A “power of sale” clause in a mortgage or deed of trust permits lenders to foreclose on defaulted loans without court approval – a non-judicial foreclosure. The sale is conducted by the trustee without court intervention. If there is no such clause, the lender must sue the borrower and obtain a court order to foreclose – a judicial foreclosure. In California, generally all mortgages and deeds of trust contain a “power of sale” clause. Thus, judicial foreclosures are rarely used.
Notice of Sale
After the notice of default is recorded with the county recorder’s office, the borrower has 3 months to reinstate the loan (or bring the account current). Cal. Civ. Code § 2924(a)(2). If the borrower does not reinstate the loan within the 3-month period, the trustee may proceed to give a Notice of Sale.
There are several requirements pertaining to the Notice of Sale. At least 20 days before the foreclosure sale, the Notice of Sale must be:
1) mailed by registered or certified mail, postage prepaid, to the borrower, all parties to whom notice of default was given, and any state taxing agency that recorded a notice of tax lien;
2) posted on the property;
3) posted in a public place in the city where the property is sold;
4) published once a week for 3 consecutive weeks in a newspaper of general circulation in the city (the first publication must be at least 20 days before the sale); and
5) recorded with the county recorder.
Cal. Civ. Code § 2924f(b)(1). Additionally, when a federal tax lien has been recorded against the property, the Notice of Sale must also be sent to the IRS by registered or certified mail or personal service, at least 25 days before the sale. Cal. Civ. Code § 2924b(c)(4).
Debtors’ Right to Reinstate
Debtors have the right to reinstate the loan up to 5 business days before the foreclosure sale date. Cal. Civ. Code § 2924c(e). If the sale is postponed, debtors’ reinstatement right is also extended to 5 business days before the new date.
Sale of the Property
If the debtor does not reinstate the loan, the property is sold by public auction. Anyone, including the beneficiary, may bid on the property. The sale is deemed final when the highest bid is accepted. The highest bidder receives title to the property by a trustee’s deed that relates back to the date when the deed of trust was recorded. Thus, all liens and encumbrances that attached to the property after the deed of trust was recorded are extinguished (unless the bid exceeds the amount necessary to pay off the senior lien as explained below under Distribution of Sale Proceeds).
Distribution of Sale Proceeds in California Following a Non-Judicial Foreclosure
After the property is sold, the proceeds are applied in the following order:
1) to pay trustee’s fees and expenses in conducting the sale;
2) to satisfy the debt to the lender;
3) to the payment of junior creditors in the order of their priority; and
4) the balance, if any, to the borrower.
When proceeds remain after trustee fees are paid and lender’s debt are satisfied, the trustee must send written notice to those with recorded interests in the property who would have been entitled to receive a copy of the notice of default.
Right to Redemption
In California, in non-judicial foreclosures, debtors have no right to redeem the property after the sale is completed. This is not the case in judicial foreclosures. In judicial foreclosures, debtors have a statutory right of redemption for one year following the sale. Accordingly, after a non-judicial foreclosure sale, the purchaser owns the property and the debtor can no longer claim any right to the property.
by C. Mina Kim, Esq, email@example.com, www.schorr-law.com, 310-954-1877