Ask the Expert: Foreclosure Defenses

Under California law, the "Notice of Default (NOD)" commences a private sale of real property securing a loan. Before a foreclosure sale is actually conducted, the borrower may "cure" the default and thereby rescind the NOD. A dispute concerning the amount necessary to cure the NOD can result in the borrower obtaining an injunction against any foreclosure sale, potentially delaying such a sale for months or years. It may also give rise to a claim for damages arising out of a wrongful refusal to accept a tender of "cure" for the NOD, and possibly a wrongful foreclosure lawsuit. This article will discuss a strategy to avoid the extra legal fees and costs necessarily caused by this predicament (while your state may not utilize these exact procedures, the issues presented will help you avoid disputes under a variety of foreclosure scenarios).

California’s Non-Judicial Deed of Trust Foreclosure Process
California real property law provides an efficient process for extra-judicial foreclosure of a Deed of Trust (a Deed of Trust is in effect a mortgage with a power of sale), which takes approximately four months from start to finish. California Civil Code ("CC") §§2924-2924(k). This statute provides a comprehensive framework for the regulation of non-judicial foreclosure sales.
The statutory procedure may be summarized as follows:
Upon default by the borrower, the lender may declare a default to proceed with a non-judicial foreclosure sale. (CCC§2924). The foreclosure process is commenced by the recording of a Notice of Default and Election to Sell by the Trustee (the "NOD"). After the NOD, the Trustee must wait three calendar months before proceeding with the sale. After the three month period has elapsed, the Notice of Sale must be published and posted and mailed 20 days before the sale and recorded 14 days before the sale (CC §2924f).
During the foreclosure process, the borrower is given the opportunity to cure the default and avoid the loss of the property through reinstatement; by making the delinquent payments and thereby reinstating the terms of the loan. This right continues until five business days prior to the date of the sale, including any postponement. (CC§2924c).
Problem: Specificity Required for the Notice of Default
Naturally, before the borrower can cure the default, he needs to have a precise amount for doing so. Earlier case law held that the Notice of Default must specifically state the default on which a beneficiary of a Deed of Trust is relying when initiating foreclosure. Anderson v. Heart Federal Savings ("Heart"), 208 Cal. App. 3d 202, 256 Cal. Rptr. 180, 186-187 (1989).
Even before Heart, lenders understood that CC §2924 required that Notice of Default to list all defaults for which the property might later be sold at foreclosure. To cover defaults that might occur after the recording of the Notice of Default (i.e., missed payments), lenders listed various possible ancillary defaults (such as the failure to pay taxes or failure to keep a senior lien current) and appended the word "if any" to them. Heart disapproved of this practice.
To illustrate the problem, assume the loan is delinquent by two months payments. A Notice of Default which specifies that the reinstatement amount is two months’ payments is filed. The borrower makes no further payments within the ensuing 120 days prior to the foreclosure sale. The borrower also skips four monthly payments to a senior lienholder and fails to pay real property taxes, and the lender advances these monies in order to protect its security interest. Six days prior to the foreclosure sale, the borrower tenders the two monthly payments referenced in the Notice of Default and insists that the NOD be rescinded, thereby forcing the lender to start the process from the beginning by recording the new NOD on account of the post-NOD delinquencies.

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