IN THIS ISSUE: - Riverside County Bar Association

Advising Clients About Foreclosures
by D. W. Duke
By now, most Inland Empire attorneys have
probably seen the impact of the declining housing market
in their own practices. Even attorneys whose practices
are outside of real estate law have seen the impact of the
market decline. Family law attorneys have reported that
they are now faced with questions involving real property
marital assets with depreciating values, often encumbered
by loans greater than fair market value. Similar concerns
are being expressed by those who practice in probate
and business law. An understanding of the principles of
foreclosure is important in providing the proper advice to
a client who is the owner of a diminishing real property
asset.
A number of factors have led to the present crisis in
the housing market. One of the initial factors was the
overextension of credit. In the last few years prior to the
present housing slump, 35% of homeowners nationwide
had loans in excess of 95% of the value of the home. In
California, 45% of homeowners had loans in excess of
95% of the value of the home. Many people purchased a
home with an adjustable-rate mortgage, planning to refinance
into a fixed-rate mortgage before the loan adjusted
to the point that it would become unaffordable. The initial
low payments made these loans particularly attractive,
and their popularity began to exceed the popularity of the
fixed-rate mortgage. However, when the homeowners
attempted to refinance, they found that the equity in the
home had decreased to the extent that lenders would not
refinance. As a result, many homeowners found themselves
in foreclosure. Mortgage fraud has also increased
the number of foreclosures, through Ponzi schemes
and pyramid holdings not unlike those in the securities
industry in the 1920’s prior to the Great Depression.
Moreover, as a result of the continuing slow-down in the
housing market, buyers have hesitated to purchase real
estate. Thus, buyer caution has exacerbated the housing
decline.
According to data from the National Association of
Realtors, nationwide existing home sales were at 4.89 million
in January 2008, compared to 6.38 million in January
of 2007. This is a decrease of about 23.4%. The glut of
existing homes on the market in the United States in
January 2008 reached 4.19 million, which is a 10.3 month
supply. In contrast, in January of 2007, the existing home
inventory was 3.52 million, which was a 6.7 month supply.
PropertyShark.com reports that foreclosures in Los
Angeles in the third quarter of 2007 were up 247% over
the third quarter of 2006. There were 5,320 foreclosure
filings in Los Angeles in the third quarter of 2007, which
was a 40% increase over filings in the second quarter of
2007. Stockton, Riverside/San Bernardino, Sacramento,
Bakersfield and Fresno are five of the top 20 foreclosurefiling
areas in the nation, according to the Department of
Housing and Community Development.
Types of Foreclosure
In California, there are two types of foreclosure
with which a homeowner might be faced. These are the
“judicial foreclosure” and the “trustee’s sale,” sometimes
called the “power of sale” foreclosure. In a judicial foreclosure,
when the amount recovered in the sale is less
than the amount owed on a loan, the difference is called
the “deficiency.” A “deficiency judgment” is a judgment
against the borrower for the difference between the
unpaid balance on the loan and the amount generated by
the foreclosure sale or the fair market value, whichever is
greater. When the foreclosure is accomplished by judicial
action, the lender may be able to obtain a deficiency judgment
against the borrower. However, the recovery of the
deficiency is available only in a judicial foreclosure and is
not permitted after a trustee’s sale. In other words, if the
lender utilizes the nonjudicial method of a trustee’s sale, a
deficiency cannot be collected. Additionally, the recovery
of a deficiency is not possible on a purchase-money loan,
including seller-carried financing, on any real property,
or on a loan on property consisting of one to four family
units of owner-occupied residential property. Recovery of
the deficiency is possible, however, on a refinanced property
loan (i.e., non-purchase money) or on a one to four
family non-owner-occupied residential property loan.
Judicial Foreclosure
Fewer than 5% of residential foreclosures in the state
of California are judicial foreclosures. A judicial foreclosure
is initiated by the lender filing a lawsuit against the
defaulting borrower in superior court. Upon sufficient
proof at trial, the court enters a judgment of foreclosure
and orders the sale of the property. After the sale, the
lender files an application for a fair-value deficiency, after
6 Riverside Lawyer, July/August 2008