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THE BASICS OF
FORECLOSURE ON A DEED OF TRUST IN CALIFORNIA
Introduction:
While many
Californians have executed Deeds of Trusts on their homes or real estate
investments when buying property, few fully understand precisely what
they are. There is a vague feeling that they are akin to mortgages and
secure loans to purchase property. There is a vague feeling that if one
does not pay, somehow the Deed of Trust allows the lender to seize the
property. But when pressed, most people do not fully understand a
document that is probably the single most powerful document in terms of
enforcing rights against them that the law allows.
This article shall
briefly review the basics of a Deed of Trust and foreclosure procedure
in California. Other states have different laws on their books. The
reader is advised to first read the two articles,
Real Estate
Transactions and
Debt Collection before
reading further.
What is a Deed of Trust?
When one borrows
money, the lender can ask for security for repayment of the loan. That
security can comprise assignment of a car’s pink slip; a pledge of
various assets owned by the debtor which are secured by filing what is
called a UCC-1; or a pledge of real property. If real property is
utilized to secure a loan, it is usually achieved by executing a
mortgage or, in California, a Deed of Trust.
A mortgage is a
document that allows the creditor, who is unpaid, to proceed to court to
force the sale of the property to pay off the debt.
A Deed of Trust
allows a similar relief, but without requiring the court process.
A Deed of Trust (D.O.T.)
is similar to a mortgage, however varies in a few crucial points.
1)
A
D.O.T. is much easier to foreclose upon then a mortgage because the
process to foreclose on a D.O.T. bypasses the judicial process. Assuming
the Trustee gives the right notices (Notice of Default and Notice of
Sale) the process will go to sale without court involvement at all.
2)
The
parties involved consist of three persons (Beneficiary(Lender); and
Trustee; and Borrower (Trustor).for the D.O.T. and two for a mortgage.
3)
Foreclosed real estate may be easier for the tenant who has been
foreclosed upon to regain their property
In a D.O.T. there
will are three parties involved, a Beneficiary (the Grantor or
Lender, e.g. one who gives the loan), the Trustor (Grantee or
Borrower), and the Trustee (ensures that the loan is paid back,
often a title company.). If someone should default on their loan then
the Trustee will organize a sale of the property in order to recover as
much of the loan as possible, paying off the Lender(s) and, if any sums
are left over, giving them to the Borrower.
For the first ninety
days after a Notice of Default is recorded, the Trustor may
normally cure the default by paying off back due payments and some minor
costs. Once a Notice of Sale is recorded, at least ninety days
from Notice of Default, this right to cure is extinguished.
During the process
in which the Trustee is selling the property the Trustor may still
renegotiate a deal with the Beneficiary or pay back the loan completely
and the entire process may be stopped but after ninety days, the right
to force the sale to stop is limited. If the property is sold then,
because of the lack of judicial mandate, the Trustor may challenge the
sale if all procedures are not strictly followed.
The reason no court
involvement is required is that the Trustee “owns” the property
equitably until the property no longer secures the loan and thus the
Trustee may utilize its equitable title, in conformity with legal
requirements, to pay off the loan by sale of the property in a public
auction.
If the borrower (the
Trustor) fails to make a timely payment, often after some informal
demands from the Lender, the Trustee will usually record a Notice of
Default in the county in which the property is located.. After the
Notice of Default is recorded the Trustor has 90 days to cure the
default as a matter of right, by paying the past due balance and some
costs.
During that 90 days
the Trustee will normally determine the priority of loans and liens to
be paid off at the sale by ordering a Trustee’s Sale Guarantee which
will provide a list of the various liens placed upon the property and
the taxes, then the private liens that were filed first will receive payment first.
After 90 days the
Trustee will normally record and file a Notice of Trustee’s Sale, or
N.O.S. This document requires that the public be made aware of the sale
through either newspapers or other public notification processes. This
notice must continue for 21 days at minimum. At the sale, the property
is sold by the Trustee and the creditor(s) may bid all or part of their
own loans to buy the property.
If all the costs and
loans are paid off, any remaining balance is paid to the borrower. If
insufficient sums are received from the sale, the creditors are paid off
in order of their claims and the borrower receives nothing.
If the property is a
home, the owner normally cannot face further liability on the Note,
predicated on the
anti
deficiency statute. This means that upon foreclosure, the
debt is extinguished in full for the home owner. Non residential
property may result in further action against the borrower if the sale
does not completely pay off the creditors.
Practicalities
Thirty four out of
fifty states allow a D.O.T. to be used in place of a mortgage and in
some of those states, a Deed of Trust is the only option presented to
handle the repayment of a loan that uses home equity.
The sad fact is that
after ninety days from Notice of Default, it may be impossible to cure
the default though many lenders are not anxious to foreclose and will
still renegotiate the loan. It is always worthwhile to discuss
restructuring the debt with the Lender. One usually has nothing to lose
and much to gain. Be sure to avoid waiving the protections of the anti
deficiency statue without good legal advice. Indeed, good legal and
accounting advice is critical to make these discussions worthwhile in
most instances.
While the anti
deficiency statue may eliminate further pressure from the note holder
after the sale, one still faces the possibility of other debts and one’s
credit is normally sullied for at least five to seven years.
After the sale the
previous owner must vacate the premises though quite often the owners
leave long before the sale.
It is important to
recall that Deeds of Trusts are not limited to residential property.
Further numerous Deeds of Trust may pertain to a single property,
normally to be paid off in order of their recording. Most Deeds of Trust
provide that if another Deed of Trust is foreclosed upon the property,
that this becomes a violation of the terms of the Note for each Deed of
Trust, so all the Deeds of Trust become due and owing.
Thus, fast action
should be taken by the borrower the moment one receives the first Notice
of Default. Waiting can only result in extinguishment of rights and a
snow balling of claims against the Borrower.
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