Monday, December 1, 2014

Foreclosure Procedure in California

Okay, so give me the procedure, in an easy list form.

[Please note that this procedure is specific to nonjudicial foreclosure in California. Other states with nonjudicial foreclosure have different procedures, and judicial foreclosure is a court action against the landlord.]

Here's what happens:

1. Your landlord doesn't pay the mortgage.

2. After a few months, or sometimes many months, the lender files a Notice of Default.

3. Your landlord has at least three months to cure the default. That's legalese for paying the mortgage or, if possible, negotiating new mortgage terms with the lender.

4. If your landlord doesn't pay or can't work out an agreement with the lender, the lender can file a Notice of Trustee Sale and put the building up for auction. The Trustee Sale will be at least 20 days from the filing of the Notice of Trustee Sale, but it can be longer.

5. Once the building has been sold, and the vast majority are "sold" back to the lender these days, the lender can, if your aren't protected by rent control or "just cause" eviction protections, serve you with a 90-days' Notice to Quit (quit is legalese for move and give up possession) or to the end of your lease if your lease expires more than 90 days after the date you receive notice from the lender.

So now for the long version, please.

Most foreclosures in California are nonjudicial for a variety of reasons I won't get into here. That means that the lender doesn't have to got to court to foreclose when the borrower doesn't pay. After your landlord has missed several payments, the lender files a Notice of Default with the County Recorder. If your landlord doesn't either pay the arrears or negotiate a deal with the lender, the lender can file a Notice of Trustee Sale and and try to sell the building at a courthouse auction.  The lender must give the borrower three months after filing the Notice of Default before filing the Notice of Trustee Sale and selling the building, but it can take many more months for the lender to get 'round to it.

It may take more than three months because the lender and your landlord are negotiating a settlement, or the lender maybe overwhelmed with foreclosures and can't process them quickly. If you live in a house or condominium, the lender may not want to file the Notice of Trustee Sale because the lender would have to pay the condominium or homeowner association dues. (That leaves the tenant in limbo, in that no one is responsible for the building, but that's not necessarily a bad thing, as no one will be asking for rent either.)

In California, the Notice of Trustee Sale should be posted at the property. This is often the first notice that tenants have that there is a problem. Most buildings don't sell at auction and the lender ends up taking the building back. The lender then enters the default with the County Recorder, and takes possession of the building.  The process will take at least four months from the filing of the Notice of Default, but it often takes much longer.

So tenants don't find out about the foreclosure until some notice gets posted on the garage door?

Well, not always. Very occasionally a landlord will tell the tenants that he's abandoning the property. Sometimes tenants find out that the building is in foreclosure when realtors who specialize in foreclosure sales start circling the building. Some landlords lied to their lenders, claiming to live at the property, and the tenants find themselves deluged with mail from the loan servicer or lender. And if you live in San Francisco or Fresno County, you should receive a warning from the County Assessor if a Notice of Default is filed on the property where you live.

For many tenants, though, the first notice is the Notice of Trustee Sale. The Notice of Trustee Sale is only mailed to properties where the tax notices and the like are mailed to another address.  You should receive a copy of that Notice and a warning that the building is in foreclosure.  The Notice will also inform you that the new owner will not be able to evict you for at least 90 days after the sale.

Since January 1, 2013, tenants in California are protected by a state law--AB 2610--that mostly mirrors the federal Protecting Tenants at Foreclosure Act.  However, there are a couple of important differences--and they're better.  The first is that all tenants are protected except those who live with the owner.  Those tenants receive only 30 days' notice.

Leases will generally survive unless the tenant is a parent, child, spouse or ex-spouse of the foreclosed owner, or the rent is substantially below market, or the lease is not what's called an "arm's length" transaction.  In these cases the lender still has to give 90-days' notice.

And under state law, you don't have to show that you are a "bona fide" tenant, which means that the lender can't frighten you out of your home by spouting Latin at you.  No, I'm serious.  I get email from tenants all the time asking me whether they're "bona fide" tenants, as the notice they received from the lender either wants the tenant to prove that she is, or is claiming that she isn't.  Now California law requires that the lender or new owner prove that you're not a bona fide tenant.

Even though this is, for many tenants, the first warning that anything is amiss, it at least notifies tenants that the lender is required to give them a 90-days' notice. However, as I noted above, if your landlord took out the mortgage on your house as an owner-occupier, you will not receive this notice.  However, you will probably already know about the foreclosure as you've been inundated with mail from the lender, foreclosure "rescue" scammers, and the like.

There are another good provision of the California law--AB 2610.  I'll probably move discussion of this elsewhere once I complete the blog revision, but for now I'll just mention it here.  One of the bad behaviors of some lenders is proceeding to "evict" the landlord, failing to even note that tenants live at the property.  This causes immense hassles for tenants, as they aren't named in the unlawful detainer action and have to intercede in the process to protect their rights.  A tenant who finds herself in this situation is not time-limited in asserting her rights.  Because some tenants never see the court papers, their first inkling that something is wrong is when the Sheriff delivers the notice that they'll be evicted in five days.  And yes, that is scary, and infuriating.  But now the tenant can stop the action by going to court--and you can do this up to the time that the Sheriff shows up to put you out.  If this happens to you, though, you need legal help.

Unfortunately, the Legislature has never enacted a provision that would have required that tenants receive a copy of the Notice of Default. Had tenants won the right to a copy of the Notice of Default, that would have given them an extra three months notice. The Legislature, though, was swayed by the argument of the mortgage bankers--that sending a copy of the Notice of Default would violate the landlord's privacy. Uh, the Notice of Default is a public record. (Oh, how I wish I could get away with making dumb arguments like that!) Many tenants, in fact, find out that a Notice of Default has been filed when realtors who handle foreclosure sales start nosing 'round the house.

My landlord's lender has filed a Notice of Default. Can I move?

If you have a month-to-month rental agreement, you can move at any time. Just send your landlord a letter stating that you'll be moving in 30 days. If you have a lease, you'll have to negotiate with your landlord to leave early, and there's not much you can do if he won't let you out of the lease. And your landlord may well want to continue collecting rent from you until the foreclosure. But your landlord cannot collect rent from you for periods after the foreclosure sale. (Some landlords have managed to collect rent for months after the building was taken back by the lender, and the tenants then have to sue the former landlord to recover the money.)

Now there is an exception to this rule if you move into your new home after the Notice of Default was filed.  This happens relatively rarely these days, as most tenants are diligent about checking out properties before they rent them.  But it does still happen, particularly to tenants moving from other states where foreclosure is less of an issue.  SB 1191 requires that a landlord disclose that a Notice of Default has been filed on the property to prospective tenants.  (Yes, if you moved in before the Notice of Default was filed, the landlord is not required to notify you, even if he hasn't been paying the mortgage for a year and a half.)  A tenant who moves in and then discovers that the Notice of Default had been filed before she signed the lease can do one of two things:

She can void the lease and move out.  Then she can sue the landlord for a month's rent or for twice her actual damages, and any prepaid rent.  In computing this, you'd add up the cost of finding a new place and moving into it, and determine whether that sum is greater than a month's rent.  If the month's rent is more, sue for that.

Or if the foreclosure has not yet occurred, the tenant can deduct one month's rent and stay in the property.

In either case, you should, after expressing your anger, consternation and fury, notify the landlord in writing of your choice, reminding him in not so gentle terms that he violated the law by not informing you that the property was in foreclosure.

I have a year's lease. Can the lender evict me if it hasn't expired?

In most cases, no. Under federal and state law tenants may remain in their homes until their leases expire, or for 90 days, whichever is later. The exception is that if your home is sold to an owner-occupier, your lease may be voided. However, you are still entitled to 90-days' notice to vacate. So if you have more than 90 days left on your lease, you'll generally get to stay for the term of the lease. If you have less than 90 days left on your lease, you'll receive 90-days' notice.

Do I have to pay the rent?

Most of the time, yes. Your landlord owns the property up to the day of the Trustee Sale. So he can collect rent until then. And since most rental agreements and leases require that the full rent be paid on the first of the month, you may have to pay the full rent, even though the landlord is going to lose the property on the fifth. You can try paying the rent for the period up to the date of the Trustee Sale, but the landlord could serve you a 3-days' notice to pay rent or quit, and then you'd have to pay the rest of the rent for the month.

The lender may not collect rents for periods prior to the Trustee Sale, and may not collect rent if you've already paid your now former landlord for the month in which the Trustee Sale occurs. If, for instance, you paid the April rent on the first, and the Trustee Sale was on the fifth, the lender cannot collect the rent for April again. You have met your obligation under the rental contract.

It gets a bit iffier if you paid several months rent in advance. While you paid the landlord when he owned the property, you paid for periods after the Trustee Sale, and that's a more complicated legal issue. If you must pay rent in advance, be sure that your agreement to do so is in writing, so that you have some proof of the advance payment. Better still, don't pay rent for several months in advance. And ferhevensake, don't ever pay the rent in cash. It's a large sum of money; you want a paper trail better than a receipt on the back of an old envelope.

What if I don't know who owns the building?

You would think that lenders would operate in a more businesslike manner than just showing up at the door and demanding that you move or pay the rent or whatever.  You know, the courteous telephone call informing the tenant that the building as been foreclosed, and asking to make an appointment to talk.  Or perhaps a letter sent through the mail, rather than an illegible missive on a scrap of binder paper, asking when it would be convenient for the tenant(s) to meet and discuss the property.  You know, the kind of behavior that doesn't treat tenants as though we're lowlifes who are going to make off with the copper pipes, given the opportunity.  

Sometimes both the landlord and the lender come round demanding rent from you. Under the law the new owner, whether or not it's the lender, is supposed to notify the tenants within 15 days after the sale--in writing.  But that doesn't always happen, and sometimes a realtor just shows up demanding the rent.  If you don't get the written notice, ask for it.  It's the law, ferhevensake.  Then, before handing anyone a check, call the County Recorder and confirm the ownership of the building. If the Trustee Sale was canceled or hasn't been scheduled, you should pay the rent to your landlord. If the Trustee Sale did happen, find out the name and address of the new owner (whether the lender or someone else). If it's not clear who the owner is, send both your landlord and the lender a letter stating that it's unclear and that you will hold the rent until you receive definitive word.

And thanks to another new California law, AB 1953, a landlord who does not give you the required notice cannot evict you for not paying rent when you didn't know who to pay.  (This has been a common strategy in communities with rent control, where lenders show up four months after the Trustee Sale, demanding the rent, and then evicting tenants for not paying it.)  The new landlord can sue you for the money, but cannot evict you from your home if they've failed to make the required notification.  And if a lender does try to evict you, you have a defense to the unlawful detainer.

Anything else?

I hope that I don't have to tell you that just because someone comes round demanding the rent, you don't have to hand him a check. On occasion, scam artists have gone round to foreclosed properties, claiming to be the agent for the lender, and demanding the rent. And on occasion, tenants have given them the money. It would be helpful if I could say that no realtor would come round demanding the rent the way the loan sharks of yore demanded payment on the loan, but it's not true.

But you should not hand it over. Explain gently but firmly that you do not hand over checks for large sums of money to anyone who demands same, and that you will wait for the official notice from the lender, and that then you will mail the check to the address noted.

Now don't you want to take back all the nasty things you've said about the State Legislature, as they have passed some good legislation on the issue?

No, I don't.  It's been five years since I wrote the first version of this blog. Nigh on a million tenants have been forced from their homes, and the Legislature should get credit for closing the barn door after most of the horses done got loose?  Not in my world.  And the view that tenants should engage in lifelong forelock-tugging crosses party lines.  The brothers Calderon are particularly egregious Democrats.  Most of the Legislature believes that nothing should be done that might discomfit landlords. Heaven forfend, for instance, that tenants should be able to get their security deposits back from landlords who often haven't paid their mortgages for more than a year.  I'd be more impressed if the Legislature took responsibility for what has happened and allowed tenants who do lose their deposits should take the entire amount of the lost deposit as a tax credit.