Judicial vs. Non-Judicial Foreclosure

Essentially, there are two types of foreclosure procedures; judicial foreclosure and non-judicial foreclosure. In California, for example, non-judicial foreclosures are more common than judicial foreclosures (lawsuits in court). A non-judicial foreclosure begins with the recording of a “Notice of Default” and ends with a “Trustee’s Sale,” where a third party, known as the trustee, sells the property at a public auction to the highest bidder. The Trustee’s Sale is held like a public auction. The property goes to the highest bidder. If no one bids at the public auction, the property reverts to the foreclosing beneficiary (lender). Foreclosed properties are referred to as REOs (Real Estate Owned by the lender that foreclosed).

Judicial Process

Generally, states that use mortgages conduct judicial foreclosures, using the court system to execute the foreclosure; states that use deeds of trust conduct non-judicial foreclosures, using an out-of-court procedure defined by state law.

In judicial foreclosure states like Florida, borrowers sign two separate instruments: the note (or bond), which is evidence of the borrower’s promise to pay the debt; and the mortgage, which is the legal instrument that creates the lien on the property as security for the debt. If the borrower cannot pay the mortgage, the lender hires an attorney, who begins legal action to protect the lender’s interest. The attorney files several documents: a summons directing the borrower (defendant) to appear in court, a complaint describing the lenders (plaintiffs) allegations of entitlement to relief and the relief sought, and a lis pendens (lawsuit pending notice), the legal document that gives notice to the world that there is a legal action pending on the property. Lis pendens is a Latin word meaning “lawsuit pending.” The documents are filed with the clerk of the court in the county where the property is located.

If the borrower fails to respond to the notices within the statutory time limit, the attorney submits a report to the court requesting that the court appoint a referee. The referee reviews the facts and circumstances in the foreclosure action and renders a report to the court. Then a judge issues a Judgment of Foreclosure and Sale in favor of the foreclosing lender. The judicial auction is advertised and the property is sold at the auction to the highest bidder.

Non-Judicial Process

Non-judicial foreclosures are based on deeds of trust that contain a power-of-sale clause. The clause enables the trustee to initiate a foreclosure sale of the collateral (home), without having to file a lawsuit or go to court. The trustee is typically required to issue a notice of default and notify the trustor (borrower) accordingly about the defaulted loan status. If the trustor does not respond, the trustee then initiates the steps for conducting the foreclosure sale of the collateral (home).