How long before they take my house? is the worried question put by a homeowner in California who can’t make their mortgage payment.
There are two answers, each equally true: California statutes tell us the minimum time for an unpaid lender to foreclose: about 4 months, from start to sale.
In practice, it’s far longer.
Since the mortgage meltdown in 2008, lenders very seldom move a foreclosure as fast as the law allows.
Statistics on new foreclosures in the first quarter 2014 suggest that on average, homeowners in California had missed 18 payments before foreclosure was started!
And once foreclosure was started, with the recordation of a formal notice of default, another 429 days elapsed, on average, before the foreclosure sale.
So, the answer to the question of “how long before they take my house” is, effectively, “not anytime soon.”
How California foreclosure works
When you borrow money and use your house as collateral, you sign a deed of trust. The deed of trust gives the lender the rights of a secured creditor in your house.
The deed of trust contains a clause called a “power of sale” which entitles the holder of the note to sell the house at a foreclosure sale outside of court. In this way, a California foreclosure is different from judicial foreclosures in other states where the courts are involved in foreclosure.
In judicial foreclosures, the standing of the foreclosing creditor can become an issue in the foreclosure process.
In California, the power of sale in the deed of trust allows foreclosure without the involvement of the courts.
California statutory law provides for two steps in the foreclosure process before the lender can sell the house on the courthouse steps.
Notice of default
The creditor’s first statutory step is to record a Notice of Default. The NOD must be mailed to the borrower as well as recorded with the county.
The NOD sets out the amount of the arrearage on the loan and gives the borrower 90 days from recordation to pay the arrears and any costs incurred by the lender in initiating the foreclosure process.
Payment of all delinquencies and the costs incurred in connection with the foreclosure reinstates the loan in good standing and ends the foreclosure process.
The second statutory step is to provide the borrower with a Notice of Sale, fixing the date the foreclosure sale will take place. Foreclosure sales are typically conducted on the steps of the county courthouse.
To keep the property, the borrower must then pay the full amount owed on the loan, or reach some other deal with the lender.
Lenders can file a notice of sale just as soon as the 90 day reinstatement period runs. But often there is a significant interval between the two steps.
A noticed sale can be continued orally by the auctioneer at the time and place set for a sale. No new notice of the continued sale needs to be published.
The foreclosing creditor can continue the sale from time to time for up to a year before they need to publish a new notice of sale.
At the foreclosure sale, the lender typically bids the amount that is then owed on the note. Other bidders must top that bid to buy the house.
After the foreclosure sale is concluded, the winning bidder is the owner of the house.
Liens that are junior to the foreclosing creditor, typically second deed of trust holders or HELOC lenders, are cut off: that is, they lose their lien on the property. They may still have a right to payment from the borrower, but that right is no longer secured by the foreclosed property.
If third parties bid more for the property than is owed to the foreclosing creditor, any junior lien holder is paid. Any excess money goes back to the person whose property was foreclosed.
Homeowner Bill of Rights
California enacted a Homeowner’s Bill of Rights that became effective January 1, 2013. The most important feature of the bill is a prohibition on continuing a foreclosure while a loan modification application is under consideration. Running the two processes side by side is called dual-tracking.
Dual tracking is outlawed by HBOR. If a loan modification application is submitted to the lender or the servicer, the foreclosure process is paused. More on HBOR.
No deficiency judgments
California has a one-action rule.
Any lender who uses the power of sale in the deed of trust to conduct a foreclosure sale is prohibited from suing the borrower for any deficiency or loss on the transaction.
The lender gets ownership of the property but nothing more. The foreclosing creditor can’t try to recover any shortfall between the value of the property and what was owed. Parties with junior liens that are cut off by the sale may be able to sue the former homeowner.
The law offers the creditor a trade off : in exchange for the ability to foreclose without going to court, the lender gives up the right to any remedy against the borrower other than taking the property.
After the sale
The buyer of the property at the foreclosure sale is then entitled to file an unlawful detainer action to evict anyone in the property.
Sometimes, the new owner will offer the occupants cash to facilitate their move from the property. Otherwise the owner must file a lawsuit to evict the occupants. Helping them fund a move out is often cheaper. More about cash for keys.
Sometimes, the new owner may be willing to rent the property to the old owners rather than having a vacant and non productive property on its hands.
Image licensed under Creative Commons: Colleen Lane