Foreclosure Avoidance Handbook in California

Frequently asked foreclosure questions in California

What are the statutes that govern California foreclosures?

The California Civil Code specifically Section 2924 et seq. and the Anti Deficiency Statute found in the California Civil Procedure Section 580 (b) while (a) is the deficiency judgment rule.

In addition, the President signed into law H.R. 3221, “American Housing Rescue and Foreclosure Prevention Act” or otherwise known as the “Housing and Economic Recovery Act of 2008.” The Foreclosure Consultant Law which was passed recently seeks to regulate and prescribe the proper conduct of foreclosure consultants or those who “who makes any solicitation, representation, or offer to any owner to perform for compensation or who, for compensation, performs any service which the person in any manner represents to stop foreclosure or postpone it, obtain forbearance, or in any manner assist the owner for a fee. This new foreclosure law will come into effect on July 1, 2009. The law requires consultants to be certified by the state and prohibits them from being appointed under a power of attorney. After certification, the consultants are required to secure a $100,000 corporate surety bond to answer for liabilities as well as have a written documentation of each procedure in accordance with the new guidelines. Upfront fees are proscribed. This law enacted to discourage and curb the practice of foreclosure swindling.

Are there other laws that are related to foreclosures?

The California Residential Mortgage Lending Act (CRMLA) which came into effect in 1996. This law is limited in its application as its provisions and requirements can only be applied within the state of California. Under the law, only those with license obtained under CRMLA can engage in the business of making or servicing residential mortgage loans within California. The law was intended to regulate mortgage banking activities. Before obtaining a mortgage loan in California be sure that the banker or lender is licensed under the CRMLA.

One distinct characteristic of this law is that it allows the licensed broker to obtain a mortgage from another licensed lender. This lends ease in securing an unbiased loan for the borrower.

The Civil Code provision of the Real Estate Act which fixes variable interest rates for purchase of real estate and in case of large amounts of mortgage, the law establishes a fixed rate mortgage. The law also punishes brokers who fail to comply with the terms of the mortgage loan with respect to disbursements of funds as well as in cases where the broker delays the closing to be able to charge more fees. The broker however who is licensed under the CRMLA is exempt from such violation considering that other offenses are provided under that law.

The state of California also enacted the Predatory Lending Act in 2000 but had been subject of numerous revisions to be in keeping with the modern lending crimes as well as frauds. It covers consumer loans secured by one-to-four unit residential properties used or intended to be sued as a principal place of dwelling of the consumer. It does not cover consumer loans, credit transactions secured by a rental property or a second home. It would be wise to read the 17 prohibitions so that you would be fully apprised of the specified limitations and prohibitions.

How are mortgages in California foreclosed?

There are two types of foreclosures in California, i.e. non-judicial and judicial foreclosures. California is a trust deed state instead of a ‘mortgage’ state. Thus, parties to a trust are called trustor (borrower), beneficiary (lender) and the trustee. The non-judicial foreclosure is one which does not involve the courts and is based upon the title theory which holds that the title to the property is held by the lender until such time when the loan is paid in full. The mortgage consists of a trust deed that effectively transfers ownership from the seller to the lender. This grants the lender or his trustee the right to foreclose the property in case of default in payments. This is possible because the deed of trust or mortgage contains a power of sale clause. The power of sale clause grants the lender or his trustee the power to sell the property in an auction to satisfy the obligation.

The judicial foreclosure as the name implies is a foreclosure conducted by the court as a proceeding wherein it issues a final judgment of foreclosure. Judicial foreclosure is usually resorted to when the deed of trust fails to provide or does not contain the power of sale clause in the mortgage. The property, after the issuance by the court of the final judgment of foreclosure shall be sold as part of a publicly noticed sale. The complaint shall be filed in the county court with a notice of lis pendens. This notice of lis pendens is a recorded document which serves as a public notice that the property is being foreclosed.

How is non-judicial foreclosure done?

1. It starts when the lender causes the recordation of the Notice of Default in the county records office of the county where the property is situated. This Notice of Default must be served on the borrower and other recorded lien holders. The Notice should state the amount of the debt owed with the information that if the amount remains unpaid, the lender shall force a sale on the property. The deed of trust contains the details on when the lender should consider the non-payment as default as well as when foreclosure proceedings will be initiated.
2. After the Notice is recorded, the borrower has only ninety (90) days until the lender issues a Notice of Trustee Sale in the recorder county’s office.
3. A Trustee Sale is a public sale auction where the property is sold to satisfy the delinquent amount on the mortgage. The Notice of Trustee Sale shall be posted on the property to be sold, another shall be posted at a public place in the county where the property is located and published in a newspaper of general circulation not later than twenty (20) days before the foreclosure sale. It must be mailed by certified, return receipt requested, to the borrower at least 20 days before the sale. The Notice shall specify that date, place and time of the sale, and the unpaid amount of the mortgage.

The sale may be held on any business day between the hours of 9:00 am and 5:00 pm and must take place at the location specified in the notice of sale. The trustee may require proof of the bidders’ ability to pay their full bid amount. Anyone may bid at the sale, which must be made at public auction to the highest bidder. If necessary, the sale may be postponed by announcement at the time and location of the original foreclosure sale.

After the Notice of Sale is recorded, can I still save my home from foreclosure?

Yes. You can stop the foreclosure at anytime up until 5 days before the date of the foreclosure sale by paying the entire amount of the mortgage as well as the late fees and attorney fees.

However, if you cannot pay the deficiency amount of the mortgage, the following resorted to:

• Special forbearance- The lender may grant you a period of time to be able to make out a plan for repayment. He may suspend payments or grant reductions in the payments. This is also known as forbearance. But you need to show and prove financial difficulty as well as your ability to make payments under the new proposed scheme.
• Mortgage modification- The lender may also increase the loan balance by including back payments and re-amortize the loan. Again you need to show proof that you can meet the payments set out in the new plan.
• Short sale- when you sell your home for an amount less than the amount of your loan owed on the mortgage This is also known as pre-foreclosure redeemed. This affects your credit but not as bad as a foreclosure. You may qualify under this alternative if your loan is at least two (2) months delinquent; you are able to sell your home within three (3) to five (5) months; and that the new appraisal from your lender qualifies under HUD program guidelines.
• Deed-in-Lieu of Foreclosure-Deeding the home back to the lender by handing him a notarized deed in lieu of foreclosure. This has the effect of terminating the mortgage and foreclosure by giving back your home to the lender. This is not as damaging to your credit as foreclosure. You may only chose this alternative if you are in default and you do not qualify for the other alternatives; your efforts failed in selling your home and you do not have another FHA mortgage in default.

In addition, you should always negotiate on your right to retain possession and occupancy by arguing that if lender insists on foreclosure, you will still have the right to occupy and stay in your home during the proceedings.

If the property was sold at a public auction and the amount is less than the amount of what is owed; can the lender still collect the remaining balance?

No. Deficiency judgment cannot prosper in California. The lender would have to take the proceeds of the sale of the property as a full satisfaction of the amount owed and the borrower has no right of redemption.

Clearly, lender chooses to foreclose using the non judicial process when the sales proceeds will pay the entire loan or when the loan was a purchase-money loan. Most often the lender prefers non judicial process because of its convenience and immediacy of the results unlike in a judicial process which usually take a year or so depending on the complex issues raised. Moreover, the other advantage of non judicial process is the fact that the buyer of the property takes it as its owner, free from any lien or other subordinate lien to the deed of trust under which the foreclosure has been conducted.

How is judicial foreclosure done?

California is primarily a non-judicial foreclosure state. It is quite rare for parties to opt for judicial foreclosure. Judicial foreclosure like any lawsuit, involves filing of a complaint, service of process, filing of responsive pleadings, discovery, motions, trial and appeal.

Judicial foreclosure is initiated with a complaint prepared by a lawyer and filed with the county clerk and is served on all the parties concerned. A deed or document is recorded known as lis pendens. It is usually a notice to the entire world that the real property shall be subject to the outcome of the lawsuit. This makes the property almost impossible to market. The jurisdiction for foreclosure cases is vested in the Superior courts in California.

In drafting the complaint, the lawyer secures a foreclosure guarantee report or a ‘Litigation Guarantee’ from a title company. This title report lists the persons who should be included or named in the lawsuit. Thus, if your name is on the title but you are named in the lawsuit, then the outcome will not affect your interests. Similarly the lien of a junior lien holder will not be affected if he is not named in the suit because his lien remains to be attached to the property. In the case of spouses, if only one spouse is named and the other is not, then the interest only of the spouse who was named is the subject of foreclosure.

After filing the complaint before the court, the notice of lis pendens is recorded. There is a court date of hearing set for the sale of the property. The loan can be reinstated by paying the arrears and interest until the time when the court renders its judgment. And if the mortgage is contested, it usually takes so much time before the court issues a judgment which means that the homeowner has the time to cure the default by paying. There will be resolution of issues raised by the parties such as the amount of debt, existence of default, and other issues that may be material to the foreclosure. The court will conduct hearings to determine the issues and shall declare foreclosure and issue a judgment for the property to be sold in a public auction. The lender is entitled to a writ of sale. Should the complaint be uncontested, it may only take a couple of months (contested complaints usually take 12 to 18 months or even longer depending on the issues to be litigated) and a default judgment shall be issued by the court.

The property is sold at a public auction and is awarded to the buyer who is the highest bidder and who pays cash. The buyer then receives the certificate of sale. The period of statutory right of right redemption begins and after the lapse of a year and such right is not exercised, the Sheriff’s deed conveyed to the buyer gives the new owner now to evict the borrower.

Is the borrower entitled to a right of redemption?

Yes. The right of redemption is available after the sale made by the sheriff of the property. This requires full payment of the outstanding loan amount, interests and other charges one (1) year after the foreclosure unless the original lender made a full price bid then the period is shortened to three (3) months. It is not often resorted to because it requires full payment and the right to reinstate the loan is reckoned from the time of judgment.

The ninety (90) day period after recordation of the notice of default, within which default may be cured, although referred to as redemption period is not the true statutory redemption. The junior lien holders are not allowed to redeem. If the deficiency judgment is waived or prohibited at the time which makes it impossible to exercise the right of redemption, then there is no statutory right of redemption.

Can there be deficiency judgment in a judicial process of foreclosure?

It depends. Should the lender not seek a deficiency judgment then the sheriff’s sale is final. There is no redemption period and the sheriff issues a deed to the purchaser. However, should the lender seek for a deficiency judgment then the buyer would only receive a certificate of sale. The redemption [period can be shortened if the winning bid turns out to be in excess of the loan amount.

What are the rules which characterize the foreclosure of mortgages in California?

• Purchase Money Rule-When you borrow money from a lender to purchase or buy a home which you originally moved into and stayed as your primary residence and you defaulted, the lender has no other recourse but to foreclose the mortgage. Should the proceeds of the sale be insufficient to cover the loan, the lender cannot recover the difference. This also covers second mortgages used in 80/20 100% financing deals.This rule shall not apply when these loans are refinanced or which was paid by HELOC and drew down it again.
• One Action Rule-The lender may only choose one option in taking against the borrower. There are only two options available: judicial or non-judicial foreclosure. Should the lender opt for non-judicial process of foreclosing the property, if the proceeds of the sale is insufficient to cover the loan; the lender cannot collect the difference anymore. However, in judicial foreclosure the lender can collect the difference. Judicial foreclosures are almost inexistent because it is inconvenient and more costly for the lender to opt for this recourse. However, if the security of a lender is wiped out, the junior lender may recover a deficiency judgment because he has not exercised his one action. This is usual on second mortgages used to remodel kitchens and bathrooms.
• Cancellation of Debt Rule-Taxes are imposed by the IRS and by the state of California on the amount of debt that is cancelled in any given tax year. There is cancellation of debt when the lender has given up his right to enforce the loan or when the lender is barred by law from collecting.
• Bankruptcy and Insolvency Exception-The debt is excluded by the IRS and California from income to the extent that it is cancelled in bankruptcy or insolvency.

Can you cite and explain the defenses which a homeowner can use as a defense against foreclosure of mortgage?

Each case of foreclosure has different attendant facts and therefore requires different types of defenses. The following may be used as defense depending on the circumstances obtaining in your case.

• In the case of a subprime-rate borrower, one should look into all the material information as specified in the advertising and other information supplied to you before you signed your mortgage. Specifically look for false and deceptive statements on which you relied on in giving your assent to the mortgage.
• Find out if there are promises and guarantees which were not fulfilled. These should not be limited to written promises. Recall if there were non-written statements made prior to signing the mortgage.
• A defense that the lender extended the loan knowing fully that the borrower had no capacity to repay.
• Existence of a ‘kicker’ or when there is intent to cause the borrower inability to pay or fulfill his responsibilities under the loan so that the lender or its assignees can have recourse over the property and still go after the borrower. This is usually a hidden asset for the benefit of the lender.
• Review and analysis of state and federal laws that may have been violated.
• Selling the loan to entities without informing or disclosing this fact to the borrower.
• Look to see if there are technical rules of procedure that the plaintiff may have ignored or not complied with. Most often requirements on the service of the complaint, summons and/or the Notice of Lis Pendens are not complied with.
• The following laws may be reviewed to see if there are violations: : (i) California Unfair Practices Act, §§ 17000, et seq. [§ 17045] of the Business and Professions Code – Secret Rebates Injuring Competition]; (ii) California Consumer Legal Remedies Act, §§ 1770(a).
• Check for violations in banking laws both state and federal.

Are there instances when resort to courts can be allowed?

There are three (3) instances when judicial recourse can be made:

1. Declaratory judgment action-When the homeowner is not in default, he may file a declaratory judgment action to declare the mortgage and the note as invalid or that the terms are not properly set forth. This is similar to a regular foreclosure of mortgage where the homeowner raises his defenses but here, claims or causes of action are raised.
2. Injunction with TRO and Preliminary Injunction-When the homeowner is in default, the foreclosure is bound to take place quickly. The threatened sale can be stopped or enjoin with this action. However, this action is costly considering the time to prepare the legal papers would be shorter but if the facts are favorable to the homeowner then this action is certainly most effective especially in cases of oppressive lending practices.
3. Wrongful foreclosure action-When the property has been foreclosed and sold, the homeowner may bring an action for wrongful foreclosure. This may be based on tort, breach of contract or violation of a statute. The homeowner may be awarded monetary damages after proof of the same.

The Court Forms are available online.

By Kevin Levonas and Giselle G.