As I established in my last post “Understanding the Foreclosure Process” every state follows a different procedure and set of laws during the foreclosure process. The two primary routes are judicial and non-judicial foreclosure and which process is followed can often be determined by which “theory” of ownership has been established in the state.
California is a lien theory state that uses a trust deed and underlying promissory note to secure the loans made against real estate. Essentially the promissory note is an unsecured “promise to pay” agreement between a borrower and lender; to provide security for the obligation borrowers sign a deed, which is held in trust by a third party “Trustee,” until the the debt is paid in full and the lien is released. The trust deed will also include a power of sale clause, allowing the lender to initiate foreclosure if the borrower fails to pay.
Because of these factors lenders in California have the option of pursuing both types of foreclosure proceedings if the borrower fails to meet his/her obligation.
The Judicial Foreclosure process is the lengthiest process and requires a court proceeding to be concluded. Further complicating this option, a foreclosed borrower reserves the right to reinstate their home after the foreclosure sale up to one (1) year after a judicial foreclosure proceeding is completed.
The benefit to lenders with a judicial procedure is the right to pursue a borrower for a deficiency judgment. Judicial foreclosures are primarily reserved for large transactions where the borrower has pledged personal liability and has substantial assets the bank could pursue after the sale. These situations are most often seen in large commercial transactions, rarely if ever in residential situations. As such an overwhelming majority of foreclosures in California are done with the non-judicial method.
The Non-Judicial foreclosure method in California has been developed through the process of case law and is governed by the statutes in California Civil Code 2924. The result established after adopting a lien theory for the state, it concludes that a loan does not transfer ownership of a property to a lender, rather it creates a lien against the property. Cal. Civ. Code 2924 establishes the rules and regulations governing mortgages in the state and the process by which lenders can foreclose on delinquent borrowers. Also known as a Statutory Foreclosure, this method does not require additional court involvement and is agreed to by borrowers via the power of sale clause found in the trust deed signed when the mortgage was originated.
Most foreclosures occur using this method which does not allow a right of redemption after the foreclosure or “trustee” sale. Additionally, as a single action state, defined by Cal. Civ. Code Section 726(a), there can be but one form of action for the recovery of any debt or the enforcement of any right secured by a mortgage upon real property. In plain speak, a lender choosing to pursue an complete a non-judicial foreclosure in California cannot also pursue a deficiency judgement against the borrower.
Perata Mortgage Relief Act - SB 1137
As a result of the recent turmoil in the housing markets, California has passed several new laws which also affect the foreclosure process in the state. The first was signed into law by Governor Schwarzenegger in 2008 and applies to loans originated between January 1, 2003 through December 31, 2007. SB 1137 established three primary changes to the foreclosure process.
First, it established a notification process for tenants living in a foreclosed property. Prior to SB 1137 many unfortunate tenants were left in limbo unaware the home they were renting was in foreclosure until after the sale had occurred. The new law sets rules requiring a minimum sixty (60) day notice prior to any eviction and sets specific language required in the notice of foreclosure given to tenants.
Second, 1137 empowers local authorities to impose a fine on financial institutions that do not maintain a vacant home after foreclosure. Primarily a means of fighting blight and protecting neighborhood health and welfare the potential $1,000 per diem is a costly deterrent for banks unwilling to address dilapidated homes expeditiously.
Finally, the most important change pertaining to home owners, SB 1137 now requires lenders to make their best attempts to contact a home owner and discuss the options available to help avoid foreclosure prior to filing a notice of default. This lender diligence period can and should included discussions regarding loan modification, short sale, deed in lieu of foreclosure and has added anywhere from fifteen (15) to ninety (90) days to the foreclosure process.
California Foreclosure Prevention Act - ABX2 7 and SBX 27
Aimed at mortgage servicers and lenders, ABX2 7 and SBX 27, known collectively as the California Foreclosure Prevention Act (CFPA) adds ninety (90) days to the foreclosure process after a lender has filed a Notice of Default (NOD). The law was passed on February 20, 2009 and will sunset on January 1, 2001, covering loans originated between January 1, 2003 and January 1, 2008. CFPA applies to first trust deeds on homes which are the primary residence of the borrower in question.
It is important to note that CFPA only affects servicers and lenders who have not filed or received an exemption to the law. Exemptions will be granted to all servicers following and adopting a comprehensive loan modification program aimed at helping defaulted homeowners avoid foreclosure. Although lenders can avoid the 90 day delay with the exemption, often times the required modification process itself will delay the foreclosure process up to the ninety (90) days stipulated in CFPA. CFPA also exempts lenders and servicers in cases where the borrower has previously filed for bankruptcy.
While the act does not dictate modification plans a lender or servicer must follow it does provide a suggested framework to be used. This includes rate reductions as needed for a fixed term up to five (5) years, extension of the amortization period of a loan up to forty (40) years from the date of origination, deferral of a portion of the principal unpaid balance until maturity of the loan, and/or some form of principal reduction.
Non-Judicial Foreclosure Timeline in California
Prior to the passing of recent legislation aimed at helping homeowners avoid foreclosure the non-judicial foreclosure process averaged approximately 125-130 days from the initial moment of default to the completion of a trustee’s sale. According to the October 2010 foreclosure report from Foreclosure Radar, lenders averaged 279 days to foreclose monitored from the time a notice of default (NOD) has been filed to the date of the foreclosure sale. It is not uncommon per the new laws mentioned above, for lenders to take up to ninety (90) additional days to file a NOD from the date a mortgage first becomes delinquent. This means the average foreclosure timeline in California can now reach 369 days, more than one year, start to finish.
To further complicate matters, California law also stipulates according to Cal. Civ. Code 2924 g(c)(1), “In the event that the sale proceedings are postponed for a period or periods totaling more than 365 days, the scheduling of any further sale proceedings shall be preceded by giving a new notice of sale in the manner prescribed in Section 2924f.” In other words, if the lender does not foreclose on a property within 365 days from filing a NOD, a new NOD must be filed and the process starts all over again.
Barring cancellation or postponement, the outcomes of a trustee sale are two-fold. 1) the property is sold to a third party bidder who becomes the new owner of record once funds are settled and the deed is recorded or 2) Property ownership reverts to the foreclosing lender and becomes an REO or bank owned property. At this point ownership has ended for the defaulted borrower and they or any existing tenants will be contacted within hours by the new owner or their representatives to begin the process of transferring possession.
This ends the foreclosure process for the defaulted borrower and begins a new chapter for the property in question.
chart courtesy of: Foreclosureradar.com