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.
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.
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.
Must the original trustee process a nonjudicial foreclosure?
No. The beneficiary may substitute trustees anytime.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 presigned 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.
What are the most common delays to the foreclosure process?
What law authorizes foreclosures through a
trustee's power of sale?
There is no law that authorizes a trustee's nonjudicial
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.
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.
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.
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.
Does
the borrower need actual notice to have a valid foreclosure?
No. The nonjudicial 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.
What
is a Trustee's
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:
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.
When
can I refuse reinstatement?
For NOD's recorded prior to
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.
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).
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.
Where
is the Notice of
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.
Who
is entitled to receive the notice of trustee's sale?
All parties pursuant to Civil Code section 2924b and (b3).
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.
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.
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.
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.
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 convenant
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.
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.
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.
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.
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
Who
gets the over bid surplus?
Any monies 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 monies should be paid, they
should commence an action for interpleader to avoid
potential liability.
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
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.
As always, consult a qualified foreclosure attorney for up-to-date information specific to your situation.