Unfortunately, due to unforeseen circumstances – the housing market crash, layoffs, family emergencies, having been lured into predatory loans, or experiencing some other genuine hardship – many honest, hard working families are unable to pay their mortgage payments as they become due. As a result, they fall behind on their scheduled payments thereby defaulting under the terms of the loan. This has lead to the greatest home seizure movement in history. Make no mistake of it, the lender’s goal is to either get paid the money they are owed or to retain the property secured by the loan. If the borrower fails to pay on the loan after several months, a trustee for the lender or bank will initiate a foreclosure action (Trustee’s Sale). On top of the devastating emotional impact, this action can deprive homeowners of their property and can destroy their credit for years to come.
California is a non-judicial state which allows the bank to sell a home at public auction without having to obtain a court order. The bank has the right to sell the home without a court order because the borrower signed off on the “power of sale” clause in the original loan agreement. The foreclosure process begins with the lender recording a Notice of Default (NOD) with the County Recorder's Office and serving it upon the homeowner. Within three months, if the borrower fails to remedy the default by becoming current on the loan, a Notice of Trustee’s Sale is recorded and served on the borrower.
Twenty days after the Notice of Trustee’s Sale is published, the home can be publicly auctioned by the trustee to the highest cash bidder. The borrower can prevent the foreclosure if five days prior to the sale the borrower pays all outstanding past due payments under the loan, inclusive of arrears, fees and costs. If the auction proceeds and the highest bid does not cover the full amount of the debt owed under the loan, the property automatically reverts back to the beneficiary for the debt, often times the bank. A Trustee's Deed Upon Sale is then recorded transferring title to the bank. At this point, the property becomes an REO (Real Estate Owned) and the bank can sell or rent it to recover the debt.
After the Trustee's Deed Upon Sale is recorded, it extinguishes any junior lien holder's rights to redeem any debt owed and secured by the property. Sometimes borrowers refinance, take out a second mortgage, or debt collectors, including the government, file liens against the property as collateral for any outstanding debt owed. These are junior liens which have a lower priority than the first mortgage because they were recorded later in time than the first. (However, this does not apply to state property tax liens which always have priority.) Faced with the prospect of taking nothing, junior lien holders also try to take measures to protect their interests. The junior lien holder may advance funds to bring the senior loan payments current so as to initiate its own foreclosure action; may bid at the senior lien holder’s foreclosure sale to increase the purchase amount so that it covers the senior and junior liens; or may acquire the property outright by bidding at the foreclosure.