Steps to a Notice of Default

Definition: Lenders file in the public records where the property is located a public notice called the Notice of Default. After the Notice of Default is filed, what specific rights does a homeowner possess? The Notice of Default is the first step to foreclosure. In some states, the Notice of Default is also attached to the home, generally on the front window, like an embarrassing scarlet letter. It states that the borrower is in default, behind on paying the mortgage payments, and if the payments are not paid up, the lender will seize the home.

In California, lenders typically do not file a Notice of Default until the borrower is at least 90 days behind in making mortgage payments. When a borrower has missed 2 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. It used to be that a lender could file a Notice of Default whenever it wanted, but laws rectified that oversight by stating borrowers are entitled to at least a 30-day notice prior to the recordation of a Notice of Default.

In California, lenders must then wait 90 days. 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 a buyer is located and that buyer is 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 payoff the mortgage. After 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, and this allows the lender, according to industry insiders, 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.

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 did not stop the foreclosure action. Only issuance of the short sale approval letter stopped dual tracking prior to January 2018. This meant homeowners who hoped to do a short sale needed to start the process immediately, prior to the Notice of Default, to stop a race against the clock.

While a lender always retained the option to stop a foreclosure action, it was not required to do so. In fact, some investors, such as government-sponsored entities like 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 PSA for some conventional loans contained financial incentives that encouraged foreclosures over short sales as well.

Let’s not forget the mortgage insurance scams, which are 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 insuring 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 it might be called sabotage.