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Understanding foreclosures...

The Federal Government has launched a web site to aid borrowers that are facing mortgage problems. The site is located at;

Foreclosure is one of the scariest words a property owner can hear. Not only does it have the potential to take away all of an owners equity and force an unwanted family move, it also has a profound affect on the owner's credit rating. The negative impact on their credit rating will affect their ability to borrow money or even to rent another home or apartment.

If you find yourself facing a foreclosure, it will probably give you some comfort if you learn more about the process. The law provides some significant protections for you. Don't be afraid to talk to your lender as many have the ability to restructure your payments to give you more time to cure your defaults. You may also want to contact an attorney for advice. One final thing, if you are married and your spouse doesn't know the full extent of your financial problems, the first thing to do is to let them know about the situation. It's all too common that a bad situation gets worse because the spouse who pays the bills (and sees the mail) is too embarrassed to tell the other spouse about their financial problems.

Also be aware that if your lender has started foreclosure, you will likely be contacted by people wanting to buy your home or make you a loan. Most of these people will pay only a fraction of what your property is worth or will charge exorbitant loan fees. Try to avoid these people (The State of California refers to them as Foreclosure Consultants but in the trade they are commonly referred to as "Sharks").

Understanding the Foreclosure process;
Stopping the Foreclosure

Understanding the process

In California, most real estate loans are secured by a document known as a "Deed of Trust." There are three parties to the deed of trust, the borrower (trustor), the lender (beneficiary) and the trustee.

One of the features of a deed of trust is that it contains what is referred to as a "Power of Sale" clause. The power of sale clause gives the lender the right to instruct the trustee to begin the foreclosure process if the borrower fails to make payments as agreed or otherwise violates the terms of the promissory note or deed of trust.

The foreclosure process consists of two parts. The first part is the "Notice of Default" period. This is a 90 day period that begins when the Trustee records a "Notice of Default" with the County Recorder in the county where the property is located. The main purpose of this period is to give the borrower an opportunity to cure the default either by paying the past due payments (including late fees and foreclosure costs), to sell the property or to take other legal action to stop or postpone the foreclosure sale.

The second part of the foreclosure process is the "Notice of Sale" period. This period is at least 20 days long but can vary in length and begins with the recording of the "Notice of Trustee's Sale" with the County Recorder in the county where the property is located. This is the period when the property is advertised for sale. One of the statutory requirements is that the trustee's sale be advertised on a weekly basis for three consecutive weeks in a newspaper qualified to carry such notices in the county where the property is located.

The foreclosure process ends with the Trustee's Sale or with a rescission of Notice of Default if the borrower cures the defaults.

The total process is at least 110 days but may be longer if there is a gap between the end of the 90 day Notice of Default period and the recording of the Notice of Trustee's Sale or if the trustee is slow in advertising the trustee's sale. The beneficiary also may grant delays to the sale. A bankruptcy filing by the borrower can dramatically extend the process.

A few other bits of information may also be of benefit. From my observation, it appears that, in today's economic climate, lenders are not beginning the foreclosure process unless a borrower is at least 6 months behind in their payments. Also, if a borrower is in the process of selling their home and have a buyer in contract, then lenders seem very willing to postpone the foreclosure sale.

Prior to beginning the foreclosure, the trustee will order a document known as a "Trustee Sale Guarantee" from a title company. This Trustee Sale Guarantee will disclose to the trustee all of the parties holding liens against the property being foreclosed on. One reason for ordering this document is so that the trustee can meet it's obligation to notify junior lien holders of the foreclosure.

Bidders at the foreclosure sale bring cash or certified funds in the amount they intend to bid. The trustee's representative conducting the sale will verify the amount of each bidder's funds prior to starting the sale. The beneficiary will usually instruct the trustee to open the bidding at the amount owed to the beneficiary. However, there are a growing number of cases in which the beneficiary opens the bidding at substantially less than either the amount of the debt or the home's fair market value. This appears to be an attempt by lenders to avoid taking the property into the bank's inventory.

Whether the bank bids the amount of the debt or some lesser amount, California's "One Action Rule" prevents the bank from pursuing a deficiency against the borrower after a trustee's sale. However, the "One Action Rule" does not protect a borrower from a deficiency action by a lien holder with a deed of trust that is junior to the one being foreclosed on. For example, if the holder of the 1st deed of trust forecloses and the borrower has a home equity line of credit or other loan secured by a second deed of trust, the second deed of trust holder may take legal action to obtain a judgment against the borrower.

Another protection for borrowers is the "Purchase Money Prohibition." If a loan, whether it be secured by a 1st, 2nd, 3rd or whatever lien position, was obtained for the purpose of purchasing the property, then no deficiency is allowed. In a relatively common practice, lenders made what were referred to as eighty/twenty (80/20) and eighty/ten (80/10) loans. The 80% loan to value (LTV) loan was secured by a first deed of trust and the 10% or 20% loan was secured by a second deed of trust. The borrower typically paid a higher interest on the second loan but this arrangement allowed the borrower to avoid paying private mortgage insurance (PMI) on the first loan. The net effect was that blended payment was less than it would have been if the borrower obtained and 90% or 100% LTV loan and had to pay PMI. In this situation, the lender holding the 10% or 20% loan secured by a second deed of trust is barred from seeking a deficiency against the borrower even if it is the first deed of trust holder that forecloses.

As you can see, this can all get quite complicated so talk to a real estate attorney about your own individual case.

The trustee is obligated to disperse funds first to the beneficiary at whose request the sale was conducted. Remaining funds will be dispersed to any junior lien holders shown on the Trustee's Sale Guarantee until those liens are paid in full. Any remaining amount is paid to the owner of the property that was foreclosed on.

You can learn more about the foreclosure process by reading section 2924 of the California Civil Code. This section deals specifically with foreclosures and can be found by clicking on the link below and then running a search for "2924" in the Civil Code section.


Stopping the the foreclosure;

1. You can stop the foreclosure by curing the default. Some of the methods used to do this are;

Sell nonessential assets to generate cash
Borrow against a retirement account
Borrow from a relative
Borrow from a conventional lender
Borrow money from a private party (some times referred to as "Hard Money")
Borrow from a credit card
Borrowing money to cure a default is a stop gap measure that creates a new obligation that must be met. Additional borrowing needs to be combined with a long term strategy to stay solvent.

2. Sell the property in foreclosure. This may be possible even if you owe more than your home is worth (this is known as a "short sale"). You may be able to do this tax free if it qualifies as your primary residence. If you start early in the foreclosure process, you should be able to realize close to the property's fair market value.

Currently, a short sale does less damage to your credit rating than a foreclosure sale. This has not always been the case and is subject to change.

If you decide to sell, spend some time and find a good Realtor to help you.

3. If you find yourself with time running out, you may still be able to sell your property being foreclosed on and close escrow in time to beat the sale. Unfortunately, you may have no option except to sell to a person that specializes in purchasing foreclosure properties. These buyers usually won't pay more than about 70% to 80% of a property's fair market value.

4. File bankruptcy. This is a really serious step because it will have a long term negative impact on your credit rating. You should consult with a financial advisor before taking this step. Not only will the consequences last several years, bankruptcy may only postpone the foreclosure unless you are able to make changes to your personal finances.

5. Let the property go to the foreclosure sale. This option is usually only used when the liens against the property exceed it's the fair market.

6. Deed the property back to the bank. This is known as a "Deed in Lieu of Foreclosure." My experience has been that lenders really resist this and will most likely require the borrower to attempt a short sale before considering this option.

No matter what happens with the foreclosure, it is important to make sure you have a long term strategy to stay solvent. Here are some things you may want to consider;

1. Get a book on managing your personal finances. There are a number of books on the subject.
2. Develop a family budget to see where all the money is going. Then, cut non essential spending until you are back on solid financial ground.
3. Talk to a financial advisor and get suggestions of ways to alter your spending and savings habits.
4. Talk to a family member or friend that is strong financially and ask their advice about changes you can make.
5. Cut up credit cards.
6. Change the person who handles the family finances

Publications Qualified To Carry Legal Notices: In Marysville and Yuba County, the Appeal Democrat is the only publication that I am aware of that is qualified to run the "Notice of Trustee's Sale." There is no publication produced in Sutter County that qualifies as a legal publication for purposes of advertising the "Notice of Trustee's Sale." Foreclosure sales in Yuba City and Sutter County are normally advertised in the Appeal Democrat but I believe they may also be advertised in a couple of Sacramento publications.

Last updated 4/18/2012


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Phone: (530) 671-6152
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