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Judicial Vs. Non Judicial
- Judicial Foreclosure Available: Yes
- Non-Judicial Foreclosure Available: Yes
- Primary Security Instruments: Deed of Trust, Mortgage
- Time line: Typically 120 days
- Right of Redemption: Varies
- Deficiency Judgments Allowed: Varies
In California, lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure process.
Judicial Foreclosure
The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present
in the mortgage or deed of trust. Generally, after the court declares a foreclosure, your home will be auctioned off to the highest bidder. Using
this type of foreclosure process, lenders may seek a deficiency judgment and under certain circumstances, the borrower may have up to one (1)
year to redeem the property. Formerly, JUDICIAL FORECLOSURE was rare but now is increasing in use as property values have dropped.
Judicial foreclosure has many disadvantages to the lender. It is not an expedited process (as is the Trustee's Sale), but involves court proceedings,
orders, appraisals, and an auction. It takes much longer and costs much more than a Trustee's Sale.The real difficulty with Judicial Foreclosure is
that it allows the Borrower a 1 year "right of redemption" in which he is allowed to buy the property back from the successful bidder. This makes
purchases of such property more uncertain and tends to lower the bidding.
The advantage to the lender of Judicial Foreclosure is that a deficiency judgement against the Borrower is allowed. [See exception below for
personal residence.] The auction proceeds are used to reduce the debt (including penalties, attorneys' fees, and costs); judgement is entered
against the Borrower for the balance.
Whether the deficiency judgment is collectible is another problem for the lender.
Non-Judicial Foreclosure(Trustee sale)
The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the
clause in a deed of trust or mortgage, in which the borrower preauthorize the sale of property to pay off the balance on a loan in the event of the
their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by
the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below in the
"Power of Sale Foreclosure Guidelines".A TRUSTEE'S SALE is the easy method of foreclosure. It's fast and inexpensive. However, NO
DEFICIENCY JUDGEMENT IS ALLOWED.In a Deed of Trust the borrower (Trustor) gives the Trustee (typically a title company) the right to
sell the property if the Buyer defaults.The first step is a Notice of Default. It states the amount in default. 90 days is given to cure the default by
catching up on all late payments, penalties, and costs.After the 90 days expires, the lender files a 21 day Notice of Trustee's Sale, at which time an
auction is held, usually at Court, with limited publicity resulting in a greatly depressed price. After it is over, the former owner must be evicted if
he refuses to leave.The Borrower can still catch up on all late payments until 5 business days prior to the sale. Within the last 5 days, the only way
to stop a sale is by payment in full of the entire balance.Most lenders prefer NOT to foreclose. Banks are in the money business, not the real estate
business. They try to avoid foreclosure, because it is bad for their books if their ratios of REO (real estate owned) and bad debts climb.
EXCEPTION Personal Residence = No Liability
By State law there is never personal liability for a purchase mortgage for a personal residence. The owner can "walk away" from the property
with immunity from personal liability regardless of the method of foreclosure.
Power of Sale Foreclosure Guidelines
If the deed of trust or mortgage contains a power of sale clause and specifies the time, place and terms of sale, then the specified procedure
must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:
A notice of sale must be: 1) recorded in the county where the property is located at least fourteen (14) days prior to the sale; 2) mailed by
certified, return receipt requested, to the borrower at least twenty (20) days before the sale; 3) posted on the property itself at least twenty (20)
days before the sale; and 4) posted in one (1) public place in the county where the property is to be sold. The notice of sale must contain the
time and location of the foreclosure sale, as well as the property address, the trustee' name, address and phone number and a statement that the
property will be sold at auction. The borrower has up until five days before the foreclosure sale to cure the default and stop the process. The sale
may be held on any business day between the hours of 9:00 am and 5:00 pm and must take place at the location specified in the notice of sale.
The trustee may require proof of the bidders ability to pay their full bid amount. Anyone may bid at the sale, which must be made at public auction
to the highest bidder. If necessary, the sale may be postponed by announcement at the time and location of the original foreclosure sale.
Lenders may not seek a deficiency judgment after a non-judicial foreclosure sale and the borrower has no rights of redemption
Deed in Lieu of Foreclosure
This is a short-cut, when the owner accepts the inevitable and gives the property back to the Bank. However, many lenders now refuse to take a
Deed in Lieu of Foreclosure. They get "cleaner" title if they foreclose, effectively wiping out all other claims to the property.
Bankruptcy
Many borrowers stall until the last minute and then file bankruptcy to stop the sale. If there is no equity in the property the lender eventually will
make a "Motion for Relief from the Automatic Stay" to allow the foreclosure to proceed. This takes time and costs the lender more money. If the
lender uses the Trustee's Sale, it waives any right to seek a deficiency judgment against anyone. Therefore, a seller who is still on the mortgage
for his former property has little (if any) real risk of liability for a deficiency.
- Judicial Foreclosure Available: Yes
- Non-Judicial Foreclosure Available: Yes
- Primary Security Instruments: Deed of Trust, Mortgage
- Time line: Typically 120 days
- Right of Redemption: Varies
- Deficiency Judgments Allowed: Varies
In California, lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure process.
Judicial Foreclosure
The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present
in the mortgage or deed of trust. Generally, after the court declares a foreclosure, your home will be auctioned off to the highest bidder. Using
this type of foreclosure process, lenders may seek a deficiency judgment and under certain circumstances, the borrower may have up to one (1)
year to redeem the property. Formerly, JUDICIAL FORECLOSURE was rare but now is increasing in use as property values have dropped.
Judicial foreclosure has many disadvantages to the lender. It is not an expedited process (as is the Trustee's Sale), but involves court proceedings,
orders, appraisals, and an auction. It takes much longer and costs much more than a Trustee's Sale.The real difficulty with Judicial Foreclosure is
that it allows the Borrower a 1 year "right of redemption" in which he is allowed to buy the property back from the successful bidder. This makes
purchases of such property more uncertain and tends to lower the bidding.
The advantage to the lender of Judicial Foreclosure is that a deficiency judgement against the Borrower is allowed. [See exception below for
personal residence.] The auction proceeds are used to reduce the debt (including penalties, attorneys' fees, and costs); judgement is entered
against the Borrower for the balance.
Whether the deficiency judgment is collectible is another problem for the lender.
Non-Judicial Foreclosure(Trustee sale)
The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the
clause in a deed of trust or mortgage, in which the borrower preauthorize the sale of property to pay off the balance on a loan in the event of the
their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by
the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below in the
"Power of Sale Foreclosure Guidelines".A TRUSTEE'S SALE is the easy method of foreclosure. It's fast and inexpensive. However, NO
DEFICIENCY JUDGEMENT IS ALLOWED.In a Deed of Trust the borrower (Trustor) gives the Trustee (typically a title company) the right to
sell the property if the Buyer defaults.The first step is a Notice of Default. It states the amount in default. 90 days is given to cure the default by
catching up on all late payments, penalties, and costs.After the 90 days expires, the lender files a 21 day Notice of Trustee's Sale, at which time an
auction is held, usually at Court, with limited publicity resulting in a greatly depressed price. After it is over, the former owner must be evicted if
he refuses to leave.The Borrower can still catch up on all late payments until 5 business days prior to the sale. Within the last 5 days, the only way
to stop a sale is by payment in full of the entire balance.Most lenders prefer NOT to foreclose. Banks are in the money business, not the real estate
business. They try to avoid foreclosure, because it is bad for their books if their ratios of REO (real estate owned) and bad debts climb.
EXCEPTION Personal Residence = No Liability
By State law there is never personal liability for a purchase mortgage for a personal residence. The owner can "walk away" from the property
with immunity from personal liability regardless of the method of foreclosure.
Power of Sale Foreclosure Guidelines
If the deed of trust or mortgage contains a power of sale clause and specifies the time, place and terms of sale, then the specified procedure
must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:
A notice of sale must be: 1) recorded in the county where the property is located at least fourteen (14) days prior to the sale; 2) mailed by
certified, return receipt requested, to the borrower at least twenty (20) days before the sale; 3) posted on the property itself at least twenty (20)
days before the sale; and 4) posted in one (1) public place in the county where the property is to be sold. The notice of sale must contain the
time and location of the foreclosure sale, as well as the property address, the trustee' name, address and phone number and a statement that the
property will be sold at auction. The borrower has up until five days before the foreclosure sale to cure the default and stop the process. The sale
may be held on any business day between the hours of 9:00 am and 5:00 pm and must take place at the location specified in the notice of sale.
The trustee may require proof of the bidders ability to pay their full bid amount. Anyone may bid at the sale, which must be made at public auction
to the highest bidder. If necessary, the sale may be postponed by announcement at the time and location of the original foreclosure sale.
Lenders may not seek a deficiency judgment after a non-judicial foreclosure sale and the borrower has no rights of redemption
Deed in Lieu of Foreclosure
This is a short-cut, when the owner accepts the inevitable and gives the property back to the Bank. However, many lenders now refuse to take a
Deed in Lieu of Foreclosure. They get "cleaner" title if they foreclose, effectively wiping out all other claims to the property.
Bankruptcy
Many borrowers stall until the last minute and then file bankruptcy to stop the sale. If there is no equity in the property the lender eventually will
make a "Motion for Relief from the Automatic Stay" to allow the foreclosure to proceed. This takes time and costs the lender more money. If the
lender uses the Trustee's Sale, it waives any right to seek a deficiency judgment against anyone. Therefore, a seller who is still on the mortgage
for his former property has little (if any) real risk of liability for a deficiency.
Secured Loan Agreements:
The Promissory Note and Deed of Trust. The promissory note recites the schedule of payments that you must make to pay off your loan.
Typically, you will have monthly payments for twenty-five to thirty years, and your payments will be the same amount each month if the interest
charged is at a fixed-rate, but they will differ in amount if the interest is charged at a variable rate (variable-rate loans usually call for the lender to
raise or lower the amount of the monthly payment once each year, typically according to a complicated formula that depends upon either the yield
rate of U.S. Treasury bonds or the prime rate, which is the interest rate that banks charge one another for overnight loans).
The Promissory Note and Deed of Trust. The promissory note recites the schedule of payments that you must make to pay off your loan.
Typically, you will have monthly payments for twenty-five to thirty years, and your payments will be the same amount each month if the interest
charged is at a fixed-rate, but they will differ in amount if the interest is charged at a variable rate (variable-rate loans usually call for the lender to
raise or lower the amount of the monthly payment once each year, typically according to a complicated formula that depends upon either the yield
rate of U.S. Treasury bonds or the prime rate, which is the interest rate that banks charge one another for overnight loans).
Short Sale
Most lenders are in the money business and would rather not own real estate. If the value of the property has decreased, some lenders cooperate
and allow a sale of the property, instead of forcing a foreclosure.
If the debt is greater than the property's value, in order to sell it and turn the lender's interest into cash, the lender must agree to accept less than
full payment as satisfaction of the debt.
Many lenders realize that some money soon is better than less money (since foreclosure auctions usually bring low prices) later, especially if the
debt continues to increase during the pend ency of the foreclosure.
Most lenders are in the money business and would rather not own real estate. If the value of the property has decreased, some lenders cooperate
and allow a sale of the property, instead of forcing a foreclosure.
If the debt is greater than the property's value, in order to sell it and turn the lender's interest into cash, the lender must agree to accept less than
full payment as satisfaction of the debt.
Many lenders realize that some money soon is better than less money (since foreclosure auctions usually bring low prices) later, especially if the
debt continues to increase during the pend ency of the foreclosure.
Tax Consequences
Most people are shocked that they can lose their property and still owe taxes on the profit. We often hear people say that they prefer to be
foreclosed since they will not owe any tax, but if they sell (and have no net sales proceeds) they will owe substantial tax. WRONG!
The tax results of a foreclosure, deed in lieu of foreclosure, or short sale depend on the nature of the loan: whether it is recourse or non-recourse.
Recourse means that the borrower has personal liability for the loan, in addition to the risk of losing his real property.
Tax Consequences: Non-Recourse Loan
Non-recourse loans include typical California purchase loans used to buy an owner occupied residence of up to 4 units.
State Law protects borrowers from personal liability on a purchase mortgage for a home which they occupy at purchase. (If the borrower later
converts the home to rental, he is still protected.) The State has put the risk on the lender; the most a lender can do is take back the house. This
law applies to properties of up to 4 units, and applies only to loans used to purchase the property. Purchase loans include bank loans and seller
carry backs. The tax consequences of foreclosure, deed in lieu of foreclosure, or short sale on a non-recourse loan are simple: the property is
taxed as if it were sold for the total outstanding amount of the loan (or sales price, if higher). Taxability of the gain and deductibility of the loss
depend on the nature of the property.
Tax Consequences: Recourse Loan
A recourse loan is a loan where the borrower is personally liable if the property is sold for less than the amount owed to the lender.There are two
issues with a recourse loan: personal liability and taxation.
Most people are shocked that they can lose their property and still owe taxes on the profit. We often hear people say that they prefer to be
foreclosed since they will not owe any tax, but if they sell (and have no net sales proceeds) they will owe substantial tax. WRONG!
The tax results of a foreclosure, deed in lieu of foreclosure, or short sale depend on the nature of the loan: whether it is recourse or non-recourse.
Recourse means that the borrower has personal liability for the loan, in addition to the risk of losing his real property.
Tax Consequences: Non-Recourse Loan
Non-recourse loans include typical California purchase loans used to buy an owner occupied residence of up to 4 units.
State Law protects borrowers from personal liability on a purchase mortgage for a home which they occupy at purchase. (If the borrower later
converts the home to rental, he is still protected.) The State has put the risk on the lender; the most a lender can do is take back the house. This
law applies to properties of up to 4 units, and applies only to loans used to purchase the property. Purchase loans include bank loans and seller
carry backs. The tax consequences of foreclosure, deed in lieu of foreclosure, or short sale on a non-recourse loan are simple: the property is
taxed as if it were sold for the total outstanding amount of the loan (or sales price, if higher). Taxability of the gain and deductibility of the loss
depend on the nature of the property.
Tax Consequences: Recourse Loan
A recourse loan is a loan where the borrower is personally liable if the property is sold for less than the amount owed to the lender.There are two
issues with a recourse loan: personal liability and taxation.
Probate Sale
Probate is the State's procedure to finalize a decedent's financial affairs and distribute his property to his heirs. An Executor is appointed by the
Probate Court to act as manager. During the Probate (usually 1 or 2 years), the Executor may sell property. If the Executor has Full Powers under
the Independent Administration of Estates Act, with consent of all interested heirs he may sell without Court confirmation or auction.Without
Court confirmation we believe that sales prices are higher and the transaction is much easier and faster for everyone involved
Mediation
allows the parties to meet with a neutral adviser who can listen to each side and try to craft a mutually agreeable solution.
Probate is the State's procedure to finalize a decedent's financial affairs and distribute his property to his heirs. An Executor is appointed by the
Probate Court to act as manager. During the Probate (usually 1 or 2 years), the Executor may sell property. If the Executor has Full Powers under
the Independent Administration of Estates Act, with consent of all interested heirs he may sell without Court confirmation or auction.Without
Court confirmation we believe that sales prices are higher and the transaction is much easier and faster for everyone involved
Mediation
allows the parties to meet with a neutral adviser who can listen to each side and try to craft a mutually agreeable solution.
Redemption Period
Once the Notice of Default records the foreclosure time frame begins. California foreclosure law states that within 10 business days a copy of the
recorded Notice of Default is sent by certified and regular mail to the borrowers at all addresses provided and any recorded special requests.
Within 30 days a copy of the Notice of Default is sent by certified and regular mail to new owners and all junior lien holders to the Deed of Trust
being foreclosed. A Trustee's Sale Guarantee Report is ordered from the title company providing all title information. The foreclosure remains
dormant for the next 60 days unless the borrower makes contact to cure.
Once the Notice of Default records the foreclosure time frame begins. California foreclosure law states that within 10 business days a copy of the
recorded Notice of Default is sent by certified and regular mail to the borrowers at all addresses provided and any recorded special requests.
Within 30 days a copy of the Notice of Default is sent by certified and regular mail to new owners and all junior lien holders to the Deed of Trust
being foreclosed. A Trustee's Sale Guarantee Report is ordered from the title company providing all title information. The foreclosure remains
dormant for the next 60 days unless the borrower makes contact to cure.
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