.
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Must the
original trustee process a non-judicial foreclosure?
No. The beneficiary may substitute trustees anytime.
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Should I
notify a senior lender of the existence of my junior lien?
Yes. A senior lender may have a provision in his deed
of trust that provides for senior priority for additional
advances to the borrower. When advances are "obligatory" to
protect the lender's security interest, they are so secured.
However, if the advances are "optional" and the senior lender
has knowledge of a junior lien, the advances may not be senior
to the junior lien of trust. A junior lender, therefore, should
give the senior lender notice of their lien. Many lenders would
like to reduce their collection efforts by having the junior
lienholder advance to their loan. Send the senior lender a
notice which tells them that you are willing to reinstate their
loan.
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Must I
give notice of delinquency to a junior lienholder even if I
don't file an NOD?
No. Junior lienholders may request status of senior lien
by doing the following:
Under the California civil code section 2924e, a lender is
required to send a notice to a junior lienholder within 15 days
after the delinquency reaches four months, when certain
conditions exist: the borrower must consent; the junior
lienholder must submit the request in writing by certified mail
along with $40; the property must contain one to four
residential units; the request shall be recorded in the county
in which the property is situated; and it has not been longer
than five years since the original request, unless a renewal
payment of $15 has been made.
Junior lenders who acquire interest by assignment, now have the
same rights as the original beneficiary to require senior
lenders to provide information regarding delinquencies of four
months. The new junior beneficiary must pay a processing fee of
$15 to the senior beneficiary. See section 2924e(b).
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If my
loan is in a senior position, when should I start my
foreclosure?
You may have to consider various constraints before you
can file a notice of default. Is this a standard Fannie
Mae/Freddie Mac document? If it is, you must send the borrower a
notice of intent to foreclose 30 days prior to the filing of the
NOD. You may have sold the loan to some other lender; they may
have certain procedures and standards that you must adhere to,
such as asking their permission to foreclose after a suitable
effort has been made to work with the borrower to encourage
repayment. If your loan is insured, you have be required to
follow certain steps in order to be allowed to file a claim with
the insurer.
The most important consideration when deciding to start a
foreclosure is "Am I well secured if I wait?" If there is
adequate protection between the value of your loan and the value
of the property, delay should cause no loss. If there is
inadequate protection, then every day delayed will cost you
money. Choose a trustee who will record your NOD without any
unnecessary delays and will stand behind their work.
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If my
loan is in a junior position, when should I start my
foreclosure?
If you service a loan for someone else, if it is insured,
or it is a standard FNMA/FHLMC document, then you have the same
constraints mentioned in the previous question. Being in junior
position adds one other very important dimension for you
consideration. The senior lender can foreclose you out of your
security or certainly diminish your protection as their loan
interest balance grows.
If the senior lender begins foreclosure, and neither you nor the
borrower bring them current, the lender could very well go to
sale and eliminate your security. It is much better for you to
initiate foreclosure early, go to auction, acquire the property
and sell it, before the senior lender can complete the
foreclosure. Of course, if necessary, you may have to reinstate
the first lender to allow enough time for you to complete your
foreclosure.
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Should I
reinstate the senior loan which is in foreclosure, or bid at its
sale?
Reinstating the senior loan should require considerably
less cash than bidding at its sale. If the loan has matured,
then you may pay off the loan prior to the sale or bid at the
sale.
If the senior lender filed a notice of default several months
earlier, you may be able to save time by bidding at the senior's
sale. However there are some pitfalls to this strategy. The
senior may delay his foreclosure; you have no control over when
they may go to sale. File your own notice of default as soon as
possible so that at least you are proceeding to your own sale.
If you intend to bid at the senior's sale, come to the sale
early, bring sufficient certified funds to bid the amount of the
debt plus your lien. You cannot credit bid the amount
owed to you under your deed of trust; your standing as a bidder
is the same as any others. If you fail to arrive on time for the
sale, your lien may be eliminated.
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Do I
need the borrower's permission to foreclose?
No. You already have their permission; they gave it when
they signed the note and deed of trust.
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What
documents do I need to foreclose?
You will need to provide the trustee with the note and
deed of trust, any modification or extension agreements,
additional notes and any assignments. If an original document is
lost, it may be necessary to provide a lost instrument bond.
Consult with your trustee. You also need to provide the trustee
with certain essential information, such as the unpaid balance
of the note, the date to which the interest is paid, the reason
for the default(such as failure to make the payment which became
due on a certain date), information regarding any advances you
have made, the last known residence or business address of the
last known owner, and the property address. If you are not using
the original trustee, a substitution of trustee must be signed
and notarized by the beneficiary.
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Why is
an accurate "last known address" of the last known owner vital?
Failure to send notice to an accurate business or
residence address of the last known owners may invalidate the
foreclosure. Search all your records completely and carefully.
If the borrower has more than one loan with your firm, review
all sets of records. If the borrowers are married and you
receive word from one of them that (s)he is no longer residing
at the property address and you are provided with a new address,
be sure to communicate that information to the trustee as soon
as possible.
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How long
does it take to foreclose?
If there are no delays, a foreclosure will be completed
in about four months. After the recording of the NOD there is a
mandatory three-month waiting period before the trustee can
publish the notice of trustee's sale. Generally the sale will
take place four weeks after the pre-publication period has
ended. The date of the sale is influenced by the county where
the property is located, the regular schedule of sales for that
county and by the frequency of publication of the newspaper in
which the trustee is required to publish. The trustee must also
consider the newspaper deadlines for advertising and the
time-necessary for preparation of the notice of sale and its
delivery to the newspaper. The California Civil Code also
requires that the notice of sale be posted on the property and a
public place at least 20 days prior to the sale; adequate time
must be allowed for this to be completed. If the IRS has
recorded a federal tax lien at least 30 days before the sale,
they require notification at least 25 days before the sale. If
the loan is insured by the Veterans Administration, the sale
date must be set to allow time enough for them to provide bid
instructions.
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Who pays
the foreclosure fee and costs?
If the borrower brings the loan current or pays it off,
the borrower is responsible to the lender for the foreclosure
fee and costs. Since the lender is obligated to pay the trustee,
the lender should be sure to not overlook these foreclosure
expenses. If the property is sold to an outside bidder at the
foreclosure auction, the foreclosure expenses will be paid by
the bidder. Only when the lender is the successful bidder at the
sale will the lender not be able to look to someone else to
recover the trustee's fee and costs. Hopefully, when the
property is resold, the lender can expect to recover their
foreclosure expenses.
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Do all
trustees charge the same?
No. The California Civil Code sets the maximum fee that
is deemed to be valid and lawful. A trustee need not
charge that maximum amount. The quality of service and the
trustee's financial strength should be of primary concern when
selecting a trustee.
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What is
a Declaration of Default?
This document contains the official written instruction
from the beneficiary to the trustee. Most deeds of trust require
the beneficiary to furnish the trustee with a Declaration of
Default. It identifies the deed of trust to be foreclosed,
states the breach, and directs the trustee to sell the property
to satisfy the indebtedness.
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What is
the fastest way to record the NOD?
You may send the trustee a pre-signed substitution along
with the other documents, or the
trustee can prepare one and return it to you for your signature.
If you are to be regularly using a trustee, you might consider
giving the trustee a limited power of attorney
authorizing them to sign the substitution of trustee and the
notice of default. Sending pre-signed substitutions or giving a
limited power of attorney reduces the time between your decision
to foreclose and the actual recording of the notice of default
to as little as 24 to 48 hours.
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What are the most common delays to the foreclosure process?
- The most common delay comes
from the filing of bankruptcy.
- A temporary restraining
order (TRO) is used to preserve the status quo pending a
court hearing for a preliminary injunction.
- A preliminary injunction is
used to preserve the status quo pending a final
determination of the action on the merits.
- The beneficiary or his
servicer doesn't send the trustee the most current
assignment. The trustee prepares the NOD and the
substitution with the wrong beneficiary shown. Several days
after the documents are recorded the title company discovers
the error. The trustee now must rescind the original NOD and
re-record new documents. If there is uncertainty regarding
the current beneficiary, ask the trustee handling the
foreclosure to check with the title company for current
information.
- The recording information on
the deed of trust was incorrect. A copy of the deed of trust
has the recording information written incorrectly or the
original deed of trust was re-recorded later.
- The paid-to-date was
incorrect.
- The unpaid balance was
incorrect.
- The last known address was
incorrect or incomplete.
- Money (partial payment) is
accidentally accepted from the borrower.
- Instructions are
misunderstood. The beneficiary instructs the trustee to
cancel the sale rather than postpone, or postpone rather
than sell.
- The NOD is re-recorded
(start-over) because of failure to notify someone.
- Correspondence requiring
response is accidentally filed rather than handled.
- Opening bid information
given to the trustee too late to order a date down of the
trustee's sale guarantee.
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What law authorizes foreclosures through a
trustee's power of sale?
There is no law that authorizes a trustee's non-judicial
foreclosure; that power is created by the borrower when he signs
that deed to trust, pledging the real property as security. The
words used in the deed of trust are; "with power of sale." There
are, however, many laws that regulate the trustee. See
California Civil Code section 2924.
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How does
bankruptcy of the borrower affect the foreclosure?
The filing of a petition of bankruptcy by the borrower,
by a lessee (tenant) who has a recorded lease, or by the
beneficiary of a junior deed of trust, immediately stops the
foreclosure, with or without notice. The trustee may not proceed
in any way; he may, however, postpone an already scheduled and
noticed sale. If the trustee conducts a sale after a bankruptcy
is filed, but without any knowledge of it, the sale is void or
voidable depending on circumstances. See section 2924j. Before
the trustee can continue the foreclosure, the lender must obtain
relief from the bankruptcy court. You should seek legal advice
immediately from an attorney who specializes in bankruptcy.
Relief must terminate the stay against the property of the
debtor and the property of the estate in bankruptcy. Relief as
to the debtor is not relief as to the estate. The trustee's sale
cannot be held within seven days after the expiration of the
stay in bankruptcy unless the court order so provides. See Civil
Code section 2924g(d). Attorneys representing lenders in
bankruptcy should include as part of their relief orders a
statement that a foreclosure sale may occur immediately upon
entry of the bankruptcy relief order.
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Could a
senior lender get relief from the bankruptcy stay and go to sale
while the junior lender is still stayed?
Yes. If you are a junior lienholder, notify your attorney
as soon as you get word of a bankruptcy. Assist them in every
way to get relief before the senior lender does.
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Who is
entitled to receive a copy of the Notice of Default?
Within ten business days after the NOD records, notice
must be mailed by certified/registered mail to the original
trustors at the address shown on the deed of trust; the current
owners, if known, at their last known business or residence
mailing addresses, and to those who have recorded a request for
a copy of a Notice of Default. In addition to the required
certified/registered mailings, simultaneous mailings must be
made by regular, first class mail to the trustors and current
owners. See section 2924b(B)(1).
Within one month after the notice of default is recorded, a copy
of the NOD must be mailed certified/registered to those entitled
to notice under the California Civil Code section 2924b(c)(1),
including the current owner of record and those lienholders with
a recorded interest.
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Does the
borrower need actual notice to have a valid foreclosure?
No. The non-judicial foreclosure sections of the
California Civil Code were designed to balance the needs of the
borrower and lender. The procedure is supposed to be clear and
easy to follow so that there is little reason to go into court
to argue issues. The notification procedure provides many
opportunities for the borrower to receive notice. If they do not
make the effort to keep the lender of the trustee informed, they
may lose their property without notice. The trustee has no
obligation to search for a lost borrower. The borrower can give
constructive notice with their current address. See I.E.
Assocs., v. Safeco Title Ins. Co. (1985) 39 C3d 281, 216 CR 438.
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What is
a Trustee's Sale Guarantee report?
The Trustee's Sale Guarantee (TSG) report provides the
foreclosing trustee with the information necessary to process
your foreclosure and guarantees the correctness of that
information. It sets forth the record owners and lists all
exceptions of record against the secured property. It provides
the names of those who are to receive notices and the name of
the newspaper in which the trustee must publish. The TSG is
provided by a title company in the county where the property is
located. When you receive your copy from the trustee, you should
be alert to certain items:
- New Owners.
- Delinquent real estate
taxes.
- Notice of default recorded
by a senior deed of trust. You should contact the senior
beneficiary to determine if their loan is still delinquent.
- Federal (IRS) tax liens
recorded.
- Bankruptcy.
- Lis Pendens. This provides
constructive notice of pending litigation, the outcome of
which will not be affected by the foreclosure.
- Notice of substandard
dwelling.
- Any irregularities noted
therein.
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Who should record a request for a copy of
a Notice of Default?
If you are a junior lienholder and have changed you
address from that shown on the upper left hand corner of your
recorded deed of trust, you should record a request for notice
pursuant to Civil Code section 2924b(a) showing your current
address. Failure to do this may prevent you from receiving
notice of a pending foreclosure on a senior deed of trust.
Additionally, if you want a copy of a Notice of Default mailed
to you within ten business days of its recording, record a
request.
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When can
I refuse reinstatement?
For NOD's recorded prior to January 1, 1986,
reinstatement is allowed by law (unless the loan has reached
full maturity) during the first three months; after the first
three months you can refuse reinstatement. For Nod's recorded
after January 1, 1986, you may not refuse reinstatement until
five business days before the date set for sale or a postponed
sale; after that you may refuse reinstatement. See Civil Code
section 2924c(e). The standard FNMA/FHLMC deed of trust allows
reinstatement by the borrower up to five calendar days before
the sale date.
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Who is
entitled to reinstate the loan?
The trustor and any junior lienholder of record have the
right to reinstate the loan. The reinstatement amount should be
enough to restore the entire loan to its original installment
basis and include attorney fee and costs which were necessary to
protect the security, foreclosure fee and costs, late charges,
and advances. Contact the trustee for updated fees and costs
before accepting reinstatement. A partial payment may not cure
the default. Accepting partial payment may invalidate the
foreclosure. If you believe it is in your best interest to
accept partial payments, consult your attorney regarding a
written agreement between you and the borrower.
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What
costs can be included in the reinstatement or payoff amount?
Money advanced to protect the lender's security, other
than improvement of the property, are allowable. For instance,
repairing a leaking roof, that would result in damage and
decrease the value of the property, would be allowable.
Replacing the whole roof would not be allowable. The costs of
collection letters and advice from an attorney in certain
instances now appear allowable. See Buck v. Barb 147 CA 3rd 920.
Additionally, attorney fees and costs incurred while defending
yourself in court or seeking relief from bankruptcy are
allowable. Check with your attorney before including any
questionable items. Also there are regularly allowable trustee's
costs for recording, mailing, publishing, posting, trustee's
sale guarantee, and one postponement fee of $50 upon the written
request of the trustor pursuant to section 2924c(c).
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How long
does the publication period last?
After the three month pre-publication period has ended, a
notice of trustee's sale is prepared and sent to the newspaper
for publication. The first ad must run at least 20 days before
the scheduled sale date. The time between the first ad and the
sale date is the publication period.
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Where is
the Notice of Sale published and how often?
The Notice of Sale is published in an adjudicated
newspaper of general circulation in the city where the property
is located. If there is not a paper adjudicated to run legal
notices in that city; then a newspaper in the judicial district
may be used.
The Notice of Sale must publish once a week for three weeks with
the first ad running no later than 20 days before the sale.
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Who is
entitled to receive the notice of trustee's sale?
All parties pursuant to Civil Code section 2924b and
(b3).
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What
should the beneficiary do during the publication period?
During this period the lender should assess their equity
position in the property to determine if they should bid less
than their total debt.
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How long
may I postpone the trustee's sale?
The lender or the trustee may postpone the foreclosure
sale for an unlimited number of times, not to exceed 365 days
from the original sale date. In the event a sale's postponements
have exceeded the allowable 365 days, the trustee will be
required to record a new Notice of Sale in addition to
republishing, posting and giving proper notice all entitled
parties. Please see section 2924g of the California Civil code.
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Must I
bid the full indebtedness, plus advances and costs?
No. It is not required and there may be good reasons not
to. For instance, it you would like to encourage outside
bidders, set the opening bid low and credit bid price upward
until you reach your total indebtedness. Another reason that you
might want to bid less than the full amount would be to allow
for a claim to an insurance company for a casualty loss against
the property. If you had bid the full indebtedness, the
insurance company could claim that your debt had been fully
satisfied. There may also be some tax consequences to consider.
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Are the
trustee's sales really held on the steps of the county
courthouse?
Yes. Most trustees use the same place to conduct their
sales. The most common spot is the front entrance to the county
courthouse, city hall, or hall or records. The only requirement
by law is that it be conducted in a public place.
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Is the
trustee's sale conducted orally or by sealed bid?
The sale is conducted verbally. The trustee will
essentially announce that they are offering to sell at public
auction to the highest bidder all right, title and interest
conveyed to and now held by the described deed of trust. The
sale will be made, but without covenant or warranty, express or
implied, regarding title, possession or encumbrances. After the
auctioneer makes an announcement, they will ask if there are any
bidders who wish to qualify. If there are, each must show the
auctioneer funds in excess of the opening bid. A junior
lienholder must qualify as any other bidder and cannot use their
lien for bidding purposes. Nomellini Const. Co. v. Modesto
Savings & Loan Assoc. (1969) 275CA2d 114,79 CR 717. The
auctioneer will note the total amount of funds each bidder
possesses, so that they know when a bidder is no longer
qualified to enter a bid. If a bidder tries to enter a bid that
exceeds their funds, the auctioneer will ask them to requalify.
Each bid is an irrevocable bid and replaces the previous bid. If
a bidder reneges, they may be liable to the trustee for damages
and subject to criminal prosecution and penalties. The
successful bidder is the one who enters the final bid that is
accepted by the auctioneer. See sections 2924g and 2924h.
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Must I
attend the sale and enter my own bid?
No. The trustee's auctioneer will enter your opening bid
on your behalf. However, you may attend the sale and enter your
own bid. If you wish to bid more than your total debt due you,
it would be necessary for you to appear at the sale with
certified funds to cover any bids you make over the amount of
your debt.
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When am
I entitled to possession of the property?
The title a successful bidder receives through a
trustee's deed entitles them to immediate possession. The
purchaser may allow the previous owners or tenants to stay or
they may bring an unlawful detainer action (eviction) to remove
them. However, a lease recorded prior to the recording date of
the deed of trust entitles the lease to priority over the title
received through the foreclosure. A unrecorded lease, where it
was reasonable to assume that a lease existed at the same time
the deed of trust was recorded, may provide the same priority as
a prior recorded lease. Alternately, if the lease is unrecorded
and it was not reasonable to assume that a lease existed at the
time the deed of trust was recorded or if the lease was recorded
subsequent to the deed of trust which has been foreclosed, the
purchaser at the foreclosure sale may choose to evict the
tenants or allow the tenants to stay.
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Is there
a redemption period after the sale?
In a non-judicial sale there is no redemption period for
the previous owner or junior lienholders. The Internal Revenue
Service (IRS) has a 120-day right of redemption, if it had a
properly recorded notice of a federal tax lien subsequent to
your deed of trust.
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What
liens or rights may survive the trustee's sale?
Failure of the trustee to notify a junior lienholder of
record (absent his actual knowledge of the sale) may allow the
junior lien to survive. It is as yet unclear under California
law whether the buyer can claim "bona fide purchase" status to
defeat the junior lien's attachment. In any event, the junior
lien could sue for damages if a BFP's interest eliminated the
junior. An IRS tax lien will not be extinguished for 120 days;
during that time the IRS has the right to redeem the property.
The rights of a plaintiff in a legal action, who has a properly
recorded lis pendens, will survive the trustee's sale. City and
county liens, easements, homeowner's association assessments,
and mechanic's liens, where the work was begun before the
foreclosing deed of trust was recorded, may survive the
trustee's sale. Leases that were recorded prior to the
foreclosing deed of trust will survive. An unrecorded lease
where it was reasonable to assume that a lease existed may
survive. If the foreclosing lender subordinated to a subsequent
deed of trust, it will survive. Any liens that were recorded
prior to the foreclosing deed of trust (which has not
subordinated itself to the foreclosing deed of trust) will
survive.
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Who gets
the over bid surplus?
Any moneys that exceed the foreclosing lender's total
indebtedness, including advances and expenses, will go to junior
lienholders of record in the order of priority, and finally to
the previous owner of record. If the trustee has doubts about
where the moneys should be paid, they should commence an action
for interpleader to avoid potential liability.
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What
happens if I feel sorry for the sold out borrower and deed the
property back to them?
If your intent is to replace your original deed of trust
with a new one having the same priority...BEWARE. The
extinguished junior liens will revive; your new deed of trust
will be subordinate. See Jensen v. Duke (1925) 71 Cal. App. 210.
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When is
the trustee's sale complete?
The sale is final upon the auctioneer saying "sold" and
the sale is deemed perfected as of 8am on the day of sale
provided the Trustee's Deed Upon Sale is recorded within 15 days
of the actual sale date.
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DISCLAIMER: Presentation of this FAQ is for
general purposes only. No information on this page is to be
viewed as legal advice or as an official description of judicial
process. These descriptions are general and are displayed
strictly as a service to consumers. They are not intended to be
all-inclusive or to cover default situations in all states.
Default procedures vary by state and change often. The
information herein is not to be construed as up-to-date.
Consumers are advised to seek professional legal counsel in any
default proceeding.
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