The legal framework for foreclosures is often complicated and requires a great deal of specialized knowledge, as rules and regulations can vary significantly from state to state. In California the foreclosure framework is defined by civil code 2924, and allows for both judicial and non-judicial foreclosures. However, judicial foreclosures are rare in California, since they allow for right of redemption for delinquent borrowers, whereas non-judicial foreclosures do not have this borrower-friendly option.
Another characteristic of California foreclosures is its “one-action” rule, which allows lenders to pursue only one specific avenue against defaulting borrowers. Overall, California is considered a consumer-friendly state due to an extensive set of rules and laws that govern the foreclosure process.
Step 1: Pre-foreclosure
Power of sale clause
When a property is purchased in a sale that is not all-cash, buyers generally have two avenues of financing – either through a mortgage or a deed of trust. In general, both mortgages and deeds of trust will include a power of sale clause, which gives the lender the right to put a property attached to a delinquent loan on the market to recoup losses incurred by defaulted loans.
In the state of California, the power of sale clause can be activated only after a borrower misses 4 monthly loan payments, known as defaulting. When a deed of trust is signed, a trustee will be appointed who will act as the lender’s representative during a foreclosure sale. While in many states lenders appoint trustees themselves, in California title companies generally act as trustees. As a title theory state, properties purchased via loans remain in trust until the full amount of loan is repaid.
Lender negotiations and avoiding foreclosure
Most borrowers will try to exhaust all other avenues to avoid a foreclosure, as this will not only mean the loss of the delinquent property, but will also bring on severe damage to a borrower’s credit score. This in turn limits a potential homebuyer’s ability to qualify for a loan for a significant amount of time after going through a foreclosure.
Another potential avenue to avoid foreclosure is a short sale. A short sale entails the borrower selling the property attached to the delinquent mortgage in an attempt to make up the outstanding balance. However, this will often be possible only for a lower amount than the outstanding mortgage balance. As a result, to carry out a short sale, the borrower always needs approval from the lender in the state of California.
Furthermore, borrower and lender must agree that the short sale has now satisfied the delinquency and the loan is paid in full, meaning the borrower has no further legal obligations to contribute any additional finances towards the lender. This process can be quite lengthy as both parties need to reach complete agreement. Moreover, the borrower has to advertise the property for a set period of time – usually around 2 to 3 months – and the lender has to approve a potential buyer’s offer.
Deed in lieu of foreclosure
To avoid foreclosure and the credit drawbacks it brings, a borrower and lender may agree to solve the issue of delinquency through the means of a deed-in-lieu of foreclosure. Through this process, the borrower agrees to give up any claims towards the property attached to the delinquent loan and relinquishes the property to the lender. This option will usually take 2 to 3 months.