Understanding Judicial And Non-Judicial Foreclosure In California
By: Richard E.Korb[1]
Foreclosures come in a small variety of forms. The most common form of foreclosure in the United States, until the mid-19th century, was judicial foreclosure. Judicial Foreclosure was eventually seen as too expensive and time-consuming, so lenders asked state legislatures for a faster, more efficient method of foreclosure. Non-judicial foreclosure, foreclosure with extremely minimal court oversight, was created and is still widely used in America, including California.
What exactly is Judicial and Non-Judicial Foreclosure?
Judicial Foreclosure – Foreclosure through the courts. Lenders begin the foreclosure process by suing the defaulting borrower in state court. The lender accomplishes this by filing a notice of Lis Pendens and a compliant with the court. If final judgment is rendered in the lender’s favor, the property is auctioned to a new buyer.
Non-Judicial Foreclosure – Foreclosure without court intervention, with requirements established by state statutes. According to Civil Code 2924 A1, lenders begin the foreclosure process in California by making a diligent effort to give the defaulting borrower an NOD, or Notice of Default. If the borrower is unable to make payment after three months, authorized sellers can begin the auction of property by giving the borrower a Notice of Foreclosure Sale.
Differences between Judicial and Non-Judicial Foreclosure
Judicial and non-judicial foreclosures are fairly similar as far as results are concerned. If the lender is successful in foreclosing, an auction will be held to sell the property. The winner of the auction will receive the property’s deed; if no one purchases the property, the lender gets the property back. The defaulted borrower will be evicted for the new owners.
The major difference between the two is in the amount of judicial oversight. In judicial foreclosure, a trial is held to verify that the borrower has defaulted and the property is auctioned by the court’s employees. In non-judicial foreclosure however, the lender sends the borrower a NOD. The defaulting borrower will have three months to cure, or pay back the money owned. After three months, the lender can then send a Notice of Foreclosure Sale to the borrower before holding the auction. Lenders can seek foreclosure in non-judicial foreclosure without suing the borrower because in a non-judicial foreclosure, the deed of trust on the property comes with a power of sales clause. A deed of trust is a document which transfers legal ownership of property from lender to borrower after the latter has paid off the mortgage. The power of sales clause allows the lender to foreclose the property if the borrower defaults and is unable to fulfill his or her end of the contract (paying off the mortgage).
The majority of foreclosures in California are non-judicial. Lenders prefer non-judicial over judicial foreclosure because the former is less expensive and takes less time; there is no trial required for a non-judicial foreclosure, and, assuming there are no extensions, the lender can expect the foreclosure to be over in about 111 days. Judicial foreclosures, with its extensive paperwork and court appearances, can take awhile for the courts to process.
If a foreclosure in California is judicial, either the deed does not have a power of sales clause, the borrower has sued the lender, or the lender is seeking a deficiency judgment. A deficiency judgment results in the borrower paying for the difference between the mortgage owned and the mortgage paid in the auction. A lender would only want a deficiency judgment however, if the value of the property was less the market value when the property defaulted. In other words, a deficiency judgment would only be necessary if the auction failed to cover the mortgage. Deficiency judgments may not be obtained if the property in foreclosure was sold through a non-judicial public sale.
In addition, a house that has been foreclosed through a judicial foreclosure has a right of redemption. This right means that, after a period of time, the defaulted borrower can buy his or her property back from the person or persons who bought it at foreclosure. In California, the waiting period for redemption is 3 months to one year, depending on whenever or not the public sale from the foreclosure was enough to pay off the secured debt. Most lenders will not want defaulted borrowers to be able to redeem their foreclosed house, as this may affect the sales auction if buyers discover that the defaulted borrower may contact them in the future.
The most important difference between the two types of foreclosures for borrowers, though, is that in judicial foreclosure the lender sues the borrower while in non-judicial foreclosure, the borrower is the one expected to bring the foreclosure to court. With judicial foreclosure, the lender is suing the borrower for breach of contract when the borrower defaults. In non-judicial foreclosure, the borrower sues the lender for incorrectly applying foreclosure laws.
Why You Should Care
Since most foreclosures in California are non-judicial, the borrower has to be the party which brings court oversight to the foreclosure process, if a court is to be involved at all. With the subprime mortgage crisis of 2009, many lenders and banks were foreclosing at an unprecedented rate. Such haste resulted in some illegal foreclosures, especially if lenders sold the mortgage to a third party or if the lender neglected a step in the foreclosure process. With so many homes being foreclosed and with so little judicial oversight, many borrowers were often unaware if their lenders were improperly foreclosing them.
If you have any questions, please contact real estate and foreclosure attorney Richard Korb (in Berkeley-Oakland-Walnut Creek) for a free consultation and further advice on foreclosure law at 510-524-0903.
[1 RICHARD E. KORB is a seasoned attorney with 30 years of business, real estate litigation and foreclosure experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, bankruptcy and general civil law and he has drafted and negotiated over 250 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters. In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. ©2011.
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