Every day TLF gets calls about foreclosures. The past few years has seen an unprecedented flood of foreclosures as propertly values sharply declined. The LA Times recently ran a piece about reforms related to foreclosures. That is well and good, but waiting for things to change really does not provide any help for the millions of people facing the loss of their homes and the millions of people facing the foreclosure of the places they are renting. Here are some very basic facts you need to know about foreclosures in California and the issues we are routinely asked about.
Foreclosure is the process by which a lender (usually a bank) takes back collateral (usually a single family home) which has been pledged to secure a loan. In the most simplified terms, this means that before the foreclosure you were the owner and after the foreclosure you are not the owner anymore. The most common type of foreclosure involves a bank lending a homeowner money secured by their real estate they used the loan to purchase. This is called a purchase money mortgage. If the borrower cannot pay back the mortgage then the lender can "take back" the property, which is the foreclosure process.
There are many, many hoops a lender has to jump through to foreclose. Way too many, in fact, to detail here. But there are some basic things you need to know. California has both judicial foreclosure and private foreclosure. Many states only have judicial foreclosure, which entails the filing of a lawsuit and judicial oversight as the case winds its way through the courts. This option to rarely used in California because it takes just as long as a regular lawsuit (a year or more) and involves attorney fees and court costs.
One reason lenders might file a judicial foreclosure is to obtain a "deficiency judgement" against the borrower. That is to say if the propery is only worth $300,000 and the remaining loan balance on the first trust deed is $500,000, the lender can get both the property and a deficiency judgment (in this example for $200,000) against the borrower personally. This hypothetical assumes the bank actually sells the property for market value of $300
California law also permits private foreclosure. These have nothing to do with the courts. There is no lawsuit required. As a result, there is no judicial oversight. The people (the bank) with the vested economic interest are the very ones in charge of ensuring they forclose in a legal way. This system, as you might imagine, has led to a number of abuses, oversights and straight up violations of the law. That is why reforms are, indeed, needed. The vast majority of foeclosures are done by private foreclosure. Still, there are many legal requirements before a house can be auctioned off on the courthouse steps. If the borrower (usually the bank) forecloses using this private, trustee sale method then there usually is no deficiency judgment against the borrower.
Some basics about private foreclosure: there has to be a notice of default and an opportunity for the borrower to cure, i.e. to pay the past due amounts, including penalties and interest. Then, after more notices, there is a public auction of the property, which is usually conducted on the courthouse steps. The lender of the first trust deed is in "first position" and will "credit bid" at the acution. This means, using our example above, that when the auction begins the bank will have a credit of $500,000. Anyone else who wants that house will have to bid over and above the amount of the bank's credit bid of $500,000. Still using the example above, if that house being auctioned off is only worth $300,000 you can see why so many banks end up "taking back" the properties which secured their loans. These properties are referred to as "REO", or real estate owned by the banks.
The banking crisis of the past couple of years has to do in large part with the fact banks had way too many REO's where they lent out more money than they ended up getting back from the houses they foreclosed. In fact, so many houses were repossesed by the lenders that they could not sell them at all. This meant the banks' return on their loans was not just a loss, it was a total loss. A consequence of so many bank owned properties which could not be sold was the creation of tremendous pressure on market valuation. In other words, foreclosures are very bad for property values, prices slide and, in effect, a viscious cycle is created. Foreclosures cause house values to deflate, thus leading to more foreclosures and even greater decrease in home values and on and on. Good luck with that!
TLF does not get involved in trying to help people refinance, renegotiate or short sell their distressed homes. If the home you own and live in has been foreclosed you are subject to being evicted by the owner. All the new owner is going to have to do is serve you with a three day notice for you to leave. If you do not leave then the new owner can initiate an eviction action, which is called an unlawful detainer. The process usually takes about four to six weeks before you have to leave, even if you do not file any sort of response to the eviction lawsuit. TFL does represent parties involved in post-foreclosure eviction litigation.
Many homeowners faced with a Three Day Notice To Quit (quit=leave) after a foreclosure often ask about the possibility of filing a bankruptcy to gain more time in their house before they have to leave. This is because the filing of a federal bankruptcy case results in an "automatic stay" of all lawsuits, including evictions, against the person who files the bankruptcy. TLF does not help people file for bankruptcy. But what we do do is file motions for relief from stay in the bankruptcy court so that we can evict people who do file BK. While it is relatively easy to file BK, it is also relatively easy to obtain a relief from the automatic stay. The person who files might buy a week or two, but BK does not effectively stop any eviction.
The short of it is this: if you owned a home that was foreclosed the odds are very, very good ]you failed to make the payments due and, in fact, really did default on your loan. Under these circumstances the law is designed to pemit the lender to take the property back and to get you out. Once the foreclosure sale has actually happened there is very little you can do to reverse the process. You will not be able to unring that bell. You are going to have to leave.
TLF represents both people who buy properties at foreclosure sales and people who have lost their properties to foreclosure. As for the new owners, sometimes they want the old homeowners to stay, take care of the property and pay rent. More time than not, though, they want the old homeowners to leave as soon as possible. Sometimes this involves "keys for cash" whereby the new owner will actually pay the old homeowner to leave. Usually the quicker the old owner is willilng to leave the more money they can get.
If you rent a home going through foreclosure you are in a much, much better position than a homeowner who lost his home. First of all, if you are in the middle of a signed lease the new owner must honor the terms of that lease. Often times a homeowner who is facing foreclosure may rent their house to an innocent third party to generate some desperately needed cash. The renter moves in and two months into their year lease they discover the house was lost to foreclosure. That renter, by law, is entitled to stay in that house until the end of their year lease. The person who bought the place at the foreclosure auction must honor your lease.
If a renter of a foreclosed property is living at the property on a month to month basis after having stayed there at least a year then they are entitled to usually 90 days notice from the new owner before they are forced to leave. If they do not leave after 90 days then they can be evicted.
TLF's skill set is advocacy. In the olden days lawyers represented either landlords or tenants exclusively. They believed there was some sort of ethical delemma in representing parties from both sides of the fence. That is a dying trend. TLF represents both new owners who purchase property at foreclosure as well as renters innocently caught up in a foreclosure dramma for which they are not to blame and, often time, victimizes them. For owners, we can ensure you do not violate the law and get the results you want, such as having the tenants sign a new lease or having them evicted. For tenants, we can optimize your "cash for keys" options as well as create the most beneficial conditions for your continued tenancy. There have been cases where, because the new owner did not know what they were doing, we have had tenants who lived in a foreclosed house for months and months without paying any rent. Of course each case is different. That is why you should always call a professional who has been through these situations time and time again.