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.
^top^
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. ^top^
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.
^top^
Must
the original trustee process a
non-judicial foreclosure?
No. The beneficiary may
substitute trustees anytime. ^top^
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. ^top^
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). ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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 service 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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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.
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. ^top^
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. ^top^
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. ^top^
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). ^top^
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. ^top^
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. ^top^
Who
is entitled to receive the notice of
trustee's sale?
All parties pursuant to Civil
Code section 2924b and (b3). ^top^
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. ^top^
Am
I limited to only three postponements?
The lender or the trustee is
limited to three discretionary
postponements, after which it is
necessary to republish the Notice of
Sale. The lender may agree with the
borrower to any number of postponements;
it is best to get this agreement in
writing and signed by the borrower. The
sale can be postponed any number of
times "by operation of law" or
one time only for bankruptcy
determination. See section 2924g(c). A
Notice of Sale is generally considered
stale after one year. It would then be
best to re-notice the trustee's sale. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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. ^top^
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