What Does It Mean to Receive a Notice of Default?
A notice of default is the first step to a bank or mortgage lender's foreclosure process. In some states, the notice of default is also attached to the home, generally on the front window or door. It states that the borrower is behind on mortgage payments and the bank is in the process of rectifying the situation. If the mortgage is not brought to current payment status, the lender will seize the home. A notice of default is also known as a reinstatement period, notice of public auction, or notice of foreclosure.
Extended Steps for California Notice of Default
It used to be that a lender could file a Notice of Default at its own discretion, but laws rectified that by requiring that lenders issue a 30-day notice to borrowers prior to the recordation of a Notice of Default.
In California specifically, lenders typically don't file a Notice of Default until the borrower is at least 90 days behind in making mortgage payments. When a borrower has missed two payments and is 60 days behind, at that point many banks may send out a 30-day notice of intent, which they are required by law to do before filing a Notice of Default.
During that 90-day period, the borrower has the right to make up the back payments and reinstate the loan. If a borrower has equity, sometimes the smart thing to do is put the home on the market and try to find a buyer. If the borrower finds a buyer who happens to be an investor, the buyer must comply with the Home Equity Sales Act to meet the standards of care in place, which protect a homeowner occupying a home in default. Otherwise, a homeowner retains rights to dissolve the transfer of title within a certain time period.
After 90 days have passed, the lender is required to publish a notice for 20 days, during which time the only way a homeowner can stop the foreclosure is to completely pay off the mortgage. After those 20 days, the lender may sell the property to the highest acceptable bidder on the courthouse steps.
If no acceptable bid is received, the trustee then conveys the property to the lender. Sometimes lenders make the opening bid so high that nobody will bid on the home. According to industry insiders, this allows the lender to retain the foreclosed home in its inventory on the books at its original value for accounting purposes, which tends to protect the bank's stock value.
Notice of Default and the Short Sale
The California Homeowner Bill of Rights allowed dual tracking in a short sale, pursuing the foreclosure, until January 2018. Before that date, applying for a short sale didn't stop the foreclosure action, but the issuance of a short sale approval letter did. This meant homeowners who hoped to do a short sale needed to start the process prior to the filing of a Notice of Default in order to stop a race against the clock.
While a lender always retained the option to stop a foreclosure action, it wasn't required to do so. In fact, some investors such as government-sponsored enterprises Fannie Mae and Freddie Mac routinely proceeded with the foreclosure if it was the fastest option and likely to produce more money than a short sale. The Pooling and Servicing Agreement for some conventional loans also contained financial incentives that encouraged foreclosures over short sales.
Let's not forget the mortgage insurance scandal, which is perfectly legal. This is when a lender takes out its own mortgage insurance without notifying the borrower. You might be surprised to know that companies exist for the sole purpose of selling insurance to protect against the bank issuing worthless loans, and some of the banks purportedly own parts of these mortgage insurance companies. When a borrower applies for a short sale, the mortgage insurance company might demand such a high payoff that the shore sale becomes impossible. In some circles, that might be considered sabotage.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.