California’s complex foreclosure laws are causing confusion in the minds of homeowners
The complexity of California foreclosure laws arises due to the fact that there are two types of mortgage loans, namely: recourse loan and non-recourse loan. The explanation of these types of loans under California law can go on in volumes. So the simple meaning is: under a recourse loan, a borrower may have personal liability after the foreclosure sale; and a borrower will typically have no personal liability, following a Sheriff Sale judicial foreclosure on a non-recourse loan.
California state foreclosure laws allow for both judicial and non-judicial foreclosures. This is not the case in many other states, where either is allowed. For example, in Florida only judicial foreclosure is allowed.
What is the difference between the two? Let us see:
A judicial foreclosure is one in which the mortgage lender has to file a lawsuit in the County Court. Documentary evidence of delinquency has to be filed with the Court to take the case for preliminary acceptance of a trial. A notice called Lis Pendens, in plain language, notice of a pending lawsuit, is sent to the mortgage borrower.
The Court decides and issues a foreclosure order for the property at public auction. A bailiff’s sale is held on the courthouse steps and the property is awarded to the highest bidder. The typical time for a judicial foreclosure is about 120 days. The borrower will have a maximum of one year, under certain circumstances, to redeem the property. So far so good.
In the non-judicial foreclosure process, it is initiated extrajudicially. A “Power of Sale” clause is inserted into the mortgage agreement, which empowers the lender to sell the property, in the event of default in payment through a “Trustee’s Sale” foreclosure. Precisely the difference is that the lender does not need a court order to sell the property.
A notice of sale by public auction by a third party Trustee, usually the lender’s representative, who is authorized to execute the “Power of Sale”, is sent 20 days prior to the sale and the borrower is given only 5 days time to settle the default and stop the foreclosure. It is important to note that lenders cannot apply for a deficiency judgment and the borrower has no right of redemption here.
For example, in the 9-county San Francisco Bay Area, both foreclosure processes are applicable, since it is within the State of California. In practice, lenders primarily take advantage of the speed and ease of the nonjudicial foreclosure process.
The most disadvantageous situation comes in the form of a “deficiency judgment” in which the court allows the lender to pursue the borrower, even after a foreclosure sale, for the outstanding balance, that is, the difference between the proceeds of the sale made by a foreclosure sale and the actual balance of the mortgage.
Balance persuasion can only take place with a court order, and yet some lenders use this section as leverage when borrower-owners approach lenders with a short sale request.
In reality, under the provisions of the Home Affordable Foreclosure Alternative Program introduced by the federal government, the borrower is completely relieved of mortgage debt and there can be no persuasion after a Short Sale.
So what is the best advice for struggling homeowners in California, particularly in the San Francisco Bay Area? They can leave the legal aspects of a foreclosure or short sale in the hands of a trusted Realtor in the area, who will save them from all this confusion and apprehension regarding their mortgage loan – recourse or non-recourse – and will protect their interests by complete.