The Mechanics of Foreclosure:

The foreclosure trustee:  The original deed of trust will name a trustee, but the beneficiary is not required to have he original trustee handle the foreclosure.  In fact, a beneficiary will usually substitute a new trustee to process the foreclosure.Many title companies will serve as a foreclosure trustee, and there are numerous companies that process foreclosures.  There are also some law firms that handle foreclosures.  If the foreclosure will be done by a different trustee than named on the original deed of trust, there will need to be a substitution of trustee prepared and recorded.  The beneficiary must advance the costs of the foreclosure, such as the trustee's fees and publication costs, but those costs get added to the amount necessary to cure the default or the final sale amount.

The Notice of Default:  The trustee will obtain the information from the beneficiary to prepare the notice of default.  This is a very important document, ad must accurately describe the nature of the default and must be mailed and recorded property. This will notify the property owner of the commencement of the foreclosure process and the default that must be corrected to avoid the sale of the property. There is a three month waiting period from the Notice of Default until a trustee's sale can be noticed.  This time period is intended to give the property owner a reasonable time to cure the default.

The Notice of Trustee Sale:  If the default has not been cured in the three month waiting period, the trustee will then schedule a date for the public sale of the property.  The sale must be published for three weeks, as well as recorded, mailed & posted.  The Notice of Sale has two purposes:  First, it warns the owner that unless immediate action is taken to cure the default they will lose their property, and second, it serves as the public advertisement to public bidders for the foreclosure sale.  The owner still has through and including the 6th business day prior to the initial sale to cure the default and reinstate the obligation and deed of trust (provided that the default is one that can be cured, such as the failure to make payments).  Beginning with the fifth business day prior to the sale, the beneficiary has no obligation to accept reinstatements of the obligation, and the only was the owner can avoid the sale of the property is to satisfy the obligation in full prior to the sale taking place.

The Trustee Sale:  The Trustee's sale will be held at a public place within the county where the property is located.  The beneficiary will establish its opening bid amount to be announced by the trustee, which is the amount that the beneficiary is offering for the property.  This opening bid will often be the total amount due the beneficiary, including foreclosure fees.  This is known as a "full credit bid."  When the property is worth more than the opening bid amount, other bidders may choose to attend the sale and bid to purchase the property.  Potential bidders must have good funds available at the time of the sale (usually in the form of a cashiers check).

The Trustee Deed:  Following the foreclosure sale, the trustee collects the money bid and provides the successful bidder with a Trustee's deed.  This transfers title to the property to winning bidder.  If the beneficiary takes the property back for amount they are owed for less, they pay no actual money to the trustee because the beneficiary is given credit for the amount they are owed.  When a third party wins the bidding, they must immediately pay the bid price to the payee.

FORECLOSURE ISSUES

The Priority of the Deed of Trust:  Generally speaking, the Trustee's Deed will place the winning bidder in ownership of the property, with title in the condition in was in at the time of the recording of the deed of trust.  If the foreclosing deed of trust was recorded before other subsequent deeds of trust or other liens, those deeds of trust and liens are "wiped out" by the foreclosure.  If the foreclosing deed of trust was behind other liens, the grantee on the Trustee's deed takes title subject to those other obligations.

IRS Right of Redemption:  If the IRS has a lien on the subject property, the IRS has a right of redemption following a foreclosure, even if the IRS lien was junior to the foreclosed deed of trust.  This means the IRS can "buy back" the property from the successful bidder by paying the buyer that amount that they paid at the trustee's sale.  Provided that the IRS was given proper notice of the trustee's sale, the IRS had 120 days to exercise its right of redemption.

Bankruptcy by the Property Owner:  The filing of a bankruptcy by an owner of the property will force a halt to the foreclosure process.  If the beneficiary is not brought current as part of the bankruptcy, the beneficiary will have to either wait until the bankruptcy is completed or dismissed, or must seek permission from the bankruptcy court to continue with the foreclosure.  Court permission to continue the foreclosure is called a "Relief from Stay."

Surplus Funds after Bidding:  IN the event of competitive bidding for the property at the trustee's sale, the trustee is likely to end up with more money than is owed to the foreclosing beneficiary.  The foreclosing beneficiary only ever gets as much as is owed under its obligation;  if there are surplus funds the money goes to the other lien holders in order of their priority.  If there are no other lien holders, the surplus funds go the the trustor or successor property owner.

Recovery of Deficiency Balance:  If the final bid amount is less than the amount the beneficiary is owed, there will still be a deficiency owing to the beneficiary.  However, following a non-judicial foreclosure, the beneficiary is barred from recovering any further amounts from the trustor, and the debt is extinguished.  If a beneficiary wants to obtain a judgement against the trustor for the deficiency. the foreclosure must be done judicially.Even then, only secured obligations can result in a deficiency.  Seller carry back financing and purchase money obligations on residential property cannot result in a deficiency judgement.