MLO Mentor is an ongoing series covering compliance best practices for mortgage loan originators (MLOs). This article gives an overview of California state’s nonjudicial foreclosure process.
The power-of-sale provision
A mortgage holder or carryback seller holding a note secured by a trust deed in default has two foreclosure methods available to enforce collection of the mortgage debt. These two foreclosure methods are:
- a judicial foreclosure sale, also called a sheriff’s sale [Calif. Code of Civil Procedure §726]; and
- a nonjudicial foreclosure sale, also called a trustee’s sale. [CC §2924]
The key to the mortgage holder’s ability to nonjudicially foreclose by a trustee’s sale on the mortgaged real estate is the power-of-sale provision contained in the mortgage.
Other security devices used to create a lien on real estate to secure a debt which may also contain a power-of-sale provision include:
- a land sale contract [Petersen Hartell (1985) 40 C3d 102; see RPI Form 168];
- a lease-option sale [See RPI Form 16319];
- a homeowners’ association (HOA) conditions, covenants and restrictions (CC&Rs) regarding assessment liens;
- bonded improvement assessments; or
- a UCC-1 financing statement. [Lovelady Bryson Escrow, Inc. (1994) 27 CA4th 25; see RPI Form 436-1]
The grant of the power-of-sale provides a private contract remedy for the recovery of money. The power-of-sale is voluntarily agreed to by the owner of the mortgaged property, authorizing the mortgage holder on a default to hold a nonjudicial foreclosure sale of the property by public auction. [CC §2924]
However, if the note evidences a recourse debt with a remaining balance exceeding the fair price of the mortgage holder’s security position in real estate, the mortgage holder may choose a judicial foreclosure. A judicial foreclosure allows the mortgage holder to seek a money judgment for any deficiency in the property’s value to satisfy the debt.
By foreclosing under the power-of-sale provision, the mortgage holder avoids a costly (and potentially time consuming) court action for judicial foreclosure.
Who conducts the sale
A trust deed is a security device which imposes a mortgage lien on real estate. The mortgage wording purports to create a fictional trust which is said to “hold title” to the mortgaged real estate for the benefit of the mortgage holder. The trustee holds no interest in the property and has no duty owed to anyone.
Thus, a mortgage has three parties:
- at least one trustor (the owner(s) of the mortgaged real estate);
- a trustee who need not be named; and
- at least one beneficiary (a lender, carryback seller, HOA, bonded assessment or other mortgage holder).
The trustee’s sale is conducted by the trustee who is either:
- named in the mortgage; or
- appointed by the beneficiary of the mortgage at the time the beneficiary initiates the foreclosure process.
A broker, attorney, mortgage servicer, subsidiary of the mortgage holder or the mortgage holder itself may be appointed at any time as the trustee.
The trustee begins foreclosure by recording a notice of default (NOD). The trustee ends the process on delivery of the trustee’s deed and disbursement of any sales proceeds. [Bank of America National Trust & Savings Association v. Century Land & Water Co. (1937) 19 CA2d 194]
Generally, trust deed forms are prepared and distributed by title or escrow companies naming their corporation as the trustee. However, a trust deed or other security device does not need to name the trustee at all. The mortgage holder later simply appoints a trustee to handle the NOD or reconveyance. [See RPI Form 450]
Also, the mortgage holder may appoint a substitute trustee to replace the trustee named in the trust deed.
The stages of foreclosure
To successfully complete a trustee’s foreclosure sale under a power-of-sale provision, the trustee and mortgage holder need to adhere to the procedures detailed in the California foreclosure statutes for handling a trustee’s sale. [Garfinkle v. Superior Court of Contra Costa County (1978) 21 C3d 268]
The foreclosure process has three stages:
- the notice of default (NOD) is recorded and mailed;
- the notice of trustee’s sale (NOTS) is recorded, posted and mailed; and
- the trustee’s sale of the real estate by auction occurs, followed by the execution of the trustee’s deed and distribution of sales proceeds.
Editor’s note — A first mortgage on a borrower’s principal residence needs to be at least 120 days delinquent before the mortgage holder may cause an NOD to be recorded. [12 CFR §1024.41(f)(1)]
While the trustee is concerned about the three stages for processing the foreclosure, the owner of the real estate and the mortgage holder are concerned primarily with two different periods of time which control payment of the debt:
- the reinstatement period, which runs from the recording of the NOD and ends prior to five business days before the trustee’s sale; and
- the redemption period, which also runs from the recording of the NOD but ends with the completion of the trustee’s sale.
Trustee’s sale guarantee
When a mortgage is in default and the mortgage holder has chosen to foreclose, the mortgage holder hands a Declaration of Default and Demand for Sale to the trustee.
The declaration contains instructions directing the trustee to initiate foreclosure on the mortgaged property as authorized under the power-of-sale provision contained in the mortgage.
Even though the trustee may have received the mortgage holder’s declaration of default, the trustee’s foreclosure process and the periods imposing rights and obligations do not begin until the trustee or mortgage holder records an NOD. [System Investment Corporation v. Union Bank (1971) 21 CA3d 137]
Once the NOD is recorded, the trustee is required to strictly comply with statutory notice requirements. To be assured the required notices are served on all the proper persons, the trustee orders a trustee’s sale guarantee from a title company before or at the time the NOD is recorded.
The trustee’s sale guarantee provides coverage to the trustee for failure to serve notices on any party due to an omission of that person’s identity in the guarantee. The trustee’s sale guarantee contains:
- the name and address of each person who has recorded a request for a copy of the NOD;
- the name and address of each party with a recorded interest in the real estate securing the obligation in default;
- any junior (later recorded) easements and to whom the easements were granted;
- the property’s legal description;
- a plat map locating the property; and
- the names of the newspapers in general circulation in which the NOTS, and the NOD if necessary, are to be published.
