Summary Non Judicial Foreclosure is a process in which a lender who holds a security interest lien against a property can take legal title to that property without going to court.  The entire process is governed by California Statute and is very technical. The following is a summary of this process.
 
Notice of Default

After several months of non-payment of mortgage, a secured lender initiates the non-judicial foreclosure process by recording a Notice of Default at the County Recorders office for the County where the property is situated in.  A property owner will receive additional notice of this filing by regular and certified mail.   From the date of recording, the property owner has 90 days to pay and reinstate/cure the delinquent amount.  During this period, if there is sufficient equity in the property, the owner may  sell the property.  However, in many cases, the existing loans are more than the value of the property, and the owner is unable to sell the property without putting money into the deal.  Some lenders initiate the foreclosure process after just two two missed payments, while others wait as long as one year.  (See Q & A→).   

Notice of Trustee’s Sale

After 90 days have elapsed from the date of filing of a Notice of Default, the lender may schedule the property for a Trustee’s Sale (foreclosure auction) by filing a notice of Trustee’s Sale.  The notice of Trustee’s Sale is published at least 21 days prior to the date of sale, and is filed at the county recorders office at least 14 days prior to the date of the sale. 

In the event the loan is not reinstated five days prior to the auction date contained in the Notice of Trustee’s Sale, the property will likely be sold by Foreclosure Auction at the Trustee’s Sale.

At the Trustee’s Sale, the property will be sold by auction, and either the successful bidder or the Lender, if there are no outside bidder’s, will receive a Trustee’s Deed, and become the legal owner of the property.   The senior liens will remain in place, but most non-tax junior liens will be wiped out.  Any remaining proceeds, if any, will be distributed in according to the prior lien position.

Eviction

Once the title to the property changes, the new record owner may evict the current occupants of the property by first delivering the appropriate notice to vacate, followed by a complaint for an unlawful detainer.    

Questions and Answers

Disclaimer:  The following Questions and Answers are not intended to give legal advise, but are general summaries of the law and are subject to revision without notice.  Each and every situation may differ, and you should not rely on the following, but seek a legal counsel regarding your individual situation. 

Question:  Can a lender just take legal title away from property without going to court? 

Answer:  Yes, but only after complying with the provisions as contained in the California Statute, as described above. 

Question:  I owe more on my property than the current market value of the property, and I cannot pay the defaulted loans.  What can I do?

Answer: Depending on your circumstances, you may have three options.  

1)  You may call us for a consultation to see if your property is a canidate for a short payoff.  If it is, then you may list your property with us, and have us contact your lender for a possible short pay off.  A short pay off is when the lender  reduces the principal balance owed to him to accommodate the sale of your property at today’s current market value.  The lender usually pays for all the closing costs, including real estate commission, so there is usually no cost to you.    

2)  You may seek a legal counsel for a possible bankruptcy, in which you may be able to extinguish your non-secured loans, reducing the payments, which you can use to pay your secured loans.

3)  You may wait until the lender forcloses the property or takes other action against you and/or your property. 

4)  You may seek a Loan Modification.   This is when the lender reduces the monthly payments on your loan for a fixed period of time.  Do not be misled by the many unwarranted promises by loan modification companies. 

5)  You may issue a deed in lieu to the lender.  This is when the lender and the borrower enters into an agreement to transfer title to the real property to the lender.

Question:  Are there any tax consequences associated with a short pay off. 

Answer:   This is an area of great confusion because different advisors are saying different things and you should seek counsel for your specific situation.  With that being said, usually, the lender can issue a 1099 for the difference of the principal that was forgiven (“debt discharge”).  In practice, I’ve seen this done about 10% of the time, but more lenders are starting to do this.  A person who receives a “debt discharge” is responsible as ordinary income tax for the difference the debt discharge realized the person’s net worth to be in the positive net worth category.  There are recently passed legislation in which tax liability associated with debt discharge is waived by the IRS for owner occupied (primary residence) single family residences.   

Question:  I heard that there is a one year right of redemption after a foreclosure sale.  

Answer:   In a non-judicial foreclosure sale, there is NO statutory right to redemption.  Do not be confused with a judicial foreclosure sale.  This is an entirely different process. 

Question:   Once the lender completes the Non Judicial Foreclosure process, and completes a foreclosure sale, can a property owner redeem the property back from the lender? 

Answer:  A previously title owner who was foreclosed out may seek to rescind the foreclosure sale by filing of a court action.  There must be justifiable grounds, such as fraud or other actions by the lender/trustee usually coupled with some abnormality in the Non Judicial Foreclosure process, which were prejudicial. Rescinding a foreclosure sale is very difficult and expensive. Each and every case is different, so the foreclosed out party should seek an attorney with experience in this field.