When borrowers are unable or unwilling to repay their real estate loans, creditors take action to regain their losses. After all collection attempts are drowsy, lenders foreclose on the defaulted loans and pay off the properties to the highest bidders. Under California law, defaulting borrowers can reinstate their loans as many as five days prior to the foreclosure sale and may, under certain circumstances, redeem, or buy back, their properties after the sale.
In the event a mortgage or a deed of trust doesn’t incorporate a”power of sale” clause, a creditor will sue the defaulting borrower to obtain a court-ordered foreclosure. In California this is a rare occasion that typically only happens with private celebration lending where loan records might not be as detailed as people with commercial lenders. The suit to foreclose may also incorporate a”deficiency judgment” under which the debtor has been prosecuted individually for the lack of cash between the house’s fair market value and the balance of the loan. Judicial foreclosures require longer and cost more money than non-judicial ones and are seldom used by California lenders.
Mortgages and deeds of trust generally include things like power of sale clauses that contractually authorize creditors to waive defaulted loans and to market the properties to recoup their losses. Since power of sale clauses are regulated by California’s contract law, lenders do not need court approval for these non-judicial foreclosure sales, and they move fast within state-mandated timelines to complete the procedure.
California’s One Action Rule
California is a”one-action” rule condition wherein the creditor must carefully select which single action he will take against the defaulting borrower. If he forecloses out of court under the jurisdiction of the power of sale clause, the creditor has selected the one allowable action against the borrower. If the foreclosure sale comes short of the money owed to the loan, the creditor is prohibited from suing the borrower for a default decision. To protect themselves from such shortfalls, creditors will bid the exceptional balance themselves with the expectation that a third party will outbid them. In the event they win the bid, the land becomes known as an REO (Real Estate Owned by the creditor ) land that they then hope to sell to the open real estate industry.
California’s Foreclosure Timeline
The foreclosure procedure is characterized by California civil code 2924 and starts with the filing of a Notice of Default (NOD) with the county recorder. Within 10 business days, the trustee of the deed of trust emails the NOD and the filing date to the defaulting borrower. A follow-up NOD is sent to the debtor within 30 days. After 90 days the sales date, time and location are set unless the debtor has filed for bankruptcy, in which case the timeline is held for further legal action. The IRS is advised prior to the event at least 25 days of the sale. Twenty days before the sale public notices are printed in adjudicated newspapers and operate for three consecutive weeks. Concurrently, a Notice of Sale (NOS) is submitted on the property and delivered to the debtor and all related parties. The NOS is subsequently listed in the county recorder’s office 14 days prior to the sale. Five days prior to the event, the borrower’s Right of Reinstatement expires and the land has been sold to the maximum bidder.
Right of Redemption
Under civil processes 729.010 through 729.090, the right of redemption may only be resolved by a defaulting debtor in the event the land was sold via the judicial foreclosure procedure; there are no redemption rights after non-judicial foreclosures. To redeem the property, the prior owner has to pay the new owner the amount tendered in the foreclosure sale and interest. When there wasn’t a lack to pay back the loan in the foreclosure sale, the redemption period was set for three months. If, however, a lack was listed, the borrower could be given up to one year to pay the deficiency to the creditor and to redeem the land from the owner. Throughout the redemption period the owner doesn’t like whole possession and might possess it”set aside” in favor of the former owner’s redemption rights.