5.1 Non-Judicial Foreclosure Process & Deeds of Trust

Non-Judicial Foreclosure Process & Deeds of Trust

In California, real estate mortgage transactions rarely utilize a traditional two-party mortgage. Instead, the overwhelming majority of residential and commercial property financing is secured by a Deed of Trust (also referred to as a Trust Deed). Understanding the legal mechanics of the Deed of Trust and the statutory framework governing non-judicial foreclosure under California Civil Code Sections 2924 through 2924o is essential for California Mortgage Loan Originators (MLOs).

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The Three-Party Deed of Trust Structure

Unlike a traditional mortgage involving only a borrower (mortgagor) and a lender (mortgagee), a Deed of Trust is a three-party security instrument. When a borrower obtains a mortgage loan in California, they execute two distinct legal documents: a Promissory Note (the financial contract establishing the debt and obligation to repay) and a Deed of Trust (the security instrument pledging the real property as collateral).

The Power of Sale Clause

The defining feature of a California Deed of Trust is the Power of Sale clause. This contractual provision explicitly grants the trustee the legal authority to sell the property at a public auction if the borrower defaults on the underlying promissory note. Because the borrower voluntarily granted this power of sale upon executing the Deed of Trust, the trustee can execute a foreclosure sale out of court, giving rise to California's non-judicial foreclosure procedure.

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Non-Judicial Foreclosure vs. Judicial Foreclosure

California law permits two methods of foreclosure: non-judicial foreclosure and judicial foreclosure. While judicial foreclosure is available for all real property security instruments, virtually all residential foreclosures in California proceed non-judicially due to significant advantages in time and expense.

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Mandatory Pre-NOD Contact Requirement (Civil Code § 2923.5)

To prevent avoidable foreclosures and protect homeowners, California enacted Civil Code Section 2923.5 (originally part of the California Homeowner Bill of Rights). Under Section 2923.5, a mortgage servicer or lender cannot record a Notice of Default (NOD) on a borrower's primary residential property (1-to-4 unit owner-occupied property) until 30 days after completing specific outreach requirements.

Required Contact & Financial Assessment

The mortgage servicer must contact the borrower in person or by telephone in order to:

1. Assess the borrower's financial situation.
2. Explore options for the borrower to avoid foreclosure (e.g., loan modification, forbearance, short sale, or deed in lieu of foreclosure).

During the initial contact, the servicer must explicitly inform the borrower of their right to request a second meeting within 14 days to discuss foreclosure prevention options. The servicer must also provide the toll-free telephone number for the U.S. Department of Housing and Urban Development (HUD) certified housing counseling agencies.

[Borrower Default] 
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       ▼
[CC 2923.5 Outreach (In-Person or Phone)] ──► Wait 30 Days ──► [Record Notice of Default (NOD)]
       │
       ├─ If no contact: Must complete statutory "Due Diligence" (letters + 3 call attempts)
       └─ Mandatory: Attach Compliance Declaration to recorded NOD

Statutory Due Diligence Requirements

If the servicer is unable to establish direct contact with the borrower, Section 2923.5 allows the servicer to proceed with recording an NOD only after satisfying strict due diligence requirements:

• First-Class Letter: Send a first-class letter containing HUD housing counselor information.
• Telephone Outreach: Attempt to contact the borrower by phone at least 3 times on 3 different days at different hours (at least one attempt on a weekend or after 6:00 PM).
• Certified Mail: If no response after 2 weeks from telephone attempts, send a certified letter with return receipt requested.
• Toll-Free Line: Maintain a prominent, working toll-free phone link to a live representative on the servicer's website.

Mandatory Servicer Declaration

When recording the Notice of Default with the county recorder, the trustee or servicer must attach a sworn declaration certifying that it has either contacted the borrower in compliance with CC § 2923.5, exercised due diligence in attempting contact, or that the property is exempt (e.g., non-owner occupied or commercial property). An NOD recorded without this declaration is legally defective.