What happens when a house goes to foreclosure

The typical Calfornia home loan is secured by a deed of trust. The deed of trust is a security agreement making the property collateral for repayment of the loan. The deed of trust contains a clause called a "power of sale" which entitles the holder of the note to sell the house at a foreclosure sale outside of court.

California statutory law provides for two steps in the foreclosure process before the lender can sell the house on the courthouse steps.

The first statutory step is to record a Notice of Default. The NOD sets out the amount of the arrearage on the loan and gives the borrower 90 days from recordation to pay the arrears and any costs incurred by the lender in initiating the foreclosure process. Payment reinstates the loan in good standing.

The second statutory step is to provide the borrower with a Notice of Sale, fixing the date the foreclosure sale will take place. Foreclosure sales are typically conducted on the steps of the county courthouse. To keep the property, the borrower must then pay the full amount owed on the loan, or reach some other deal with the lender.

At the foreclosure sale, the lender typically bids the amount that is then owed on the note. Other bidders must top that bid to buy the house.

After the foreclosure sale is concluded, the winning bidder is the owner of the house. Liens that are junior to the foreclosing creditor, typically second deed of trust holders or HELOC lenders, are cut off: that is, they lose their lien on the property.

Any lender who uses the power of sale in the deed of trust to conduct a foreclosure sale is prohibited from suing the borrower for any deficiency or loss on the transaction. The statutory trade off is that in exchange for the ability to foreclose without going to court, the lender gives up the right to any remedy against the borrower other than taking the property.

The new owner of the property is then entitled to file an unlawful detainer action to evict anyone in the property. Sometimes, the new owner will offer the occupants cash to facilitate their move from the property. Otherwise the owner must file a lawsuit to evict the occupants. Helping them fund a move out is often cheaper.

Sometimes, the new owner may be willing to rent the property to the old owners rather than having a vacant and non productive property on its hands.