Judicial and non-judicial foreclosure in California
In California, owners may face two types of foreclosure proceedings, which are non-judicial and judicial foreclosure. There are some strong differences between the two, which we will explain below.
Non-judicial foreclosure is the most common type of foreclosure in California. Lenders may use the non-judicial foreclosure process when there is a “power-of-sale” clause in the mortgage note or deed of trust, which gives the lender the right to sell the house and use the profits to pay off the balance of the mortgage in the event that the borrower defaults on the loan. As the name implies, a lender need not hold a court hearing in order to carry out the foreclosure process. However, there are strict laws governing the non-judicial foreclosure process, and lenders need to provide documentation of the ownership of the mortgage and the borrower’s failure to pay.
The lender initiates the process by sending the borrower a Notice of Default, giving the borrower 90 days to cure the default. If the borrower does not, then the lender files a 21-day Notice of Trustee’s Sale. After 21 days, the house is then sold at auction. However, the borrower has until up to five days prior to the sale to cure the default to stop the sale.
Many lenders prefer to use non-judicial foreclosure because it is often faster and less expensive than judicial foreclosure. Non-judicial foreclosure has an expedited time compared to judicial foreclosure. Borrowers also have no right of redemption in non-judicial foreclosure, meaning they cannot buy the property back after the foreclosure sale like they can in a judicial foreclosure.
However, a lender gives up the right to obtain a deficiency judgment against the borrower to make up the difference between the amount owed on the mortgage and the proceeds from the sale of the real estate.
Judicial foreclosure is very rare in California. Lenders who do not have power-of-sale clauses in their mortgages must foreclose on borrowers who have defaulted through judicial foreclosure, which requires a hearing. If the lender is successful at the hearing, the court will order the sale of the property at auction. The lender may choose to pursue a deficiency judgment against the borrower in a judicial foreclosure.
The borrower has the right of redemption from the new owner for up to one year after the sale of the property in a judicial foreclosure.
How California protects homeowners in foreclosure
California’s legislature has noticed a subculture of fraud arising from the foreclosure economy. Specifically, California Civil Code 2945-2945.11 declares that: “homeowners whose residences are in foreclosure are subject to fraud, deception, harassment, and unfair dealing by foreclosure consultants from the time a Notice of Default is recorded pursuant to Section 2924 until the time surplus funds from any foreclosure sale are distributed to the homeowner or his or her successor.”
To protect homeowners from unscrupulous “consultants,” the regulation broadly defines those considered to be a consultant, including those who solicit or make representations to owners that, for compensation, they can stop or postpone foreclosures, obtain extensions, obtain forbearances from beneficiaries, or help owners avoid credit disrepair, along with other rehabilitative or preventative actions.
Because of the various ways that foreclosure consultants can commit fraud against unknowing homeowners, the code provides homeowners the right to demand that consultant service contracts be in writing, as well as the power to rescind foreclosure consultation contracts the owners deem fraudulent and misleading. The code’s intent is to promote fair dealing; California courts are allowed to liberally construe article provisions to achieve this intent.
Civil Code Section 2945 also provides relief for homeowners victimized by unscrupulous foreclosure consultants. A foreclosure consultant who violates the terms of the code can be fined up to $25,000 – or even face imprisonment. Additionally, victimized homeowners can recover treble damages – three times the compensation given to the foreclosure consultant – along with reasonable attorney fees.
California has taken extra exigency measures to stem the tide of foreclosures. The state implemented a 90-day moratorium on foreclosures. The stay focuses on properties with a first mortgage on which a notice of default has already been filed. Also, under the proposal lenders will have to show that they have installed aggressive programs to keep homeowners in their homes.
Legal representation in foreclosure proceedings
Laws about foreclosure in California are intricate, and it is wise for both borrowers and lenders going through the foreclosure process to seek legal representation. If you have questions about foreclosure in California, speak with a seasoned California real estate attorney who can advise you about your specific situation.