Seems like hardly a day can go by without an article about how foreclosures in California are on the rise. The San Francisco Chronicle reported yesterday that California had the second-highest foreclosure rate in the nation, with Nevada being the first.
While it sounds intensely alarming – the actual number reported seems fairly small: "There were 624 Bay Area bank repossessions in June, a dramatic increase from 39 the previous June."
Ok, so that means of the thousands of homes in default last year in the 9 counties of the Bay Area, only 39 actually went back to the bank.
The foreclosure process in California is actually many months. The average scenario begins with Borrowers missing 2 or 3 payments on their loan to Wells Fargo. So they miss January, February and March. During that timeframe, assuming the Borrowers still have income, they still have a chance to bring their loan current by entering into a Forbearance arrangement with Wells Fargo.
What’s a Forbearance Agreement? It’s when a lender agrees to forbear from going to Trustee’s Sale on their loan in exchange for the borrower making catch-up payments. That means the borrower will try to make something like 1.5x their normal payment until they are caught up.
Why would a bank agree to this? They would far rather have a performing loan, albeit a slow one, that end up owning the house and tying up their cash.
If the Borrowers do not bring their loan current or do not enter into a forbearance arrangement with the bank, then Wells Fargo will record a Notice of Default (NOD). Under California Civil Code, Section 2924(a)(1)(D)(2), the Notice of Default must provide 3 months before the lender can Notice a Trustee’s Sale.
During this three month timeframe, many borrowers will try to re-finance their loan and pull more equity out of their house to cure the arrearages with the first bank. This is a short term solution, and in a declining or flat market, is most effective the borrowers then immediately sell the house once it is out of default. This is often when borrowers will turn to private money investors who will charge a higher interest rate.
Once the three months has run, the trustee will then record a Notice of Trustee’s sale, which will set a date for the foreclosure sale that is at least 20 days out. During that timeframe, the trustee will publish for 3 consecutive weeks the Notice of Trustee’s Sale.
That means that start to finish, the foreclosure process in California is about 4 months. Borrowers who are resourceful can find solutions for themselves in that timeframe and so many defaulted loans never go to sale.
Additionally, if the Borrowers try to sell the property while in default, under certain circumstances, the bank will consider a Short Sale, or essentially taking a payoff of their loan for less than they are owed. That too can avoid the property from ultimately going to foreclosure sale–however, it can come with tax consequences as a debt forgiveness.