Before the foreclosure crisis, federal and state laws regulating mortgage servicers and foreclosure procedures were relatively limited and tended to favor foreclosing lenders. However, federal and state laws now heavily regulate loan servicing and foreclosure processes. Most of the laws give protections to borrowers. Servicers generally have to provide borrowers with loss mitigation opportunities, account for each foreclosure step, and strictly comply with foreclosure laws.
Also, most people who take out a loan to buy a residential property in California sign a promissory note and a deed of trust, which is like a mortgage. These documents give homeowners some contractual rights in addition to federal and state legal protections.
If you're a California homeowner behind in mortgage payments, learn about each step in a California foreclosure, from missing your first payment to a foreclosure sale. That way, you can make the most of your situation. You might be able to work out a way to save your home or at least get through the process with as little anxiety as possible.
In a California foreclosure, you'll most likely get the right to:
The period after you fall behind in payments, but before a foreclosure officially starts, is generally called the "preforeclosure" stage. (Sometimes, people refer to the period before a foreclosure sale happens as "preforeclosure," too.)
During this time, the servicer can charge you various fees, including late and inspection fees, and, in most cases, must inform you about options to avoid foreclosure, and send you a breach letter (a preforeclosure notice).
Under federal law, the servicer usually can't officially begin a foreclosure until you're more than 120 days past due on payments, subject to a few exceptions. (12 C.F.R. § 1024.41). This 120-day period provides most homeowners with ample opportunity to submit a loss mitigation application to the servicer.
If you default on your mortgage payments in California, the lender may foreclose using a judicial or nonjudicial method.
A judicial foreclosure begins when the lender files a lawsuit asking a court for an order allowing a foreclosure sale. If you don't respond with a written answer, the lender will automatically win the case.
But if you choose to defend the foreclosure lawsuit, the court will review the evidence and determine the winner. If the lender wins, the judge will enter a judgment and order your home sold at auction.
If the lender chooses a nonjudicial foreclosure, it must complete the out-of-court procedures described in the state statutes. After completing the required steps, the lender can sell the home at a foreclosure sale.
Most lenders opt for the nonjudicial process because it's quicker and cheaper than litigation in court.
Again, most residential foreclosures in California are nonjudicial. Here's how the process works.
California law requires that your servicer personally contact you or meet specific requirements for trying to contact you by phone or in person at least 30 days before recording a notice of default (see below). The purpose of the contact is to assess your financial situation and explore options to avoid foreclosure. (Cal. Civ. Code § 2923.5).
During the initial contact, the servicer must advise you that:
The assessment of your financial situation and discussion of options may occur during the first contact or subsequent meeting. Either way, the servicer must also provide you with the toll-free telephone number to find a HUD-certified housing counseling agency.
If the servicer isn't able to get in contact with you, it can't record the notice of default until 30 days after it has done all of the following:
These outreach requirements are applicable to first lien mortgages or deeds of trust secured by owner-occupied residential real property containing no more than four dwelling units.
But the servicer doesn't have to contact you—or attempt to contact you—to assess your financial situation and explore options to avoid foreclosure if you notify the servicer in writing to cease further communication with you.
California law bans dual tracking. If you submit a complete first lien loan modification application (assuming you didn't previously apply for a modification or you've had a material change in your financial circumstances since your previous application) at least five business days before any scheduled foreclosure sale, the servicer can't proceed by recording a notice of default or notice of sale, or conducting a trustee's sale until:
The nonjudicial foreclosure process formally begins when the trustee records a notice of default at the county recorder's office. The notice of default includes information like the nature of the breach and how to cure it.
Within ten business days of recording, the trustee mails a copy of the notice of default to the borrower and anyone requesting such notice. Within one month, the trustee mails a copy of the notice of default to any other interested parties, like the borrower's successor in interest and junior mortgage holders, among others. (Cal. Civ. Code § 2924b).
The notice of default gives the borrower three months to cure the default. (Cal. Civ. Code § 2924).
If you don't cure the default, a notice of sale will be recorded. It can be recorded up to five days before the end of the three-month period. The notice of sale will contain the time and place of the sale, along with other information, like the property address. The foreclosure sale date must be at least 20 days after the end of the three months. (Cal. Civ. Code § 2924).
The notice of sale will be:
The foreclosure sale must be held between 9:00 a.m. and 5:00 p.m. on any business day, Monday through Friday. (Cal. Civ. Code § 2924g). At the sale, the lender usually makes a credit bid. The lender can bid up to the total amount owed, including fees and costs, or it may bid less.
In some states, when the lender is the high bidder at the sale but bids less than the total debt, it can get a deficiency judgment against the borrower. Deficiency judgments usually aren't allowed in California (see below).
If the lender is the highest bidder, the property becomes "Real Estate Owned" (REO). But if a bidder, say a third party, is the highest bidder and offers more than you owe, and the sale results in excess proceeds (that is, more money than what will pay off all the liens on your property), you're entitled to that surplus money.
A few potential ways to stop a foreclosure and keep your home include reinstating the loan, redeeming the property before the sale, or filing for bankruptcy. Or you might be able to work out a short sale or deed in lieu of foreclosure and avoid a foreclosure. But you'll have to give up your home.
One way to stop a foreclosure is by "redeeming" the property. To redeem, you have to pay off the full amount of the loan before the foreclosure sale.
Some states also provide foreclosed borrowers a redemption period after the foreclosure sale, during which they can buy back the home. However, California law doesn't give borrowers a statutory right of redemption after a nonjudicial foreclosure. Once your California home has been foreclosed nonjudicially, you can't redeem it. (If the foreclosure is judicial, you might get a post-sale right of redemption.)
If you're facing a foreclosure, filing for bankruptcy might help. In fact, if a foreclosure sale is scheduled to occur in the next day or so, the best way to stop the sale immediately is by filing for bankruptcy.
Once you file for bankruptcy, something called an "automatic stay" happens. The stay functions as an injunction, prohibiting the lender from foreclosing on your home or trying to collect its debt, at least temporarily.
In many cases, filing for Chapter 7 bankruptcy can delay the foreclosure by a matter of months. Or, if you want to save your home, filing for Chapter 13 bankruptcy might be the answer. To find out about the options available, speak with a local bankruptcy attorney.
The borrower's total mortgage debt sometimes exceeds the foreclosure sale price in a foreclosure. The difference between the total debt and the sale price is called a "deficiency."
For example, say the total debt owed is $600,000, but the home sells for $550,000 at the foreclosure sale. The deficiency is $50,000. In some states, the lender can seek a personal judgment against the debtor to recover the deficiency. Generally, once the lender gets a deficiency judgment, the lender may collect this amount—in our example, $50,000—from the borrower.
A deficiency judgment isn't allowed following a nonjudicial foreclosure in California. (Cal. Code Civ. Proc. § 580d). Because residential foreclosures are usually nonjudicial, most Californians going through foreclosure don't have to worry about being on the hook for a deficiency judgment.
If you don't vacate the property following the foreclosure sale, the new owner will probably:
The eviction process starts with a three-day notice to quit. If you still don't leave after the three-day period expires (excluding Saturdays, Sundays, and other judicial holidays), the new owner will go through the court system to evict you and get possession of the property.
For more information on federal mortgage servicing laws and foreclosure relief options, go to the Consumer Financial Protection Bureau (CFPB) website.
If you have questions about California's foreclosure process or want to learn about potential defenses to a foreclosure and possibly fight the foreclosure in court, consider talking to a foreclosure attorney. It's also a good idea to talk to a HUD-approved housing counselor to learn about different loss mitigation options.