The real estate industry runs in cycles with the economy. With the tight economic times, business owners in a pinch cannot pay their lenders. When borrowers stop paying the secured lender, the lender typically begins the foreclosure process. Foreclosures are heating up across the country. As of November 2022, the number of foreclosure proceedings started across the U.S. was 20,686, up 98% since November 2021. California had more foreclosure starts than any other state, with 2,244 non-judicial foreclosures begun during that period.
There are two types of foreclosures: judicial (requiring a lawsuit) and non-judicial. Sophisticated lenders often file a lawsuit for breach of contract, breach of guaranty, judicial foreclosure, and ask for a court receiver to take over the property while the lawsuit proceeds, which the lender does in order to take the revenue from the leased premises away from the borrower. At the same, that sophisticated lender begins the non-judicial foreclosure too. Once non-judicial foreclosure is complete, the lawsuit can be dismissed or relevant claims dismissed.
So, how does the non-judicial foreclosure proceed and how long does it take? The foreclosure process varies by state. In California, the process takes at least 200 days, typically proceeding as follows:
•January 1. Borrower does not timely make the loan payment.
•April 1. Borrower is now 90 days behind on the January payment (home lenders wait 90 days, commercial lenders are not required to wait 90 days, but as a practicality, the lender tries to solve the loan default through some sort of workout during this pre-filing period or a longer period). The lender starts the foreclosure process by recording a Notice of Default with the county recorder. It is a public document.
•July 1. 90 days have elapsed since the Notice of Default was recorded at the county recorder. The lender can now serve and record a Notice of Trustee Sale, which must set the sale at least 20 days in the future.
•July 15. Borrower’s right to pay up and reinstate the loan expires.
•July 21. The lender proceeds with the foreclosure. Borrower no longer owns the property.
There are myriad of things that may occur during that process to slow it down, including, for instance, the lender agrees to a workout, borrower files bankruptcy, or the lender simply moves slower than the process allows.
For the borrower, there are a few possible ways to slow or stop the foreclosure process.
•Borrower can reinstate the loan by bringing the payments current before July 15.
•Borrower can stop the foreclosure process by filing a bankruptcy and propose a plan to pay the loan or sell the property.
•Borrower can allege a serious error by the lender and file a lawsuit to try to stop the process (this may be the most difficult when dealing with institutional lenders).
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