Facing a Foreclosure in California? Here’s What Will Happen

What to expect if you fall behind on the mortgage payments for your California home.

Updated: Nov 29th, 2023

I bought a home in San Diego, California, six years ago with an adjustable-rate mortgage (ARM). The monthly payments were very affordable when I first got the house. But since then, I took a different job that pays less than I made before. When the payment reset last year, the amount I have to pay each month went up significantly. I cut down on other expenses and managed to come up with enough money to keep current on the loan for a while, but I can’t make the payments anymore. What’s going to happen next?

When money’s tight, and you’ve cut down on your other expenses as much as possible, it still might be impossible to keep up with your mortgage payments. Once you fall far enough behind on the loan, your lender (or the subsequent loan owner) will likely foreclose—that is, go through a specific legal process before eventually selling your home to a new owner at a foreclosure sale.

Here’s a step-by-step explanation of what typically happens in a California foreclosure.

When a Foreclosure Can Start in California

If the property is your principal residence, federal law generally requires the servicer to wait until you’re more than 120 days’ delinquent on the loan before starting a foreclosure. In some cases, however, the process can begin earlier, like if you violated a due-on-sale clause or if the servicer is joining the foreclosure action of a superior or subordinate lienholder.

Cal. Civ. Code § 2923.4 and following) is a set of California laws that provide protections to homeowners in foreclosure. The law went into effect on January 1, 2013, and on September 14, 2018, Governor Brown signed a bill that permanently reinstated its expired provisions.

Under this law, the servicer can’t officially begin the foreclosure until 30 days after it has contacted you in person or by phone—or satisfied specific requirements for attempting to contact you—to assess your financial situation and explore alternatives to foreclosure, like a loan modification or repayment plan. During the initial contact, the servicer has to tell you that you have the right to ask for a subsequent meeting, which can take place over the phone.

If you ask for a meeting, the servicer has to schedule it to occur within 14 days. However, the servicer may assess your financial situation and discuss foreclosure avoidance options during the first contact rather than at a subsequent meeting. The servicer also has to give you the toll-free telephone number for the United States Department of Housing and Urban Development (HUD), so you can find a HUD-certified housing counselor.

Also, the Homeowner Bill of Rights makes the following activities, among others, illegal:

• dual tracking a foreclosure while a loan modification application is pending (see below) and
• robosigning foreclosure documents.

Stopping the Foreclosure Sale or Getting Damages

If a lender or servicer materially violates specific provisions of the Homeowner Bill of Rights, you can sue to stop the foreclosure sale (if a trustee’s deed upon sale has not been recorded) or receive damages (if a trustee’s deed upon sale has already been recorded).

• Stopping the sale. In cases where the lender or servicer has violated the Homeowner Bill of Rights and the trustee’s deed (see below) hasn’t yet been recorded, you can ask the court for an injunction (an order) stopping the foreclosure. But this will likely just postpone the sale until the lender or servicer complies with the law’s requirements. Still, it could buy you some extra time in the home or time to try to work out an alternative to foreclosure. Also, if you get the injunction, the court may award you attorneys’ fees and costs as well.
• Suing for damages. If the trustee’s deed has already been recorded, you can sue the lender or servicer to recover your actual damages, which is the monetary losses you incurred due to the violation, plus attorneys’ fees and costs. In addition, you can get triple damages or $50,000, whichever is greater, if a court finds that the violation was intentional, reckless, or resulted from willful misconduct.

But a lender or servicer can avoid potential liability under the Homeowner Bill of Rights if any violation is corrected and remedied before the trustee’s deed is recorded.

What Are the Different Kinds of Foreclosure in California?

If you don’t apply or qualify for a foreclosure alternative, the servicer can start the foreclosure. California foreclosures can be judicial or non-judicial. Judicial foreclosures go through the state courts. Non-judicial foreclosures happen outside of the court system. In California, foreclosures are usually non-judicial.

Because in California; you’ll go through a non-judicial foreclosure, that process is summarized below.

How the Non-judicial Foreclosure Process Works in California

To officially start a non-judicial foreclosure, the trustee records a notice of default in the county records and mails you a copy within ten business days. The notice of default gives you three months to reinstate the loan (bring it current). After three months, the lender can set the sale date and issue a notice of sale.

The trustee records the notice of sale in the county recorder’s office and mails you a copy at least 20 days before the foreclosure sale. The notice of sale may be recorded up to five days before the lapse of the three months, but the sale date can’t be earlier than three months and 20 days after the notice of default’s recording date.

Under California law, you may reinstate the loan at any time up until five business days before the sale date.

Also, a notice about the sale must be posted in a conspicuous place on your property at least 20 days before the sale, posted in a public place, and published in a newspaper for three weeks.

Mortgage Relief for Homeowners Affected By COVID

Homeowners in California who’ve experienced a financial hardship because of COVID-19 can apply for some of the $1 billion allocated to the state under the American Rescue Plan Act from the California Mortgage Relief Program. This program uses federal Homeowner Assistance Fund money to help homeowners get caught up on overdue housing payments and avoid foreclosure.

If You Apply for a Loan Modification, the Foreclosure Might Have to Stop

Under California law, if you didn’t previously apply for a modification, or if you’ve had a material change in your financial circumstances since your previous application, and you send the servicer a complete application at least five business days before a scheduled foreclosure sale, the servicer can’t proceed with the foreclosure (that is, it can’t dual track your loan). The foreclosure can only begin after:

• the servicer makes a written determination that you’re not eligible for a modification, and the appeal period has expired
• you don’t accept a modification offer within 14 days, or
• you accept a modification offer, but you default (fail to make the payments) or otherwise breach the agreement.

But if you’ve already applied and your financial circumstances haven’t changed, submitting an application won’t prevent the foreclosure from going forward.

This California law is more generous than federal law. Federal law requires you to submit your application more than 37 days before the sale to stop the foreclosure.

How Foreclosure Sales in California Work

If you don’t get current on the loan, work out an alternative to foreclosure, or stop the process by filing for bankruptcy, the sale will take place on the set date. California foreclosure sales happen between the hours of 9 a.m. and 5 p.m. on business days, Monday through Friday.

At the sale, the lender will most likely bid on the property using a “credit bid.” With a credit bid, the lender basically gets a credit in the amount of your debt. The lender can bid the total amount you owe on the loan, including foreclosure fees and costs—or it may bid less.

In some states, when the lender is the high bidder at the sale but bids less than the total amount of the debt owed, it can get a deficiency judgment against the borrower. But in California, deficiency judgments aren’t allowed after non-judicial foreclosures. If the sale results in excess proceeds (money over and above what’s needed to pay off all the liens on your property), you’re entitled to that surplus money.

After the sale, the winning bidder gets a trustee’s deed.

Can I Get My Home Back After a Foreclosure Sale in California?

Although the Homeowner Bill of Rights won’t let you get your home back after a trustee’s deed is recorded, you might be able to reclaim your home in rare circumstances by making a legal claim like wrongful foreclosure or breach of contract, depending on the facts of your situation.

For example, if you have an FHA loan and the servicer didn’t meet FHA’s loss mitigation requirements, you might be able to challenge the foreclosure on the basis of wrongful foreclosure. Or, you might be able to make a claim of breach of contract if, for example, the servicer foreclosed on your home even though you were making payments according to a written loan modification agreement. In either of these situations, as well as some others, you might be able to invalidate the sale.

You can raise a claim of wrongful foreclosure or breach of contract in the unlawful detainer (eviction) action after the foreclosure or by filing your lawsuit.

When Do I Have to Leave My Home After a California Foreclosure?

If you don’t move out after the foreclosure sale, the new owner (usually the lender) has to give you a three-day notice to quit (move out) before starting a formal eviction action in court. Generally, it’s better to leave the property before an eviction starts.

Talk to a Lawyer

While this article provides an overview of a typical California foreclosure, keep in mind that state and federal laws are complicated—and servicer’s often make mistakes in the process. Most of the time, however, servicer errors go unchallenged. If the servicer skipped a step, made a mistake, or violated the law, you could have a defense that could force the servicer to start the foreclosure over, or provide you with leverage to work out an alternative.

Also, laws change, so verifying them is always a good idea. How courts and agencies interpret and apply the law can also change. And some rules can even vary within a state. These are just some of the reasons to consider consulting an attorney if you’re facing a foreclosure. Talk to an experienced foreclosure lawyer to learn about different options in your circumstances.

Conclusion

Selling a house in default in California is possible, but it comes with challenges and complexities. You have several options to explore, from reinstating your loan to pursuing a short sale or selling on the open market. However, each option has its pros and cons, and it’s crucial to assess your situation carefully and seek legal counsel to make the best decision for your circumstances.

Remember, “default” in California real estate can be a stressful situation, but with the right guidance and a clear understanding of your options, you can take steps to mitigate the impact and find a solution that works for you. Don’t hesitate to reach out to professionals who specialize in distressed property transactions to help you navigate this challenging process successfully.

Disclaimer: This material is provided for information purposes only and is not to be construed as financial, investment or tax advice. Readers are strongly advised to consult with their professional advisors regarding the information herein.

Contact Terry Jenkins at Jenkins Real Estate Auctions LLC – to learn more about a new home selling and marketing program (916) 588-0067.

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