Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators (MLOs). This video explains the procedures followed for a trustee’s sale. For course credit toward renewing your NMLS license, visit firsttuesday.us.

The trustee’s procedures

Homeowner’s do default on their consumer mortgages.   Unless the default is cured in some manner, the mortgage holder is forced to instruct a trustee to begin foreclosure proceedings. When instructed, the trustee records a notice of default (NOD) to enforce collection of the debt by sale of the secured property at a public auction, unless cured before completion of the auction sale.

The trustee follows specific notices and procedures for conducting a pubic auction to sell the property, called a trustee’s sale. The foreclosure process ends on delivery of the trustee’s deed to the highest bidder and disbursement of sales proceeds to the foreclosing mortgage holder. [Bank of America National Trust & Savings Association v. Century Land & Water Co. (1937) 19 CA2d 194]

While commonly called a trustee’s sale, the public auction is also formally called a nonjudicial foreclosure sale. The public auction is the result of a private agreement set out in provisions in a mortgage document — a security device — called a trust deed, directing the property be sold to the highest bidder by the trustee when an uncured default exists on the mortgage. [Calif Civil Code §2924h]

Before the auction begins, the trustee may:

  • demand all prospective bidders show evidence of their financial ability to pay as a precondition to recognizing their bids; and
  • hold the prospective bidders’ amounts to be bid. [CC §2924h(b)(1)]

A bidder at auction can tender their bid amount in U.S. dollars in the form of:

  • cash;
  • a cashier’s check drawn on a state or national bank;
  • a check issued by a state or federal thrift, savings and loan association (S&L), savings bank or credit union; or
  • a cash equivalent designated by the trustee in the NOTS, such as a money order. [CC §2924h(b)(1)]

Each bid made at a trustee’s sale is an irrevocable offer to purchase the property. However, any subsequent higher bid cancels a prior bid. [CC §2924h(a)]

The trustee’s sale is considered final on the trustee’s acceptance of the last and highest bid. [CC §2924h(c)]

Once the highest bid has been accepted by the trustee, the trustee may require the successful bidder to immediately deposit the full amount of the final bid with the trustee. [CC §2924h(b)(2)]

Occasionally, the successful bidder tenders payment by a check issued by a credit union or a thrift. Here, the trustee can refrain from issuing the trustee’s deed until the funds become available. [CC §2924h(c)]

Failure to deliver payment of bid

When a successful bidder tenders payment by check but the funds are not available for withdrawal to cover the check:

  • the trustee’s sale is automatically rescinded; and
  • the trustee will send the successful bidder a notice of rescission for failure of consideration. [CC §2924h(c)]

To hold a new trustee’s sale auction, the trustee sets a new trustee’s sale date and records, serves and publishes a new Notice of Trustee’s Sale (NOTS). The new NOTS follows all the same statutory requirements as the original NOTS.

Further the successful bidder who fails to tender payment when demanded is liable to the trustee for all resulting damages, including:

  • court costs;
  • reasonable attorney fees; and
  • the costs for recording and serving the new NOTS. [CC §2924h(d)]

Bids by the mortgage holder

The mortgage holder is frequently the only bidder at a trustee’s sale. Thus, the mortgage holder automatically becomes the successful bidder — and the property becomes a portfolio investment denoted as real estate owned (REO) property held by the mortgage holder.

The mortgage holder bids without tendering funds up to an amount equal to the debt secured by the property being sold, plus trustee’s fees and foreclosure expenses. This amount is called a full credit bid. [CC §2924h(b)(2)]

Typically, the mortgage holder is the successful bidder under a full credit bid.  Here, the trustee retains possession of the mortgage holder’s note (or other evidence of the mortgaged debt) in exchange for the trustee’s deed to the property.

The mortgage holder is not required to bid the full amount of the indebtedness at the trustee’s sale. The mortgage holder can bid an amount below the full amount of the debt, called an underbid, and acquire the property when no other bid is higher.

Conveyance by a trustee’s deed

On completion of a trustee’s sale as no higher bidders have come forth, the trustee uses a trustee’s deed to transfer title to the property to the successful bidder.

Often a buyer other than the mortgage holder is the highest bidder, purchasing the property for value and without notice of title or trustee’s sale defects. Here, the buyer is considered a bona fide purchaser (BFP).

The BFP’s interest in the property sold is perfected as of 8 a.m. on the date of the trustee’s sale, conditioned on the trustee’s deed conveying the property to the BFP is recorded:

  • within 15 calendar days after the date of the trustee’s sale; or
  • when the county recorder is closed on the 15th day, the next business day following the 15th day after the sale. [CC §2924h(c)]

Importantly, the title received by the BFP is clear of any interest claimed by the owner, mortgage holders or tenants whose interests in the property are junior to the foreclosed mortgage. [Hohn v. Riverside County Flood Control and Water Conservation District (1964) 228 CA2d 605]

However, a residential tenant may hold a fixed-term lease at the time of the trustee’s sale. Here, the new owner is required to honor the existing residential lease unless:

  • the home is to be occupied as a principal residence;
  • in which case the new owner may serve the tenant with a 90-day eviction notice. [CC §2924.8(a)(1); see RPI Form 573]

Further, title is taken clear of any unrecorded prior interests or claims in the property held by others not in possession of the real estate. However, to take clear title free of claims, the BFP cannot have actual knowledge or constructive notice of any existing priority claims when acquiring title to the property at the trustee’s sale. [CC §§1107, 1214]

A lis pendens recorded against the real estate prior to the trustee’s sale places bidders on constructive notice of a lawsuit involving a claim to a right in title or to possession of the real estate. When the claim has priority to the foreclosed mortgage, the lis pendens destroys the BFP status of the successful bidder.

Related article:

MLO Mentor: Notice of Default & Notice of Trustee’s Sale