In California, the most common method of securing a loan on real property is for the lender to record a deed of trust against the property. If the borrower defaults on the loan, the lender may then foreclose on the real property. Various disputes may arise regarding the origination or foreclosure of a loan secured by a deed of trust. We assist clients in resolving these disputes.
A promissory note evidences the borrower’s basic monetary obligation to a lender.
Deed of Trust
A deed of trust gives the lender a lien on the secured property to satisfy the obligation under the note if it is not paid. A deed of trust creates a triparty relationship between the trustor, trustee and beneficiary. The “trustor” is the owner of the real property estate that is pledged. The “beneficiary” is the lender. The trustee holds legal title to the secured real property interest, but only so far as necessary to carry out the trustee’s duties—i.e., to conduct a nonjudicial foreclosure sale and convey title to the successful bidder in the event of the borrower’s default. The trustee under a deed of trust is not a true “trustee” and owes no fiduciary obligations. The trustee has no functions other than (1) upon a default, to enforce the lender’s nonjudicial (private power of sale) foreclosure rights; or (2) upon satisfaction of the secured obligation, to execute and record a reconveyance.
A promissory note also can be secured by a mortgage on the property. Like a deed of trust, a mortgage gives the creditor a lien on the real property to satisfy the borrower’s obligation. However, in California, deeds of trust traditionally have been the preferred security instrument in real property loan transactions because they provide the lender with broader remedies upon the borrower’s default. Under a deed of trust, the lender has the remedy of nonjudicial foreclosure.
A deed of trust may be foreclosed judicially (i.e. through the courts) or non-judicially (i.e. outside of the courts). Most residential loans are foreclosed non-judicially. California has a comprehensive statutory scheme governing nonjudicial foreclosures. (See, Civil Code § 2924 et seq.) The statutory scheme has three purposes: (1) to provide the lender with a quick, inexpensive and efficient remedy against a defaulting borrower; (2) to protect the borrower from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser. By electing to pursue a non-judicial foreclosure, the lender loses the right to recover any “deficiency” judgment against the borrower—i.e., if the property has declined in value and thus is worth less than the secured debt at the time of foreclosure, the lender forfeits any claim against the borrower for the difference (deficiency).
Overview of a Non-Judicial Foreclosure Sale
A non-judicial foreclosure sale can be completed in under four months. The basic procedures for a non-judicial foreclosure sale are as follows:
Notice of Default
A nonjudicial foreclosure is commenced by the “trustee, mortgagee, or beneficiary, or any of their authorized agents” recording a “notice of default” in the office of the county recorder for each county where the secured real property (or any part thereof) is located.
Notice of Sale
If the borrower does not cure the default within three months after the date of recordation of the notice of default, the trustee may proceed to give a notice of sale. The notice of sale must set forth the time and place of the trustee’s foreclosure sale. A nonjudicial foreclosure sale may be postponed at any time prior to completion of the sale at the trustee’s discretion or upon instruction by the beneficiary.
Foreclosure Sale (“Trustee’s Sale”)
The trustee’s foreclosure sale is conducted by public auction in the county where the property (or any part thereof) is located. The successful bidder is issued a Trustee’s Deed Upon Sale. At the foreclosure sale, the lender will normally bid the amount of the outstanding debt. This is known as a credit bid. If no person bids more than the credit bid, then the bank will “take back” the property. When a bank acquires a property at a foreclosure sale, it is often referred to as an “REO” property, which is an abbreviation for for “Real Estate Owned”.
California Homeowner Bill of Rights
Effective January 1, 2013, the Homeowner Bill of Rights (HBOR) modified the nonjudicial foreclosure process by ensuring that specified borrowers who may qualify for a foreclosure alternative are considered for, and have a meaningful opportunity to obtain, available loss mitigation options. Protections afforded to borrowers under HBOR include the following: (a) Prior to recording a notice of default, lenders, mortgage servicers, mortgagees, trustees, beneficiaries and their authorized agents must contact the defaulting borrower to provide specified information regarding options for avoiding foreclosure, (b) Mortgage servicers conducting a large volume of residential foreclosures must assign each borrower a single point of contact to handle the process, (c) Nonjudicial foreclosures may not proceed while borrowers have complete applications for foreclosure prevention alternatives pending, or while borrowers are in compliance with approved modifications (this is known as “dual tracking), and (d) Borrowers may bring suit against mortgage servicers to enforce the statute before a foreclosure sale takes place, or to seek damages for violations after the sale. Most of the statutory provisions apply to owner-occupied residential real property of not more than four units that serves as the owner’s principal residence and secures a first lien mortgage or deed of trust obtained for personal, family or household purposes.