Foreclosure is a daunting experience that can arise from various unforeseen life circumstances. In California, particularly in San Diego, the process involves complex legal proceedings and strict regulations that can overwhelm anyone without a solid understanding of real estate laws.
Below, we’ll shed light on the reasons behind foreclosures, the specific foreclosure process in San Diego, and how enlisting the help of an attorney can provide crucial guidance and peace of mind if foreclosure may be looming on your home or business.
How Foreclosures Occur in California
Foreclosure is a legal process through which a lender seeks to recover the balance of a loan from a borrower who has stopped making payments. This process involves the forced sale of the asset used as collateral for the loan—typically, a home, though it may also be a commercial property. When a borrower signs a mortgage, they agree to certain terms, including making regular payments to the lender. If the borrower fails to comply with these terms, the lender has the right to initiate foreclosure proceedings to sell the property and recoup the unpaid loan amount.
The proceeds from the sale are then used to pay off the mortgage debt, any accrued interest, and other costs associated with the process. If the sale proceeds exceed the amount owed, the surplus may be returned to the borrower. However, if the proceeds are insufficient to cover the debt, the lender may pursue a deficiency judgment against the borrower for the remaining amount.
Foreclosures most commonly occur due to financial hardship on the part of the borrower. Several factors can contribute to this hardship, including:
- Unemployment or Loss of Income: Losing a job or experiencing a significant reduction in income can make it difficult for owners to keep up with mortgage payments, leading to potential foreclosures.
- Unexpected Expenses: Sudden, significant expenses such as medical bills or emergency property repairs can deplete a borrower’s finances, forcing them to choose between covering these costs and paying their mortgage.
- Increased Living Costs: Rising living costs without a corresponding increase in income can strain a borrower’s budget, making it challenging to meet mortgage obligations.
- Adjustable-Rate Mortgages (ARMs): Borrowers with ARMs may find their mortgage payments increase to an unaffordable level due to rising interest rates, leading to potential default and foreclosure.
- Declining Property Values: In some cases, a steep decline in property values can result in borrowers owing more on their mortgage than their real estate property is worth. This situation, often referred to as being “underwater” on a mortgage, can discourage borrowers from continuing to make payments, especially if they face other financial challenges.
Foreclosure is a last resort for both lenders and borrowers. It can lead to significant financial and emotional distress for owners, while lenders may incur substantial costs and potentially receive less than the value of the mortgage. As such, lenders often explore alternatives with borrowers, such as loan modifications, forbearance agreements, or short sales, to avoid foreclosures.
The Foreclosure Process in San Diego
In California, the foreclosure process is primarily non-judicial, meaning it occurs outside of the court system based on the power of sale clause in the mortgage or deed of trust. This process is regulated by state law, with specific prerequisites and timelines that must be followed. Here’s an outline of the legal requirements for foreclosure, including the notice of default and the right to cure, the non-judicial foreclosure process, and the typical timeline from the initial missed payment to eviction.
Legal Prerequisites for Foreclosure
The foreclosure process in California begins with the lender recording a Notice of Default (NOD) with the county recorder’s office in the county where the property is located. Before filing the NOD, California law requires the lender to contact the borrower to assess the borrower’s financial situation and explore options to avoid foreclosing at least 30 days prior to issuing the NOD.
After the NOD is recorded, the borrower has a period to “cure” the default, typically at least three months. During this period, the borrower can pay the overdue payments, along with any penalties and interest, to halt foreclosing activities.
Non-Judicial Foreclosure Process
After the notice of default and the cure period, if the borrower has not made the loan current, the lender can move forward with the process.
At least 20 days after the three-month cure period, the lender can issue a Notice of Sale (NOS), setting the date for the auction. The NOS must be recorded in the county where the property is located, mailed to the borrower and any parties with a recorded request for notice, and posted on the property and in one public place. It must also be published in a newspaper of general circulation in the county where the property is located once a week for three consecutive weeks before the sale date.
The foreclosure sale is a public auction, and the property is sold to the highest bidder. The lender can credit bid up to the amount owed, including fees and costs. After the auction, the winning bidder receives a trustee’s deed upon sale, transferring ownership of the property.
Timeline of the Foreclosure Process
The timeline of the foreclosure process in San Diego, California, follows the state’s guidelines for non-judicial foreclosure, which is the most common possibility process in the state. Here’s a breakdown of the timeline, starting from the first missed payment to the potential eviction after a foreclosure sale:
- Initial Missed Payment: Foreclosure processes can’t start until at least one payment is missed, but lenders typically offer a grace period.
- Pre-Foreclosure Period: After multiple payments are missed (usually three to six months), the lender sends a letter and then contacts the borrower as required by California law to discuss options to avoid foreclosure.
- Notice of Default: Issued after the lender has made contact and assessed the borrower’s financial situation without finding a solution to avoid foreclosing. The cure period begins.
- Cure Period: This lasts for a minimum of three months, during which the borrower can cure the default.
- Notice of Sale: Issued at least 20 days following the cure period, with the sale date typically set for 21 days after the notice of sale is recorded.
- Foreclosure Sale: The property is auctioned to the highest bidder.
- Eviction: If the property is sold at auction, the new owner may initiate eviction proceedings if the former owner does not voluntarily vacate the property. The timeline for eviction can vary, but it typically starts a few days to several weeks after the sale.
Variations in Local Ordinances
While the process described above is standardized across California, local variations might exist, particularly in relation to eviction proceedings post-foreclosure and any additional notices required by local ordinances. In San Diego, as elsewhere in California, the primary process is driven by state law, with local court proceedings potentially coming into play during eviction if the former owner does not leave the property voluntarily. It’s important for owners facing foreclosures in San Diego or any other part of California to consult with a legal professional familiar with both state laws and local ordinances to understand their rights and obligations fully.
Alternatives to Foreclosure
Facing foreclosure can be one of the most challenging situations for an owner. However, several alternatives may be less damaging to the owner’s credit, potentially allow them to avoid the foreclosure process, and in some cases, even stay in their property.
Challenging the Foreclosure’s Validity
Attorneys often challenge whether the lender has the legal right (“standing”) to foreclose. This can involve scrutinizing the mortgage’s assignment chain to ensure the entity pursuing repayment owns the loan. Suppose the loan servicer made significant errors in managing the mortgage account, such as incorrect calculation of the balance due or misapplication of payments. In that case, these errors could be grounds to challenge the proceedings.
Short Sale
A short sale occurs when an owner sells their real estate for less than the amount owed on the mortgage with the lender’s approval. This option can be appealing to lenders as it allows them to avoid the lengthy and costly foreclosure process. For owners, a short sale can be less damaging to their credit score than a foreclosure.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure involves the owner voluntarily transferring the title of the property to the lender in exchange for the cancellation of the mortgage debt. This process can be quicker than a foreclosure and may have a slightly less negative impact on the owner’s credit.
Loan Modification
Loan modification involves changing the terms of the mortgage to make the payments more affordable for the owner. This could include reducing the interest rate, extending the term of the loan, or even reducing the principal balance.
Filing for Bankruptcy
As a last resort, filing for bankruptcy can halt the process due to the automatic stay provision, which prohibits creditors from continuing with collection actions during the bankruptcy proceedings.
- Chapter 13 Bankruptcy: This allows the owner to keep their property and pay back their debt over a three to five-year period. This option can be particularly effective if the owner has a regular income and can catch up on missed payments through the repayment plan. It’s available for both homeowners and businesses.
- Chapter 7 Bankruptcy: This option can temporarily stop foreclosure, but it may not ultimately prevent the loss of the property if the owner cannot catch up on missed payments. However, it can provide time to negotiate a solution with the lender or prepare for a move. It’s only available to individuals, not businesses.
- Chapter 11 Bankruptcy: This is often used by businesses to reorganize their debts while continuing their operations. Upon filing for Chapter 11, an automatic stay is immediately enacted, which halts all collection activities, including foreclosure actions against the business’s real estate properties. It’s particularly suited for corporations, partnerships, and some sole proprietors who have substantial debts, including those related to real estate.
How an Attorney Can Help With Foreclosure
An experienced real estate attorney plays a crucial role in implementing these strategies effectively. They can provide legal analysis to identify the best course of action, prepare and file necessary legal documents, negotiate with lenders, and represent the owner in any court proceedings. Moreover, an attorney can offer advice tailored to the owner’s specific situation, helping to navigate the complexities of foreclosure laws and ensuring that the owner’s rights are protected throughout the process
- Negotiation with Lenders: Attorneys have the negotiation skills and legal knowledge to communicate effectively with lenders. They can present the owner’s situation in a legally compelling way, maximizing the chances of the lender agreeing to an alternative to foreclosing.
- Legal Representation and Advice: An attorney can provide advice on the best course of action based on your specific circumstances, including exploring all legal avenues to prevent foreclosure. This could involve challenging its legality if the lender has not followed proper procedures or seeking alternatives like a short sale or deed in lieu of foreclosure.
- Documentation and Paperwork: Attorneys can ensure that all necessary paperwork is completed accurately and filed on time. They can also review any agreements from the lender to ensure they are in the owner’s best interest.
- Protecting Owner’s Interests: Perhaps most importantly, an attorney acts as an advocate for the owner, ensuring their rights are protected and their interests are represented throughout the process.
By considering alternatives to foreclosure and seeking the assistance of an attorney, owners can navigate the difficult situation with more control and potentially less impact on their financial future.
Take Action Before Accepting Foreclosures
Understanding the foreclosure process in California and the specifics in San Diego is critical for owners facing this difficult situation. While the prospect of losing ownership of your real estate can be overwhelming, it’s important to remember that there are options and resources available. Engaging a skilled attorney can not only help navigate the legal complexities but also provide a sense of security and control during an uncertain time. If you’re facing foreclosure, consider reaching out to the real estate attorneys at Peterson Law, LLP, to explore your options and protect your interests.
