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Steps of a Foreclosure Process in Pasadena California
In California there are two types of foreclosure with which a home owner might be faced. A “judicial foreclosure” and the “trustee sale” sometimes called the “power of sale” foreclosure.
In a judicial foreclosure, where the amount recovered in the sale is less than the amount owed on a loan, the difference is called a “deficiency.” A “deficiency judgment” is a judgment against the borrower for the difference between the unpaid balance on the loan and the amount generated by the foreclosure sale or the fair market value, whichever is greater.
If the foreclosure is accomplished by judicial action, the lender may be able to obtain a deficiency judgment against the borrower.
However, the recovery of the deficiency amount is only available in a judicial foreclosure and is not permitted after a “trustee’s sale.” In other words if the lender utilizes the non-judicial method of a trustee sale, a deficiency cannot be collected.
Additionally, the recovery of a deficiency is not possible on a “purchase money” loan, including seller-carried financing, on any real property or loans on property consisting of 1 4 family units of owner occupied residential property. Recovery of the deficiency amount is possible, however, on a refinanced property loan (non purchase money) or on 1-4 family non owner occupied residential property loans.
Foreclosure by Trustee Sale
In contrast to the judicial foreclosure, in a trustee sale there is no court filing. Instead the lender elects to accelerate the loan under the “power of sale” clause contained in the deed of trust and the property is sold at a trustee sale.
In actual practice, when the borrower is approximately 45 to 60 days in default, the lender sends a letter advising that the loan is in foreclosure and that the lender is going to exercise the option to accelerate the loan. The borrower is also provided information about how to reinstate the loan. If the borrower does not cure the default, the lender then records a “notice of default” against the property. The soonest the actual foreclosure sale can occur once the notice of default is recorded is three months and twenty one days.
If the property sells at foreclosure for more than the amount due plus costs of foreclosure, the “excess proceeds” are distributed to junior lien holders whose loans or liens were “wiped out” by the foreclosure and any remaining excess is returned to the property owner. Where the junior lien holder’s security is wiped out by the foreclosure of the primary lender, the junior lien holder may choose to sue on the note under a breach of contract claim. While this was rarely done in the past, some lenders are now pursuing this course of action to recover the lost security on their loans.
Here’re the simplified steps to a Trustee Sale Foreclosure
A home owner has missed a payment or two, but you can still make up the payments to the lender. The lender will still accept late payments.
Foreclosure notice or Notice of Default (NOD):
The lender publishes the NOD in the paper and records the NOD with the county. In order to cure the default, a home owner generally has to make a lump sum payment to the lender that covers arrearages, late fees and attorney fees. Generally, you will receive an NOD after being approximately 90 days delinquent. Although, the lenders are all overwhelmed now and in reality some lenders take closer to 4 to 6 months to file.
Notice of Sale (NOS):
Approximately ninety days after the bank has filed the NOD, the bank will issue an NOS. This means a trustee sale date has been made, which could be within in just seven days or less. At this point the only way to stop the foreclosure is to cure the default by paying everything the bank says you owe, filing a Bankruptcy (which grants an automatic stay) or by filing an injunction if you have grounds to do so.
After the redemption period (if applicable), you will be given an Eviction Notice and have a specific amount of time to vacate the home. In some instances, you will be given an offer of “cash for keys”, meaning the bank will give you money to vacate early. Some banks will do this to get you out faster and/or help ensure that you don’t do anything to harm the property.
Options for a Home Owner Facing Foreclosure
One of the plans usually offered to the borrower is “forbearance.” Under a forbearance plan the lender will allow the borrower to continue for a certain period of time, such as six months, without making a payment. When the borrower is able to catch up, the borrower resumes making payments plus an additional amount to bring the loan current.
Loan modification can also involve rewriting the terms of the loan to make the loan affordable for the borrower. This might consist of changing an adjustable rate mortgage to a fixed rate mortgage, for example. The objective is to work out the default with the borrower to allow the borrower to remain in the home and avoid foreclosure.
“Short sales” may occur once a home is in foreclosure or prior, but before the property goes to sale.
In a short sale, the lender accepts an offer from a third party buyer for less than the outstanding loan on the property and forgives the deficiency owed by the borrower.
This arrangement may be appealing to lenders because it saves time and money by stopping the legal foreclosure process and by taking the property off the lender’s books. However, recently it has come to light that some lenders agreeing to short sales are including language in the release which allows them to sue on the note even though they are releasing the security in the property. Pasadena home sellers need to ensure that there is appropriate language on the release to avoid potential problems in the future.
Until December 21, 2007, if the lender accepted less than the balance owed and cancelled the debt, that amount would be considered debt forgiveness, and tax would be due on the amount forgiven. This forgiven amount was called “phantom income.” According to the IRS it is the same as if you received that amount of income.
On December 21, 2007 President Bush signed H.R.3648: Mortgage Forgiveness Debt Relief Act of 2007 which provides relief to homeowners facing foreclosure from the phantom income realized from debt forgiveness or foreclosure. The benefit to the borrower of a short sale is that the credit report will show that the loan settled for less than full value as opposed to a foreclosure. Those who are most interested in the short sale opportunity are those who would like to preserve their credit by avoiding the foreclosure.
Deed in Lieu of Foreclosure:
In a “deed in lieu of foreclosure” plan the borrower returns the deed on the property to the lender in exchange for a release of the security interest and a cancellation of the note. As in the case of foreclosures and short sales, the borrower may be able to claim relief under the Mortgage Forgiveness Debt Relief Act.
Caution: A number of lenders have been offering a deed in lieu of foreclosure. However, when the borrower reads the fine print on the release of claims, he discovers that the lender is reserving the right to proceed against the borrower for breach of contract on the loan.
It is strongly recommended that home owners request an attorney to review the documents received from a lender before entering into a deed in lieu of foreclosure transaction to assure that the documents express the true intent and understanding of the borrower.
Bankruptcy is another option that defaulting borrowers may sometimes consider.
Generally, bankruptcy will be attractive where the borrower is in debt with no feasible way of recovering. The most common scenario is where the borrower is in default on a loan where the lender is seeking judicial foreclosure or where the lender is suing on a note where the underlying security has been “wiped out” by a senior creditor.
Again, whenever you are facing possible foreclosure, it is prudent to consult an attorney who is qualified to address all of the available options.
If you are thinking of buying or selling your home, please give us a call for a comprehensive and free consultation. We can be reached at 626-629-8439.
Pasadena Real Estate Agents
Posted on June 12th, 2009
Posted in Foreclosures Info
Posted by: Irina Netchaev
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