Over the past few years I’ve counseled hundreds of “upside down” homeowners facing foreclosure. Not so much recently, but a few years ago, the usual situation involved a big-bank talking the talk but not walking the talk of a short sale or loan modification, and in the end foreclosing ‑‑ taking the property ‑‑ even with a borrower/homeowner willing to make the loan payments.
As a result of those client representations, I developed a sour attitude toward big, national banks. I also learned most folks don’t know anything about the foreclosure process.
NEW FORECLOSURE CASE
Pan Sparrow got two loans from Countryside Home Loan. Each loan was secured by a separate deed of trust on a home in Hercules, California. Sparrow defaulted on one of the loans, which resulted in a foreclosure. Sparrow lost the property.
The detailed facts of which lender was in first and which lender was in second position are too confusing and not important for our Law Review column. However, the Opinion gives us an opportunity to discuss the foreclosure process in the Golden State.
NOTICE OF DEFAULT/SALE
The usual situation when someone borrows money to buy property, let’s say a home, is make a down payment, then borrow the money from a lender, signing a promissory note promising to pay the loan over time. Also signing and recording a deed of trust securing the note. If the borrower defaults, the lender can foreclose (force a sale) of the property to get paid.
The lender’s first step towards a foreclosure is to record and mail the borrower by certified mail a Notice of Default, sometimes titled Notice of Default and Election to Sell. The lender must then wait three months, then may record, serve by certified mail on the borrower, and post on the property, a Notice of Sale.
The Notice of Sale with time and place of auction must be published once a week in a newspaper over a three week period. See typical Notices on the back pages of the Sierra Sun, right near this column. At the foreclosure auction the lender generally bids what it is owed, which usually results in the lender owning the home, but sometimes a third party buyer shows up at the foreclosure sale with a handful of cashier’s checks, outbids the lender and ends up as owner.
The entire foreclosure process takes about four months unless there is a bankruptcy or other delaying event.
PROCEEDS OF FORECLOSURE SALE
Rarely, but on occasion, bidders at the foreclosure auction bid more than the amount the lender is owed. For example, the lender bids what it is owed, let’s say $500,000.00, but the property being foreclosed on is worth $900,000.00, so interested bidders at the foreclosure sale may offer more than $500,000.00 to buy the property. That extra money is called “surplus proceeds” of the sale.
SURPLUS PROCEEDS OF FORECLOSURE SALE
The Court of Appeal in the Pan Sparrow case summarized California law on surplus proceeds. (Civil Code Section 2924(k)). The proceeds of a trustee’s (foreclosure) sale are distributed in the following order: First to the costs and expenses of the sale; next to the payment of obligations secured by the deed of trust which is being foreclosed on (i.e. to the foreclosing lender); third to junior lien holders in the order of their priority, for example, a junior deed of trust; then fourth to the borrower being foreclosed on.
Senior lenders do not receive surplus proceeds, but the buyer at the foreclosure sale buys “subject to” senior deeds of trust. For that reason, junior lien holders seldom foreclose.
Hopefully this column is of no interest to you.
Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, California, and Reno, Nevada. Jim’s practice areas include: real estate, development, construction, business, HOA’s, contracts, personal injury, accidents, mediation and other transactional matters. He may be reached at email@example.com or www.portersimon.com.
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