“Nonjudicial foreclosures” (also known as “trustee’s sales”) are available in California to enforce defaulted real estate loans. The procedures for nonjudicial foreclosure proceedings, including service and recordation of the notice of default and the posting and publication of the notice of trustee’s sale, are highly technical and are governed by various provisions of the Civil Code. Borrowers’ advance waivers of these provisions are not effective.
Lenders generally prefer nonjudicial foreclosure to judicial foreclosure because (i) usually (barring a bankruptcy filing by the borrower) a nonjudicial foreclosure can be completed in a much shorter time period than a judicial foreclosure (in approximately four months versus up to two years), (ii) the borrower does not have a right of redemption following a nonjudicial foreclosure sale, and (iii) the legal and other fees incurred in connection with a nonjudicial foreclosure are usually much less expensive than those incurred in a judicial foreclosure. However, in a nonjudicial foreclosure, the tradeoff is that the lender loses up any the right it may have to pursue a deficiency judgment against the borrower: under California law, a deficiency judgment is always prohibited after a nonjudicial foreclosure has been completed.
The timetable for nonjudicial foreclosures requires the trustee to wait three months after recording and serving the notice of default before giving 20 days’ notice of sale. In addition, trustees customarily allow for an additional 11 days in scheduling the sale date in order to determine whether any federal tax liens were recorded as of 31 days before the sale date. These timetables can be significantly extended if the borrower files for bankruptcy protection, triggering the automatic stay to preclude foreclosure, or if the borrower brings an action challenging a nonjudicial foreclosure.
The borrower has a right to cure the default under the loan up to 5 business days before the date that the real property collateral is sold in the nonjudicial foreclosure. If the sale date is postponed, the borrower’s right to cure is extended. If the lender fails to provide the borrower with the information about the amount that is due, and as a result the borrower tries to, but cannot, cure its default, the lender opens the foreclosure to challenge.
The lender may credit bid (bid up to the amount owed to it under the loan) at the nonjudicial foreclosure sale. However, the lender must carefully ascertain the amount that is due to it under the loan, because if it claims amounts not due to it (for example, a usurious rate of interest if the loan was not exempt from California’s usury laws), the borrower may have grounds to challenge the foreclosure sale.
It is not uncommon for lenders and borrowers to extend the sale date for a nonjudicial foreclosure in order to continue workout discussions. (Sometimes lenders unilaterally extend the sale date for other reasons.) There are limits on how many extensions can be done before the trustee must provide a new formal “Notice of Sale” for the rescheduled nonjudicial foreclosure sale.
Many nonjudicial foreclosure sales of commercial real estate attract no bidders other than the foreclosing lender. Because bidders other than the foreclosing lender must immediately pay their bid amounts in cash or cash equivalents, such as cashier’s checks, many would-be bidders would rather buy foreclosed properties after the foreclosure, from the foreclosing lender. However, the foreclosing lender is not allowed to “chill the bidding” by taking certain steps to discourage other bidders from attempting to bid. Specifically, it is unlawful to (1) to offer to accept or accept from another,
any consideration of any type not to bid, or (2) to fix or restrain
bidding in any manner, at a nonjudicial foreclosure sale; however, it is lawful for any person including the trustee, to state that a
property being foreclosed is being sold in an “as-is” condition.
Though bidding strategies can vary, many foreclosing lenders will credit bid not more than about 90% of the current appraised value of the property. However, bid strategies vary considerably from lender to lender. It is usually imprudent to bid in the entire amount of the debt owed, in case a problem with waste or fraud is discovered later, after the winning bidder (usually the foreclosing lender) takes title to the property.
[Under recently enacted legislation that expires January 1, 2013, certain additional requirements apply to foreclosures involving residential real property. These requirements include the following:
- In the case of a mortgage loan made during 2003 through 2007 to a borrower whose principal residence is the mortgaged property, the foreclosing lender generally must contact (or take specified due diligence actions to contact) the borrower in person or by telephone in order to assess the borrower’s financial situation, discuss the borrower’s options for avoiding foreclosure and provide the borrower with certain additional information. The lender must do this at least 30 days prior to recording the required notice of default.
- In the case of a loan secured by a property that includes one or more rental housing units, any tenant or subtenant in possession of a unit at the time of the foreclosure sale must be given at least 60 days’ notice (double the amount of time afforded under prior law) to move from the foreclosed property.
- In all cases, the legal owner must maintain vacant residential property purchased at a foreclosure sale or acquired through foreclosure under a mortgage or deed of trust. This maintenance requirement includes caring for the exterior of the property (such as preventing excessive foliage growth that diminishes the value of surrounding properties) and taking action to prevent trespassers or squatters from remaining on the property, to prevent mosquito larvae from growing in standing water and to prevent other conditions that create a public nuisance. A governmental entity may impose civil fines and penalties (of up to $1,000 per day) for failure to do so.
(The last two of the above requirements apply to both judicial and nonjudicial foreclosure proceedings.)]
Many technical requirements must be met in the various notices and other steps in a nonjudicial foreclosure. In California, obtaining a trustee’s sale guaranty is virtually required in order for the lender to make sure it provides the required notices to the right parties. If a lender makes a mistake in the notices or the process, the borrower may be able to challenge the validity of the foreclosure.