What is a foreclosure in California?
Foreclosure is the legal process by which a lender takes possession of a property from the borrower and forces the sale of the property to recover on the loan.
That’s a lot of words. To buy a home, most people get a loan from a bank. This is called a mortgage. This loan needs to be repaid. A bank is willing to take on the risk of a loan because it holds a lien on the financed property. A lien is a fancy legal word that means the right to repossess a property until a debt is paid. So, if a recipient of a loan does not make payments on the loan, then the bank can foreclose on the property to get its money back.
The law on foreclosure is laid out in the California Civil Code:
Cindy and Vladimir take out a $100k mortgage to on their new home. They make regular payments on the mortgage for the first year. At the beginning of the second year, they both lose their jobs and they have no savings. They don’t make any payments for 120 days. The bank then notifies them that it will be foreclosing on the house to recover its money from the loan.
Breaking down foreclosure
Let’s take a closer look at the types and process of foreclosure. In California, lenders can use the nonjudicial process or the judicial process to foreclose. The nonjudicial is more common.
What is a Nonjudicial foreclosure?
Nonjudicial foreclosure means foreclosure that happens outside of court. This is the most common type of foreclosure in California, probably because it is much faster and less costly than going to court.
A nonjudicial foreclosure is an option if there is a power-of-sale clause in the deed of trust. The power-of-sale clause indicates that the borrower pre-authorizes the lender to sell the property if the borrower misses payments.
If a lender chooses nonjudicial foreclosure, he gives up his right to collect a deficiency judgment. A deficiency judgment is equal to the difference between the amount owed and the amount the property sold for in foreclosure.
Cindy and Vladimir agreed to a power-of-sale clause in their mortgage, even though they didn’t know it. Since they’ve missed their payments, the bank can foreclose on their home without even taking it to court. The bank begins this process.
What is a Judicial foreclosure?
A judicial foreclosure is a foreclosure that goes to court. This is rare in California and usually only happens if there is no power-of-sale clause in the contracts. The court process is longer and more expensive than the nonjudicial option. If successful, the court will order the sale of the foreclosed property, and the property will be auctioned off to the highest bidder.
In a judicial foreclosure, the lender can get a deficiency judgment, but the borrower now has the right of redemption. The right of redemption allows the borrower to buy back the property from the bidder for 1 year after the sale.
This time, let’s imagine Cindy and Vladimir did not agree to a power-of-sale clause. The bank would then need to go through the court process of foreclosure and eviction. This will take more time, but the bank will also likely go after the deficiency judgment. 1 year after the foreclosure, Cindy and Vladimir are still paying off the deficiency judgment so they don’t have money to buy back the house within 1 year.
So, there are trade-offs to both options.
What is the Foreclosure Process?
Every foreclosure in California is a little bit different, but there are certainly some common steps.
1. The lender must perform a foreclosure avoidance assessment.
If the borrower misses some payments, the lender can’t just sell the house and that’s it. The state provides a legal process that still must be followed. First, the lender must contact the borrowers to determine if they can avoid foreclosure. Sometimes there are still options available to avoid foreclosure.
2. The lender then records a Notice of Default.
If no other option can be agreed upon, then the lender records a Notice of Default in the county of the property and serves the borrower a copy. The lender must wait at least 30 days from the time he contacted the borrower for the foreclosure assessment before doing this.
The borrower then has 90 days to pay the amount owed on the loan.
3. The lender then records a Notice of Sale.
If the borrower does not pay the amount owed, then the lender records a Notice of Sale. The Notice of Sale declares the property will be sold at auction in 21 days. California requires the lender to follow a few specific guidelines for the Notice of Sale to be valid.
4. The property is then sold at auction.
The auction can’t take place until at least 21 days after the Notice of Sale was posted. At the auction, the winning bidder must the full cost of the property in either cash or check, and the lender usually bids to win the property in the case no one else bids.
The borrower can still pay off the amount due on the mortgage up until five days before the auction.