Understanding Foreclosure

INTRODUCTION

Foreclosure is the process whereby your mortgage company sells your home to pay off the loan it made to you. Without foreclosure, it could take the bank many months, even years, to obtain a judgment and force the sale of your home. Accordingly, California law provides for an expedited procedure through which a bank can get paid in the event a mortgage is not kept current. 

    This report will discuss the typical foreclosure proceedings on a residence in California ONLY. If your mortgage was not a standard transaction, or if the foreclosure proceeding does not relate to your residence, or if your property is located in a state other than California, you should consult an attorney for advice as this report may not apply to you. 

    In order to purchase your home, you borrowed a large sum of money and signed a promissory note. To ensure repayment, you (the “mortgagor”) posted your home as collateral to ensure payment of the debt to the bank (the “beneficiary”). This is done by signing a Deed of Trust which allows a third party (a “trustee”) to hold a security interest in the home pending full payment of the promissory note. When the note is paid in full, the beneficiary sends a notice to the trustee instructing the trustee to file a reconveyance of the security interest. If the note is not paid off, or the payments become delinquent, the trustee is sent instructions to foreclose.

THE LAW

The process for foreclosure is contained in the California Civil Code, starting at Section 2920. Further, there have been many, many appellate court cases which have explained some of the terms in this section of the Code.

THE FORECLOSURE PROCESS

    A mortgage can be “in default” any time a payment is not made on a timely basis. Most lenders will wait until a mortgage is several months late before starting foreclosure. Most mortgages contain grace periods. However, any time a mortgage is in default, the bank can foreclose. At that time, the beneficiary (the bank) instructs the trustee (the third party) to initiate foreclosure proceedings.

The foreclosure procedure takes a minimum of 111 days. 

    The first step is for the trustee to file a Notice of Default. This is typically called the “NOD.” The NOD is recorded and remains in place for 90 days. If the loan is not brought current or some resolution made, the trustee then files a Notice of Sale. This is called the “NOS.” The NOS sets a sale date, or auction date, for the property. 

    The sale date must be at least 21 days from the date of the filing of the NOS. This is why it takes at least 111 days (90 days + 21 days) to completely foreclose on property. The sale is publicized and the public is invited to show up and bid on your property. If there are no successful bidders, the bank will then take the property back and own it at that time. The result is that you end up living in property you no longer own. Normally, the new owner will then begin eviction proceedings against you. When they obtain a judgment, which can take as little as 2-3 weeks, a Marshall or Sheriff can come to the house and remove you and your possessions. 

    Because the NOD and NOS are recorded with the County Recorder, they are a matter of public record. This is why people going through foreclosure get so many letters in the mail. Many individuals and businesses obtain this public information and send out solicitation letters offering help. Be wary of the many solicitations which are sent to you. While many of these are sent to you by well-meaning attorneys, Relators, or mortgage brokers, many are scams. If something seems too good to be true, it probably is. The newspapers are full of stories about scam artists who prey upon people going through a difficult time in foreclosure.

FORECLOSURE IMPLICATIONS

    1.  Credit Reporting. The foreclosure proceeding (even the NOD) will be reported on your credit report. A foreclosure is among the worst things that a person can have on their credit report. A foreclosure will make it difficult for a person to get loans or even rent a house for several years. Clearly, it is not impossible to obtain these kinds of loans or rent property. There are thousands and thousands of people that go through foreclosure in Los Angeles County alone on a yearly basis. All of these people have gone on to very productive and rewarding lives. However, a foreclosure does make it more difficult. 

    2.  Deficiency Liability. California law provides that a bank that forecloses using its private power of sale (that is not exercising its foreclosure remedies through the courts) cannot seek anything more against the former homeowner than ownership of the property. That is, in a traditional scenario, there is no such thing in California as “deficiency” liability. This is not the rule, however, for a “sold out” junior mortgage. For example, if the holder of a second deed of trust forecloses, they sell the property at their foreclosure sale subject to, or including, the first deed of trust. This means that the buyer of the property must also take over the first mortgage. However, if the first mortgage holder sells the property at a foreclosure sale, the second mortgage holder is “cut off” or “sold out.” As such, they no longer have a security interest against the house. Unfortunately, they do have the right sue the former property owner for repayment of the debt. 

    3.  Tax implications. There are also potential tax ramifications arising out of the foreclosure. The realization of capital gains is an issue which should be discussed with your accountant, although recent changes in the tax laws have made this less of an issue. Also, there may be some issues which arise as a result of the foreclosure relating to forgiveness of indebtedness and forgiveness of indebtedness income. Be sure to discuss these issues with your tax advisor prior to a foreclosure sale occurring.

SOLUTIONS

    There are many ways to attempt to resolve a potential foreclosure situation. However, it cannot be emphasized enough that any of these actions need to be taken early on in the process. The deeper into the foreclosure process one gets, the fewer options they have. 

    1. Pay the delinquent amount. The first solution is, obviously, to repay the delinquent portion of the loan. The California Civil Code provides that the total amount which is delinquent can be paid at any time up to five business days prior to the date first scheduled for the foreclosure sale. Many lenders will even accept payment during that last five-day period, but don’t rely on it. The amounts which must be repaid is all of the delinquent payments, plus late fees, plus any interest due, plus any foreclosure fees and associated costs. You can contact the trustee who will tell you the full amount necessary to cure the default.

    2. Negotiate. Another alternative is to attempt to negotiate some type of repayment with the lender. Sometimes, a payment or two can be put on the back of the loan. However, any negotiation is solely at the discretion of the lender. Many people ask whether a lender will reduce the total amount due or permanently reduce the monthly payments. While anything is possible, these are the least likely things that a lender is typically inclined to do. However, in light of the recent downturn in the economy and falling property values, lenders might be more inclined to discuss a modification of the mortgage. 

    3. Sell. Another solution is to sell the property. If escrow is closed on the property prior to the foreclosure, no foreclosure can occur because a closed escrow means that the loan has been paid in full. If you have equity in the property, this may be a good solution as it will allow you to get your equity out of the property and put it in your pocket. If the property is upside down (that is, more is owed than the property is worth), you still may be able to sell the property by doing a “short sale.” This means that the lender voluntarily agrees to accept less than the full amount due. A lender may agree to go along with a short sale as it is usually better for them to have their money now as opposed to going through foreclosure and then reselling the property as this could take many months. If you choose this solution, you should choose a real estate agent who has experience in short sales. If you like, we can certainly recommend one or two Relators to you. Choosing a Relator experienced in short sales will return  and some dividends later on down the line.

     4. Chapter 7 bankruptcy. Many think that another alternative is to file a Chapter 7 bankruptcy. Chapter 7 involves a total liquidation of a persons unsecured debts. However, a Chapter 7 bankruptcy will not solve a foreclosure problem. Rather, it will only serve to stall it for a short period of time. We very rarely recommend Chapter 7 in a situation where a property is in foreclosure and the homeowner wants to keep the property.

     5. Chapter 13 bankruptcy. Another alternative is to file Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, any delinquent amounts can be repaid over a three or five year period. The lender has no choice but to accept this repayment plan. Of course, any mortgage payments which become due after the filing of the Chapter 13 bankruptcy proceeding must also be paid. If a person has the financial ability, this is a wonderful way to require a lender to take a repayment over period of time.

     6. Let it go. Lastly, you can simply choose to let the property go to foreclosure. You have the opportunity to live in the property, free of charge, up to the time of the foreclosure sale. This is because you own the property up to that point in time. After the foreclosure sale, you may be facing eviction proceedings and could be charged a reasonable rate of rent during that period of time. It is for this reason that we usually advise clients to vacate the house about the time of the sale, if it is their choice to let it go.

CONCLUSION

    Foreclosure is an extremely serious matter. A lender can sell your home in a very short period of time. It is for this reason that some action needs to be taken immediately when a Notice of Default is filed on your property. The worst thing that you can do is delay. It becomes much more difficult to resolve these problems the further on that the foreclosure process proceeds.