California foreclosure laws permit both nonjudicial and judicial foreclosures. Despite most California foreclosures taking upward of 200 days to complete, the state is considered to be a primarily nonjudicial (out-of-court) foreclosure state. California’s foreclosure timeline can be extended in a number of ways either by real estate investors working with homeowners to buy California foreclosures during the pre-foreclosure period or by homeowners themselves .
The California Pre-Foreclosure Process
As in most other states, federal law discourages the initiation of foreclosure proceedings in California until the borrower has fallen 120 days past due on their mortgage loan payments. Although this period of time is not officially part of the pre-foreclosure process, real estate investors should consider it an essential part of investment strategy because many homeowners in this stage feel they have entered “pre-foreclosure” and may be considering selling their properties.
In California, once the 120-day mark is reached, the delinquent loan is considered officially in default. The lender must file a Notice of Default with the court and notify the homeowner within 10 days. This notice must contain certain information, including:
- Options for getting out of default
- The homeowner’s ongoing obligations (usually property insurance and property taxes)
Once the owner of a California foreclosure receives the Notice of Default, they have three months to bring the loan current. If only a partial payment is made, the loan will remain officially in default. The bank cannot set a date for the auction until three months have passed from the date at which the Notice of Default was issued. After the window has passed the homeowner will receive a Notice of Trustee Sale via certified mail and, upon receipt, the bank can schedule the auction. The California foreclosure property cannot be sold until at least 20 days have passed from the time the homeowner received the Notice of Trustee sale.
During pre-foreclosure, California homeowners may pursue a variety of loss-mitigation opportunities, foreclosure alternatives, and foreclosure mediation strategies. In fact, California foreclosure laws require that foreclosing servicers personally contact homeowners in default by phone or in person 30 days before recording the notice of default. This is important information for real estate investors who want to buy California foreclosures and work with homeowners in pre-foreclosure because it will help you figure out how much time a homeowner really has in which to decide about selling the property. California foreclosure laws can also impede real estate investors’ ability to buy foreclosures if the property is vacant, since there are many requirements dealing with the lender’s obligation to contact the homeowner and extending the pre-foreclosure timeline in the event that the homeowner is unreachable.
California Judicial and Nonjudicial Foreclosures
Judicial foreclosures occur mainly in situations where the lender plans to sue for a deficiency judgment. In the case of judicial foreclosure in California, the borrower has up to one year to redeem the property (pay off all monies owed including penalties and fines) after the property has been sold at a foreclosure auction if there was a deficiency (the property was sold for less than was owed) after the auction. For a year afterward, a former homeowner can redeem the property by paying the deficiency to the lender and the cost of the home at auction to the California foreclosure buyer. If there was no deficiency, the former homeowner has only three months in which to redeem the property. If the lender waives the right to a deficiency judgment after a judicial foreclosure, the former homeowner cannot repurchase the property at all.
In a nonjudicial California foreclosure, the borrower can pay off the default and applicable costs of foreclosure in order to stop the foreclosure up to five days prior to the foreclosure sale. Foreclosure sales in California may be held between 9am and 5pm on any business day. The trustee’s sale is a public auction and the property is sold to the winning bidder. The trustee may require bidders to pay the full bid amount in cash or cashier’s check. Anyone may bid at the sale, including the lender and any junior lien holders. A trustee’s sale may be postponed by announcement at the sale. If a sale is postponed more than three times, a new notice of sale must be issued.
After the sale is complete, the trustee transfers ownership to the winning bidder. The borrower does not have the right to redeem the property after the sale.
California Foreclosure Moratoriums and Eviction Moratoriums
In 2020, the COVID-19 (coronavirus) pandemic response in California sent much of the infrastructure around California foreclosure processes grinding to a halt. At the end of August 2020, the Tenant, Homeowner, and Small Landlord Relief and Stabilization Act of 2020, also known as the Tenant Homeowner and Landlord Act, prohibited most evictions for nonpayment of rent and nonpayment of home loans in an attempt to slow the spread of the virus. The U.S. Centers for Disease Control and Prevention (CDC) also passed and then extended federal eviction moratoriums preventing landlords, foreclosing lenders, and real estate investors from evicting non-paying residents from homes. California enacted similar moratoriums and forbearance at the state level.
California enacted some of the nation’s most stringent health policies in response to the COVID-19 pandemic and kept those policies in place longer than almost any other state. Real estate investors hoping to buy California foreclosures should be aware that the state aggressively legislates housing policy and may pass measures affecting your ability to acquire and control California foreclosures.
Other California Foreclosure Legislative and Legal Updates
Here are a few other noteworthy legislative events in California housing law history:
On July 11, 2012, California Gov. Jerry Brown signed into law a major overhaul of foreclosure laws in the Golden State. Known as the California Homeowner Bill of Rights, the new law went into effect on Jan. 1, 2013.
The law prohibits “dual-tracking” the practice of negotiating with clients to modify a mortgage so that payments become more affordable while simultaneously pursuing foreclosure. It also guarantees struggling homeowners a single point of contact at their lender with knowledge of their loan and direct access to decision makers, and imposes civil penalties on fraudulently signed mortgage documents.
The new laws also banned “robo-signing,” the improper or faulty processing of foreclosure documents, and allowed state agencies and private citizens to sue financial institutions, under limited conditions, for economic compensation and for additional civil damages of up to $50,000 if lenders willfully, intentionally or recklessly violate the law. No lawsuit could go forward if the bank or servicer first fixes the problem with documentation or procedures, according to the bills.
On September 28, 2020, California Gov. Gavin Newsom signed SB 1079, which stated that “eligible bidders” could bid on foreclosed properties for 45 days after the foreclosure sale if they were:
- A tenant in the foreclosed property
- A person wishing to purchase the property as a primary residence
- An eligible affordable housing-related nonprofit organization
The bill became effective January 1, 2021, and was scheduled to sunset in 2026. See the most recent version of SB 1079 here.
Stopping or Stalling California Foreclosures
In the mid-2000s, California became notorious for its extended foreclosure timelines and the many ways that delinquent borrowers were able to stall California foreclosures. Today, there are two primary ways homeowners stop or stall California foreclosures: by paying off back payments, interest, and other fees or by filing for bankruptcy. Real estate investors who buy California foreclosures must understand how and if these strategies will play into a deal if they are working with a homeowner in pre-foreclosure and, additionally, consider state legislation governing evictions prior to purchasing a California foreclosure.
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