HOW ARE MORTGAGE LIENS TREATED IN CALIFORNIA?
California is known as a title theory state where the property title remains in trust until payment in full occurs for the underlying loan. The document that secures the title is usually called adeed of trust but may also be referred to as a mortgage. California has a complicated set of rules concerning foreclosures and alternate rules for foreclosures; it is generally a consumer friendly state.
HOW ARE CALIFORNIA MORTGAGES FORECLOSED?
The primary method of foreclosure in California involves what is known as non judicial foreclosure. This type of foreclosure does not involve court action. When the deed of trust is initially signed, it will usually contain a provision called a power of sale clause, which upon default allows a trustee to sell the property in order to satisfy the underlying defaulted loan. Thetrustee acts as a representative of the lender to effectuate the sale, which typically occurs in the form of an auction. Unlike many states where trustees are appointed by lenders, title companies primarily serve as trustees managing foreclosure sales in California. California has a requirement known as the one action rule. If a foreclosure is completed by non judicial means, a second action to recover a deficiency judgment is not permitted. Using a judicial foreclosure, a lender may recover a deficiency judgment in certain circumstances. But since this process takes longer than non judicial foreclosure, it is rarely used. California non judicial remedies have stringent notice requirements and the mortgage documents are required to contain thepower of sale language in order to use this type of foreclosure method. Judicial foreclosure are permitted in California and these usually occur when no power of sale language is included in the loan documents.
POWER OF SALE NOTICE REQUIREMENTS:
1. A notice of default is recorded after a default occurs in the county in which the property is located. This does not necessarily occur after one or more payments are not met but for logistical reasons may occur after a loan is in substantial default — sometimes six months or more past due. This is known as the redemption period. The foreclosure process does not move forward for a minimum of 90 days. A notice of sale containing the name and address of trustee, certain disclosures (including that the property is about to be lost to foreclosure sale), the name of thebeneficiary, and other information must be recorded in the county in which the property is located at least 14 days before any foreclosure sale after that time period. This is known as the publication period.
2. The borrower must receive a twenty (20) day notice before any foreclosure sale, further notice of the foreclosure must: (a) mailed to the defaulting borrower (and other creditors whose liens affect the property) and; (b) be posted at the property being foreclosed upon and in a public place in the county where any sale would occur. The defaulting borrower may prevent the foreclosure sale by paying all arrearages up to five (5) days before the sale. Of course, one can always stop the sale of the property by filing for Bankruptcy prior to the sale.
The trustees' foreclosure sale then occurs at the earliest twenty one (21) days after the first publication.
3. Foreclosure sales must take place on any business day between the hours of 9AM and 5PM and must occur at the location referenced on the notice of sale. The trustee will auction the property to the highest bidder, including the lender. The borrower is permitted to postpone the sale for one (1) day.
In California, the lenders can also go to court in what is known as a judicial foreclosure proceeding where the court must issue a final judgment of foreclosure. If the deed of trust does not contain the power of sale language, the lender may seek judicial foreclosure. The property is then sold as part of a publicly noticed sale. A complaint is filed in county court along with what is known a lis pendens. A lis pendens is a recorded document that provides public notice that the property is being foreclosed upon. The debtor then becomes a defendant with all the rights to defend against the judicial foreclosure in court. One should seek the advice of an attorney if they are served with a summons and a complaint for a judicial foreclosure.
WHAT ARE THE LEGAL INSTRUMENTS THAT ESTABLISH A CALIFORNIA MORTGAGE?
The documents are known as the deed of trust, note, and in a commercial transaction, a security agreement. Sometimes the mortgage document is combined with the security agreement. Alternatively, a mortgage is filed to evidence the underlying debt and terms of repayment, which is set forth in the note.
HOW LONG DOES IT TAKE TO FORECLOSE A PROPERTY IN CALIFORNIA?
Before the property can be sold, the debtor must first be served with what is called a Notice of Default.
There is no set time for the lender to send this to the debtor.
This does not necessarily occur after one or more payments are not met but for logistical reasons may occur after a loan is in substantial default — sometimes six months or more past due.
After the Notice of Default is served on the debtor then not less than 90 days shall elapse prior to the lender giving the debtor Notice of the Sale Date. Of course, this doesn't mean that all sales happen this quickly.
They may be delayed for various reasons, such as, the debtor and the loan company are trying to work out a loan modification, delay in sending out the Notice of Default, and Bankruptcy to name a few.
IS THERE A RIGHT OF REDEMPTION IN CALIFORNIA?
California has a complicated statutory right of redemption after the foreclosure sale has occurred, which would allow a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs one (1) year after foreclosure sale unless the original lender made a full price bid then that period is shortened to three (3) months. A borrower does have ninety (90) days after the recordation of a notice of default to cure any default and this is commonly referenced as the redemption period although it is not a true statutory redemption. Junior lien holders cannot redeem. There is no statutory right of redemption if a deficiency judgment is waived or prohibited at the time of which effectively negates any possibility of a redemption occurring in the scenario noted above.
ARE DEFICIENCY JUDGMENTS PERMITTED IN CALIFORNIA?
The short and quick answer is usually no.
California is one of the few, if not the only state to have what is commonly referred to as the "anti-deficiency" statute.
Normally, a deficiency judgment may not be obtained when a property in foreclosure is sold through a non judicial public sale or if the foreclosure relates to a purchase money mortgage. This rule usually also applies to refinancing.
However, there are certain circumstances which could allow it. For example: let's say one buys a home for $500,000.00 and obtains a loan for $450,000.00.
Later, they refinance it and the new loan is for $500,000.00.
They use the $50,000.00 to remodel the kitchen for $25,000.00 and buy a new car for $25,000.00.
The house is then sold in foreclosure for $400,000.00.
Thus, the lender can only obtain a deficiency judgment for the $25,000.00 not used to benefit the house.
In addition, a 2nd deed of trust or line of credit can always sue to get their money.
