Attorney Stephen J. Beede
In California, Foreclosure comes in two forms each with very different requirements. The following is a general overview of that process:
A. Non-Judicial - (Trustee Sale)
This is the most common process, primarily because of its speed and the fact that no court process is involved. On most loans, the borrower signs a Deed of Trust which gives the creditor a security interest in the real property the loan is on.  If the borrower defaults on the loan, the Deed of Trust gives a designated Trustee the power to protect the lender if there is a default. This is called a power of sale, or more commonly foreclosure.

The process starts with the recording of a Notice of Default in the County where the property is located. This Notice is also posted on the property, published in a newspaper, and mailed to the borrower and all junior creditors.  Once this occurs, the borrower has 90 Days to cure the default by paying all delinquent amounts plus late fees and costs.
If the borrower fails to cure the default within the 90 days, the Lender does the same process with a Notice of Sale. This states that the property will be sold at public auction in 21 days unless within 5 days before the sale the borrower cures the default or pays off the loan in full before the sale. At the sale, the foreclosing lender generally starts the bidding at the amount they are owed. If no-one overbids, the Lender will get the property through a Trustee’s Deed. The foreclosure extinguishes all junior liens on title as well as all leases and rental agreements.

This is a fast track process; Trustee sale can occur within as little as 111 days. However, in exchange for the fast track, a foreclosing lender cannot obtain a judgment against the borrower if the property value is less than the amount owed on the loan.
B. Judicial - (Sheriff’s Sale)
The second process involves a court action and sale and is the only route by which a lender can generally get a judgment against a borrower. The Deed of Trust also gives the Trustee the power to sue to enforce the security agreement. This is typically called Judicial Foreclosure.

The process starts with the Trustee filing a lawsuit against the borrower seeking 1) Sheriff Sale of the real property; then 2) a Deficiency Judgment if the amount obtained in the Sheriff Sale is not enough to pay the Lender in full including a fees, costs, and attorney fees. The borrower is served with a Summons and the Complaint and has 30 days to file an Answer. If the borrower fails to file an Answer, the Lender takes his default and the time is greatly shortened.
At some point in the proceedings, the Court will issue and Order for the property to be sold. After the sale, a Court hearing is held and the Lender can obtain a Judgment against the borrower for the deficiency between the amount of sale and the amount owed. The Lender can then seek to collect on the Judgment by going after the borrower’s other assets as well as garnishing wages.Unless the borrower defaults, the Judicial Foreclosure process can take up to 1.5 years or possibly more. Plus, if it is the borrower’s home, the borrower has an additional 1 year right of re- instatement.  Thus, a Judicial Foreclosure could take 2.5 years before the foreclosing lender could really sell the property to anyone. This makes this a very rare process which is typically only used when a large amount of money is at stake or there are property issues (title, toxics, etc) that prevent the Lender from being able to do a Trustee Sale.
This Report is general in nature and is not intended to provide legal advice to anyone on their specific problems. If you have a problem involving possible foreclosure, get competent legal help as soon as possible.
STEPHEN J. BEEDE is the founder and Managing Partner of BPE LAW GROUP, INC., a Sacramento law firm with offices in Fair Oaks and Roseville focusing primarily on real estate, business, and estates. Steve, together with his wife, Ann,  has been a real estate broker, investor, developer, and manager for 30 years and, owns properties in California and Idaho. You can reach the firm at BPE Law Group, Inc., 11140 Fair Oaks Blvd., Suite 300, Fair Oaks, California 95628, Ph: (916) 966-2260  Fax: (916) 966-2268, e: sjbeede@bpelaw.com.  On the web at www.bpelaw.com

By:  Keith Dunnagan, Esq. (Washington) and Stephen J. Beede, Esq. (California)
BPE Law Group, Inc.
www.bpelaw.com

All of you in the real estate market are keenly aware of the recession affecting the housing market.  Many of you are probably aware that in June 2008 the California Office of Attorney General filed a lawsuit in Los Angeles County for violations of California’s Business and Professions Code as a result of Countrywide’s predatory lending practices for the past 4 years. As you well know, Countrywide was the chief culprit in the subprime lending debacle that led to artificially high prices for residential properties and foreclosure of a high volume of subprime loans. What many of you may not know is that on October 20, 2008, Countrywide and the State of California settled the AG’s lawsuit by entry of a Stipulated Judgment and Injunction (“Settlement”). This settlement is of particular import as the requirements place a heavy burden on Countrywide. Aside from the 1.7 million dollar attorney’s fees provision, the creation of a nearly 28 million dollar foreclosure relief program for the State of California, and that former CEO Angelo Mozilo and COO David Sambol are still involved with litigation commenced by the California, Countrywide has agreed to a myriad of things that could be of import to you as a borrower, real estate agent, potential seller or potential
buyer.

The first and most important fact to understand is that the Settlement affects both Countrywide Originated loans and loans that Countrywide purchased on the secondary mortgage market. This means that if JP Morgan purchased a mortgage loan covered by the Settlement that was originated by Countrywide, the Settlement would cover the loan even though Countrywide has no stake in the loan. What makes the settlement really interesting is that if JP Morgan would have been the originator and Countrywide purchased the loan on the secondary market and was servicing loan, then the loan would be covered by the terms of the Settlement.

But onto the nitty gritty of the Settlement.  The termination date of the Settlement is June 30, 2012. Therefore, over the next four years Countrywide will be obligated to work with the borrowers of California to attempt to remedy the predatory lending and foreclosure epidemic in California. There are a few requirements that need to be satisfied to be eligible for relief under the Settlement, however, the main element is that the mortgage must be for an owner occupied 1-4 unit residential property. Unfortunately, under the term of this Settlement, real estate investors are not covered. However, they may have remedies under other legal constructs.

At the most basic level the Settlement requires Countrywide to attempt modify loans that are currently in default or likely to be in default at a substantial loss to both Countrywide and now Bank of America which purchase Countrywide earlier this year. The purpose of the Settlement was to require Countrywide to identify loans likely to face default and attempt to modify loans to a more traditional loan or a government backed loan to facilitate home retention.

To accomplish this Countrywide as agreed to multitude of provisions. Countrywide has agreed to not initiate or advance any foreclosure process until a borrower’s ability to modify a loan has been assessed. If a borrower can not qualify for a modified loan, has abandoned the property or has no interest in remaining in the property, there is no obligation for Countrywide to stay any foreclosure action in that instance. However, if an individual is foreclosed upon, they would qualify for assistance from the State under the Foreclosure Relief Program funded by Countrywide. The financial assistance available is fairly small and very limited. More importantly though is the ability to modify an existing loan that is in default. The term affordability equation will be used and refers to a loan not exceeding either 42% or 34% of the borrowers income. The percentage is based upon the nature of the modified loan.
The loans that are specifically targeted as part of this Settlement include Subprime 2,3,5,7 and 10 Hybrid Arms, Pay Option Arms and Subprime First Mortgage Loans. In each case, we are looking to see what the LTV is (loan to market value). You are looking for LTV greater than 75%.

Mortgages with LTV’s less than 75% may not be precluded from protection, but the Settlement is not specifically directed at them. In the case that a borrower is delinquent or seriously delinquent (more than 60 days in arrears) the Settlement is triggered. In the case of Hybrid Arms the following options are available: (1) the borrower can modify their loan into a government backed HOPE or FHA loan, (2) a modification of the loan to restore the initial rate for a period of five years before becoming a traditional ARM loan or (3) a fully amortizing loan subject to the affordability equation which would include a restoration of the introductory rate or lower depending on the current market rates but not lower than 3.5% and after five years the loan would automatically convert to a fixed rate mortgage at whichever is higher the Fannie Rate or the introductory rate, (4) a fully amortizing loan, with a ten year interest only period and then modification to a traditional ARM where the interest rate is no lower than the interest rate floor (between 3.5% and 2.5% depending on circumstances) and capped at the introductory rate.

In the case that the borrower is delinquent or seriously delinquent on a pay option loan the following options are available: (1)  the borrower can modify their loan into a government backed HOPE or FHA loan, (2) a modification to a fully amortizing ARM loan eliminating negative amortization, including an optional ten year interest only payment and reduction of the interest rate to the interest rate floor and capped at 7% and if the borrower owns only one residential property and the LTV is greater than 95% the borrower is eligible for a write down of the principal to an LTV of 95%. Countrywide is not obligated to go any lower than that.
In the case of any other subprime loan, the borrower is eligible for HOPE and FHA modifications as well as the fully amortizing loan identified under (3) of the Hybrid Arm loan modifications.
As part of the loan modification process for qualified mortgages contained in the Settlement Countrywide has agreed to waive all late and delinquency fees, prepayment penalty fees and will not charges to the extent permitted any fees for modification of the loan to government HOPE and FHA loans. Further, if an eligible borrowers who prior to this Settlement modified a loan is still eligible to modifications under the Settlement. Finally, once the modification process has been commenced, Countrywide is obligated to make a the offer to modify an existing loan on average not more than 60 days after identifying the eligible borrower and having received necessary income documentation. Due to the potential that individuals may take advantage of the modification program under the Settlement, in the event an eligible borrower intentionally becomes delinquent to benefit from the program, Countrywide can require intensive full documentation prequalification of a modified loan. The government does not want the legitimate delinquent borrowers ability to modify an unaffordable loan slowed or hampered because of intentional defaults by borrowers that can afford their loan. Further, the pre-qualification would have the effect of possibly eliminating some of the
benefits from modifying including the elimination of a rate reduction for the intentionally defaulting borrower.
Finally, in an effort to ensure compliance, Countrywide is obligated to provide annual reports
to the AG’s office.
There is a lot more to this Settlement and one should consult an attorney before entering into
a modification of an existing loan.  If you have specific questions, feel free to contact us at BPE Law
Group, Inc.   (916) 966-2260 .