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Foreclosure Basics

Fundamentals of Non-Judicial Foreclosures in the State of California

Note: This document is intended only for basic information. Laws and regulations change frequently in this industry and we strongly recommend that you contact our office or competent legal counsel for current information.

The Deed of Trust

  1. In the State of California when an obligation is to be secured by real property, a Deed of Trust is used. A Deed of Trust is a three party document between:

    1. The Borrower, called the Trustor.

    2. The Lender, called the Beneficiary.

    3. A neutral third party called a Trustee.

  2. When a Borrower puts real property up as collateral for an obligation, he “conveys” the property to the Trustee to be held in trust pending the satisfaction of, or default in, the obligations it secures. When all obligations are satisfied, the Trustee reconveys the property to the Borrower or his successor in interest. If, however, the Borrower fails to satisfy the obligations and defaults, the real property can be sold by the Trustee at a public auction in order to satisfy the obligations by exercising the power of sale conferred on it in the Deed of Trust.

  3. The Beneficiary has the right, under California Civil Code Section 2934, to change, or “substitute” Trustees at any time by executing a Substitution of Trustee and recording it with the County Recorder’s office. The particular steps required are outlined in that section.

  4. When recorded, a Deed of Trust creates a “priority” on the real property. The Deed of Trust’s priority is based on the date and time of its recording relative to any other recorded liens and encumbrances. The priority can be changed by a Subordination Agreement.

  5. In all cases, the real property taxes/assessments are a first lien on the real property. Usually these are followed by a financial institution’s purchase money first Deed of Trust and, more often than not, junior Deeds of Trust resulting either from a hard money (equity) loan or seller carry-back loans. Frequently there are also personal liens, such as judgments and tax liens found affecting the title.

    1. A “Purchase Money” Deed of Trust is given as a portion or all of the purchase consideration for real property. It is usually a non-recourse loan.

    2. A “Hard Money” Deed of Trust is given to secure a loan taken out against the equity in the real property. It is sometimes a recourse loan where the Lender can pursue multiple remedies.

    Note: In all cases, title should be examined prior to the recordation of a Deed of Trust and title insurance is strongly recommended to insure the Lender against items which could adversely affect his position. The Beneficiary’s original position in title is the same position he will end up with after a Trustee’s (foreclosure) Sale.

  6. Generally, the Deed of Trust secures repayment of a Note, or Notes, for money. Many times, however, the Deed of Trust secures the performance of a party.

    1. Bail Bond Deed of Trust which secures the defendant’s appearance in court.

    2. Deed of Trust executed by a Guarantor under a Note or another form of agreement (e.g. lease).

    3. Deed of Trust executed to secure performance under an agreement or a court order.


  1. When a Trustor defaults in payment of a Note or in the terms/provisions of the Note and/or the Deed of Trust, a Notice of Default (NOD) must be recorded with the County Recorder of the county where the real property is located. Generally, this is done by the Beneficiary taking his Note and Deed of Trust to the Trustee named in the Deed of Trust, or to a substitute Trustee, signing the necessary declaration of Default and all other papers needed by the Trustee to commence and carry through the Trustee’s Sale proceedings.

    Note: Depending on when the loan was made, and if the property is owner occupied, there may be legal requirements that a Beneficiary must adhere to prior to being able to file a Notice of Default.

  2. The process, as set forth in California Civil Code Section 2924 et seq., begins with the recordation of a Notice of Default and, if necessary, a Substitution of Trustee.

    1. The Trustee must, within 10 calendar days, mail a copy of the NOD to the Trustor as his address set forth in the Deed of Trust and to any other known addresses, as well as to all persons who have recorded a separate Request for Notice as provided under California Civil Code Section 2924b. The term “Trustor” includes a new owner which is known to the foreclosing Beneficiary. We also recommend noticing any other known parties in interest at this time.

    2. Within one calendar month, the Trustee must mail a copy of the NOD to the Beneficiaries under any junior Deeds of Trust, new record owners, the assignee under any junior Deed of Trust, the Vendee or Lessee under any recorded contract of sale or lease and to the State Controller if a lien for postponed property taxes has been recorded.

    Notices are sent by both Certified Mail and by regular first class mail to the address that the County Recorder would use to return the recorded document. No additional search is required by law. If a party has moved and the forwarding order has expired, the Notices will be returned by the Post Office to the Trustee. This is one of the main purposes of recording a Request for Notice. Thus, it is very important for any Beneficiary of a junior lien to record a Request for Notice.

    There is no legal requirement that notices be received, only that they be mailed.

  3. When the NOD is recorded, the Trustee orders a Trustee’s Sale Guarantee (TSG) from a title company. The TSG is a title report which shows:

    1. The name and mailing address of the record owner of the trust property at the time the NOD is recorded.

    2. The liens and encumbrances against the trust property and the mailing addresses for those items.

    3. The liens and judgments against the owner(s) of the trust property and the mailing addresses for those items.

    4. What City or Judicial District the real property is located within and what newspaper must be used for the publication of the Notice of Trustee’s Sale.

    The TSG assures, but does not insure, Trustees of these notice requirements. The TSG is updated twice during the foreclosure to insure that all notice requirements are met. It should also be noted that, with the exception of the Internal Revenue Service, no notice is required to be given to any party whose interest comes from a document which is recorded after the NOD is placed of record.

  4. The initial period of the foreclosure lasts three calendar months, commonly referred to as the Reinstatement Period. During this time, the Trustor or a junior Beneficiary has the right to “reinstate” the loan by making up all the back payments, late charges, advances and foreclosure fees and by curing any other defaults (i.e. delinquent senior loans, insurance, or property taxes) as required. This presumes, of course, that the Note has not matured. During this three month period, the foreclosure fees are at their lowest level, thus making it “easier” for the defaulting Borrower to cure the default.

  5. If the default has not been cured or paid off during the Reinstatement Period, as prescribed, the Beneficiary has the right to instruct the Trustee to schedule a Trustee’s Sale of the trust property. A Trustee’s Sale is a public auction with a minimum bid at which the trust property is sold for cash to satisfy the obligation being foreclosed. The successful bidder at the auction must tender the amount of his bid to the Trustee in full by Cashier’s Check at the end of the auction.

  6. The sale proceedings start with the preparation of a Notice of Trustee’s Sale (NTS). This notice must set out the date, time and exact location of the Trustee’s Sale as well as the recording information of the Deed of Trust, the street address or other common designation of the trust property, if any, the Assessor’s Parcel Number, and usually the legal description. It also gives an approximate amount of the total debt, and the name, address and telephone number of the Trustee or agent holding the Trustee’s Sale.

    The NTS is mailed in the same manner as the NOD to all parties who were mailed a copy of the NOD as well as to any State taxing agency with a recorded lien and to the Internal Revenue Service for any Federal Tax Lien recorded at least 30 days prior to the Trustee’s Sale.

  7. The NTS is published once a week for three consecutive weeks is a newspaper of general circulation published within the City where the trust property is located, or if the property does not lie within a City or that City does not have a newspaper, a paper published within the judicial district where the property is located. Many times these newspapers are “throw-aways” but the newspaper must be adjudicated to publish legal notices. The first publication must be at least 20 days prior to the scheduled Trustee’s Sale.

    A copy of the NTS must also be posted in a conspicuous place on the trust property at least 20 days prior to the scheduled Trustee’s Sale. If the property is a single family residence, the NTS must be posted on a door to the property if the door is accessible. The NTS must also be posted in a public place in the City where the sale is to be held and must be recorded at least 20 days prior to the Trustee’s Sale.

Trustee’s Sale

  1. The purpose of the Trustee’s Sale is to have “equity” done for all parties. The Beneficiary’s equity is the satisfaction of the amounts owed him, the Trustor’s equity is to have the property sold for the highest possible price and the junior lienholder’s equity is the possibility of “surplus funds” (sums bid over and above the foreclosing Beneficiary’s obligation) which might, at least partially, satisfy their obligation.

  2. The Trustee’s Sale is a public auction with a minimum bid which is comprised of all amounts owed to the foreclosing Beneficiary (principal, interest, advances, costs, foreclosure charges, etc.). This amount is called the “Credit Bid“. If the Beneficiary wishes to bid at the Trustee’s Sale he must appear at the sale with a Cashier’s Check for any amount above his Credit Bid that he wishes bid. If no one appears at the sale to bid, the property automatically reverts to the foreclosing Beneficiary. All amounts which are bid over and above the Credit Bid are surplus funds and are paid to junior lien holders in order of recording priority. If there are conflicting Demands on the surplus, the Trustee will turn the funds over to the courts for determination.

  3. The Trustee’s Sale may be postponed as follows, however, if the total combined length of time exceeds one year, a new Notice of Trustee’s Sale must be published:

    1. At the Beneficiary’s request, for any reason.

    2. By mutual agreement between the Trustor and Beneficiary or if the postponements are by court order (e.g. bankruptcy stay or restraining order).

    3. At the discretion of the Trustee, in order to insure that all legal requirements have been met, that all figures are accurate or if there is any question as to the propriety of the sale.

  4. The purchaser at a Trustee’s Sale buys the property without any insurance or warranty as to title, possession or encumbrances. A prudent buyer will either check the title himself or have it checked by a title company in order to find out what liens, encumbrances or other matters he will be taking title subject to. The foreclosure of a Deed of Trust “reverts” title to the time the Deed of Trust was recorded thereby, as a general rule, wiping out any title matters recorded after it. For instance, on a piece of property which has three Deeds of Trust recorded against it and where the second Deed of Trust forecloses, the buyer will take title subject to the first Deed of Trust, and the third Deed of Trust will be wiped out. Three common exceptions to this rule are an action attacking the title to said property before the Deed of Trust recorded; mechanics liens, where the work commenced prior to the recordation of the foreclosing Deed of Trust; and Federal Tax Liens, under which the Internal Revenue Service which has a 120 day right of redemption after the Trustee’s Sale during which time they can take the property by paying the purchase price from the Trustee’s Sale, together with nominal interest and some costs incurred by the purchaser after the Trustee’s Sale (e.g. payments to senior lienholders and property taxes).

  5. When more than one Trustee’s Sale is scheduled for the same date and time, the Trustee first cries any postponements and then proceeds with each Trustee’s Sale individually. At the conclusion of each sale, the Trustee will require the highest bidder to deposit the amount of his bid. (A bidder who refuses to deposit is guilty of a misdemeanor.) If the Deed of Trust being foreclosed encumbers more than one piece of property the parcels may be sold as one or as separate parcels (the aggregate bids must exceed the total debt). A Trustee’s Deed is then drawn and recorded either by the Trustee or the successful bidder. It is then the purchaser’s responsibility to evict any occupants of the trust property and to take over any senior liens.

What’s Next?

If you have foreclosure questions or need a foreclosure service, please feel free to contact our office.