As we noted in Foreclosure Law, foreclosure is the process by which a bank or lender takes possession of collateral used to secure a loan. Put another way, foreclosure happens to a homeowner when he or she doesn’t pay their mortgage.In California, there are two types of foreclosure: judicial foreclosure and trustee’s sale (non-judicial) foreclosure. Judicial foreclosure is very rare, and is almost never used in residential foreclosures. Judicial foreclosure is just like it sounds: it is a lawsuit by a bank against a lender to secure a judgment of foreclosure. This means paperwork, court proceedings, motions, orders, appraisals, and a formal auction. As such, judicial foreclosure is more expensive for a bank, and takes longer. There are other important differences to the homeowner that we’ll cover in a moment.
A trustee’s sale is a walk in the park for a bank: The trustee names in the deed of trust (mortgage) simply needs to record a public notice of default to initiate a non-judicial foreclosure against the owner. No court intervention is required. If the owner doesn’t pay in a certain amount of time, the trustee can schedule a public sale of the property.
Judicial Foreclosure vs. Trustee’s Sale Foreclosure (Non-Judicial Foreclosure)
But now to the important differences between judicial foreclosure and a trustee’s sale:
1. In a judicial foreclosure, the borrower is entitled to a 1-year “right of redemption” by which the borrower enjoys the right to repurchase the property from a successful bidder. This puts a real damper on the auction sale price, as one might imagine.
2. In a trustees sale, the bank cannot get a deficiency judgment against the borrower (on certain residential property). In short, that means the bank cannot sue the borrower for the difference between the bank loan and what the bank received at the trustee’s sale.
Anti-deficiency is a good deal for homeowners whose properties are “underwater,” (where the value is less than the total amount of the loans).
Foreclosure Defaults and Timelines
The short answer: a foreclosure in California takes about 7 to 9 months from when a borrower first misses a payment. When a borrower misses a payment on a mortgage loan, the bank springs into action. The bank will make telephone calls to the borrower and ask for payment. The representatives making these calls are low-paid hourly workers. They are trying to collect payment, but will also record what the borrower says into a database. At this stage, the lender is trying to establish whether the loan is in trouble or not, and try to get the borrower up to date. As a borrower falls further into default, the bank will continue collection efforts. After three or four months with no payments, the bank will send to the borrower a notice advising that foreclosure will begin in 30 days. Upon the expiration of that 30 days, the bank will file a “Notice of Default.” This notice (familiarly called an “N.O.D.”) is a key event in the foreclosure process: once the N.O.D. is filed, the wheels of foreclosure begin to turn. Keep in mind, though, that the N.O.D. won’t get filed until the borrower is 3 to 5 months behind in payments. Recently (in mid-2007), I have experienced lenders taking much longer to file N.O.D.’s–they do not appear to be in a rush.
After the N.O.D. is filed, the “redemption period” begins. The redemption period is simply a period of dormancy during which the borrower can “cure” the default by bringing his payments up to date. If the borrower does nothing, at the end of the redemption period, the “publication period” begins. The redemption period lasts 90 days from the N.O.D. filing.
The publication period lasts another 30 days beyond the redemption period. At the commencement of the publication period, the Trustee prepares a Notice of Trustee’s sale and published in a newspaper of general circulation in the city where the property sits. Up until 5 days before the trustee’s sale, the borrower enjoys a right to reinstate the loan by bringing all payments current.