Analyzing the Steps of Foreclosure
-By Sara Sutachan, Senior Research Analyst

Foreclosures are at an all time high according to various data sources both nationally and in California. Based on preliminary calculations by the CALIFORNIA ASSOCIATION OF REALTORS®, the number of foreclosures in the state is expected to exceed 220,000 for the year, reaching a peak in 2008 and remaining elevated in the first half of 2009. As such, home prices will continue to face downward pressure through the first or second quarters of next year because of the presence of foreclosures/distressed sales.  

Given the recent rise in the level of foreclosures and the impact they have on the current real estate market, it is worth reviewing the steps in the foreclosure process in the state of California. The process begins when a homeowner has missed a payment or two, at which time the lender may choose to start the foreclosure process. This usually happens in 45 to 60 days but the decision to begin the foreclosure process is at the lender’s discretion and may vary.  Once the lender decides to begin the foreclosure process, the lender is required to file a 30-Day Notice of Intent to file a Notice of Default (NOD).

The 30-Day Notice is a rule put into place by Senate bill 1137 in July of this year and applies to owner-occupied residential properties sold between January 1^st, 2003 and December 31^st, 2007. After the 30 days are up, the lender can file an official NOD.  Lenders of residential properties that do not fall under the Senate bill can simply file an NOD after the first missed payment, again the actual time they file an NOD is at the lender’s discretion so may vary. The lender provides information on how to reinstate the loan and the homeowner has not less than three months from the NOD filing to do so.

If the homeowner does not act by end of three months after the NOD is filed, the lender can proceed with the foreclosure.  The lender must publish a Notice of Trustee’s Sale, which is posted for 20-31 days (the law requires lenders to post the sale for at least 20 days but most usually file 31 days before the sale because of an IRS notice requirement). In all, the homeowner has a little over three months to bring their loan into good standing from the time an NOD is filed on their property. In addition to the time frame above the homeowner can, by law, bring their loan current until five days prior to the Trustee Sale. Even after the deadline to cure a default is filed, the homeowner still has an option to pay the entire loan amount up to the time of the Trustee Sale. However, once the Trustee Sale is recorded, the property is transferred to a new owner, in most cases the lender itself, and all bets are off for the homeowner. The property is then owned by the lender and becomes a real-estate owned or REO property.

The elapsed time from the first sign of financial distress to the final Trustee Sale may range anywhere between four and seven months, during which the homeowner can take steps to avoid foreclosure. The two most common ways of avoiding foreclosure are to negotiate a plan with the lender or negotiate a short sale (selling the home for less than what is owed to the lending institution). Regardless of how a homeowner’s mortgage problems are ultimately resolved, the foreclosure process tends to be lengthy and stressful, not to mention costly for all of those involved. The lender has incentives to work out a deal with homeowners if it is viable for them because the foreclosure process costs time and money in terms of legal fees, carrying costs, maintenance costs, and the burden of selling the property. The first thing for homeowners to do when they are facing difficulties paying their mortgage is to call their lender as soon as there is a problem. This early communication is key to avoiding foreclosure.

    
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