California Probate and Foreclosure

FORECLOSURE AND PROBATE
Concerns regarding foreclosure and probate and protecting assets from foreclosure sale has become a critical area of understanding for probate representatives and probate attorneys alike. A complete loss of the real property is an increasingly significant concern for probate and wills administrators and executors. With the recent uncertainty in real estate values and a volatile economy in general, the threat of loss of real estate equity due to foreclosure has certainly increased recently. The potential exposure to loss or waste under the California probate code for an estate with property in default, can be substantial, with many hidden risks.
ESTATES TYPICALLY DEFAULT ON A DECEDENT'S MORTGAGE DUE TO ONE OR MORE OF THE FOLLOWING REASONS:
  • Lack of sufficient available probate wills cash or reserves in estate to pay mortgage.
  • Executor or Administrator is unaware of loan(s) on the decedent's property upon beginning to probate a will.
  • Improper assumptions by Executor or Administrator that mortgage lender will wait until the close of probate for payment of monthly installments and forestall foreclosures until then.
  • Executor or Estate Administrator and/or heirs uncertain of value and unwilling to "throw good money after bad" if the property has no equity .
  • Difficulty in finding a buyer and selling the property due to marketability problems such as deferred maintenance (poor condition), title problems, etc.
  • Adversarial relationships between heirs.
  • Issues regarding dispute over who should be responsible for foreclosure and probate mortgage payments.
  • Poor communication between probate wills Estate Executor or Administrator, Attorneys and mortgage lenders.
  • Misunderstanding of the California probate code, how to probate a will, or the foreclosure and probate process generally.
WILLS PROBATE AND FORECLOSURE
According to foreclosure trustees, the increased frequency of estates defaulting recently may be the result of changes in the mortgage marketplace adversely affecting foreclosure and probate wills:
  • In the past, lenders offered more flexibility on loans once advised of opening probate and were more willing to work with an executor or administrator trying to probate a will
  • Lack of direct relationship between lenders and borrowers as loan servicing rights frequently transfer
  • Pressure from lending institutions to reduce their number of non-performing mortgages by investors
  • Indifference by lenders to foreclosure and probate, they've got so many foreclosures already, they just don't care you're trying to probate a will
PROBATE WILLS ISSUES AND CONCERNS: LOST ASSETS, TIME AND BAD FAITH
Supreme among concerns for the probate wills attorney and the personal representative of the estate is the loss of real property to a secured creditor through foreclosure and probate. Frequently, the only asset of any real value in an estate is the decedent's residential real estate.
PROBATE WILLS AND EQUITY: Despite the fact that the real property of a probate estate may have substantial value, there simply may not be any party willing or able to advance the funds to make ongoing mortgage payments to keep the mortgage current. Liquidity to make ongoing mortgage payments is often a problem facing the estate, as the value of the estate is tied up in the property. It's sticky situation which often leads to the unfortunate foreclosure of homes in probate with substantial equity.
PROBATE A WILL QUICKLY: Stopping foreclosure by selling or borrowing, while in probate may be necessary in some situations, however, such a loan reduces the amount of proceeds available for ultimate distribution to heirs. Moreover, while the estate as a whole may have a net positive cash value, there is no straightforward process established to deal with these secured mortgage creditors and stop a probate foreclosure in the interim. This leaves the wills probate practitioner no other choice but to negotiate quickly during foreclosure and probate or conduct loan modifications on a case-by-case basis with no assurance that any satisfactory outcome is available to the estate to stop foreclosure in probate.
FORECLOSURE AND PROBATE: Cautiously proceeding to avoid the risk of loss of estate property due to foreclosure and probate is critical. Protecting the administrator's commissions, while not being of primary importance, is also a factor after first considering the interests of the estate heirs in a foreclosure and probate situation. A large amount of time invested on a small, problematic case may not be recoverable as extraordinary fees or may be lost entirely if the real property goes to foreclosure and probate trustee's sale.
THE FORECLOSURE AND PROBATE PROCESS: UNDERSTANDING THE FORECLOSURE TRUSTEE'S TIMETABLE
THE NON-JUDICIAL FORECLOSURE PROCESS IS CONDUCTED PURSUANT TO CALIFORNIA CIVIL CODE 2924.
2924 allows a lender to foreclose on the real property securing their loan without the time and expense of an actual court action (as is the case in many states). A non-judicial foreclosure can take as few as 111 days from start to finish, but typically takes longer. The following is a simplified overview of the foreclosure and probate process.
THE FORECLOSURE PROCESS:
STEP 1: Notice of Default is Filed and Recorded with the county recorder (day 1).
STEP 2: Reinstatement of Loan can occur any time up to and including 5 business days preceding the sale.
STEP 3: Foreclosure Sale Date Set (No less than 90 days following Notice of Default date).
STEP 4: Notice of Trustee Sale recorded, mailed, posted and published.
STEP 5: Foreclosure Sale (Property is Sold at Public Auction, usually 3-4 weeks, but no less than 21 days, following Notice of Sale).
SPECIAL ISSUES AND CONCERNS REGARDING FORECLOSURE AND PROBATE
IMPORTANCE OF TRUSTEE'S PROPER NOTICING OF PERSONAL REPRESENTATIVE(S) OF THE PROBATE ESTATE PRIOR TO FORECLOSURE
Since the foreclosure trustee is responsible for accurate and proper noticing of a potential foreclosure sale, communication by the probate estate representative regarding foreclosure with both the lender and the foreclosure trustee should not only be initiated quickly, but documented carefully. If the foreclosure trustee has no knowledge of a probate proceeding regarding the property, a non-judicial foreclosure sale generally will proceed without much chance of the sale being set aside or postponed. However, if the foreclosure trustee has notice of the probate, and if such foreclosure is initiated without the trustee having properly noticed the personal representative, after being made aware of the borrowers death and being made aware of the probate, the estate may be able to enjoin the trustee and lender in a legal action to set aside the sale. The situation is not that the foreclosure trustee may not go forward with the foreclosure sale, they simply must give proper notice to the probate estate pursuant to California law. Therefore, the importance of informing the trustee and lender of the probate (and documenting same) is vital to protecting the asset. [See: Estate of Yates 25 Cal.App.4th 511; 32 Cal.Rptr.2d 53 [May 1994], Baker v. West End Financial Corp., Inc.]
PROBLEMS WITH INSOLVENT ESTATES
California real estate values have experienced dramatic price declines recently. Recently, the numbers of properties which are over-mortgaged and under-secured, a common situation when values have dropped below loan principal balances, has risen dramatically causing foreclosure and probate problems. Probate property sellers who find themselves in this situation may be considering a foreclosure and probate "Short sale".
However, when mortgaged probate estate property is sold, the priority of claims to the sales proceeds, may not be what you'd expect. Specifically, certain foreclosure and probate cost of administration (as well as attorneys fees) or other expenses, take priority over payment to secured creditors. This creates a result you wouldn't expect, namely, the probate personal representative should get paid out of the proceeds of the sale of the foreclosed property prior to the secured lender. Foreclosure and probate can lead to unusual results.
CALIFORNIA PROBATE CODE SECTION 10361 PROVIDES THAT THE APPLICATION OF PURCHASE MONEY SHALL BE APPLIED IN THE FOLLOWING ORDER:
  1. Expenses of administration which are reasonably related to the administration of the property sold as provided in paragraph (1) of subdivision (a) of Probate Code Section 11420;
  2. The payment of the expenses of the sale;
  3. The payment and satisfaction of the amount secured by the lien on the property sold if payment and satisfaction of the lien is required under the terms of the sale.
Section 11420 of California Probate Code (Priority for Payments of Debts) further elaborates on this theme, essentially restating California Probate Code Section 10361.
When a non-judicial foreclosure sale takes place (as is commonplace these days), the distribution of the proceeds and the responsibilities of the foreclosure trustee to disburse those proceeds would appear to be the same as in a traditional, voluntary sale. However, since the foreclosure trustee represents the lender (not the probate estate), there are still important unresolved conflicts of interests, such as how to treat a credit sale or credit bid resulting in a reversion back to the beneficiary (the lender). Obviously, a fair amount of confusion exists regarding foreclosure and probate, it illustrates the complexities associated with probate and wills, foreclosure and probate, and if you have been designated as the personal representative to probate a will it is wise to speak to a probate attorney before taking action on behalf of the probate estate.
WHAT ACTIONS CAN BE TAKEN TO AVOID A PROBATE FORECLOSURE ACTION IN THE FIRST PLACE?
  • Always obtain a title report, not merely a property profile, for each piece of real estate owned by the decedent upon opening a probate case to know if there are any foreclosure and probate issues to address. Most title insurance companies sell title reports for a modest charge (or possibly even free of charge in some cases) and the cost may be credited toward purchase of a title policy at later time when the property is either sold or financed
  • Contact, preferably in writing, mortgage lenders and other lien holders immediately. Keeping these parties informed will reduce the chance of a miscommunication and counter-productive efforts on everyone's part, and could moderate foreclosure and probate problems later
  • Obtain account balances from lien holders and other creditors. Knowing exactly what is owed is critical for foreclosure and probate situations
  • Request proof of the mortgage lien and validation of the debt. Obtain copies of promissory notes and trust deeds (these may be in the public records) and review terms and conditions for repayment. In some circumstances, recorded documents may be held invalid and help to avoid foreclosure and probate problems
  • Keep secured mortgage loans current. The total expense to the estate will be minimized if the lender does not initiate foreclosure proceedings. It's possible that the original borrower (the decedent) may have had a history of collection problems or late payments with his or her mortgage lender who is now less than motivated to offer much foreclosure and probate assistance.
REMEDIAL ACTIONS TO PROBATE A WILL AND MINIMIZE PROBATE AND FORECLOSURE PROBLEMS
Not all typical borrower remedies to foreclosure are available to an executor or administrator of a probate estate as would be available to a natural person outside the foreclosure and probate backdrop. Specifically, it is difficult to convince a lender to consider a loan modification or loan workout on a property in foreclosure and probate. Additionally, bankruptcy protection is generally not available for the property as the would-be debtor is no longer alive to file the bankruptcy case to mitigate foreclosure and probate problems.
SOME TIPS TO MINIMIZE FORECLOSURE AND PROBATE PROBLEMS
  • Don't procrastinate if a mortgage lender begins foreclosure, the time goes quickly so the property must be sold quickly to avoid the lender from foreclosing
  • Send all communication to the mortgage lender via certified mail, return receipt requested (the green card at the post office) in foreclosure and probate situations. This action allows the probate personal representative to provide proof of "notice" of his or her involvement in the matter, and the mortgage lender or foreclosure trustee must then "notice" the personal representative properly or risk having the foreclosure sale set aside or deemed invalid; foreclosure and probate causes problems and risks for lenders too
  • Advise heirs to consider advancing personal funds to probate a will and to cure the default, especially if there is equity in the real property or refinance the old debt with a new lender who will lend to a fiduciary under such circumstances (this has become difficult however). Unfortunately, few lenders want to get involved with a representative attempting to probate a will with a foreclosure and probate issue
  • List the property for sale with a real estate broker and attorney experienced in selling properties out of probate, familiar with foreclosure and probate in California, and estate administration, such as McFarlin & Geurts, LLP, if you are outside California, we may be able to refer you to someone who can help through our network of professionals
  • Consider initiating a lawsuit against the mortgage lender if they refuse to cooperate or recognize the probate personal representative attempting to probate a will and avoid foreclosure and probate problems (as is sometimes the case).
Administrating probate estates, which are facing foreclosure and probate or have a mortgage in default are increasingly common and most probate attorneys simply do not understand how these issues relate to one another. Remedies do exist for estates in foreclosure but timing and working with the right professionals is critical. Unfortunately, with mortgage lenders overwhelmed with loan modification and loss mitigation requests, they may not be in a position to take the appropriate action in regard to a probate foreclosure. In such instances, having experienced probate and foreclosure attorneys on your side, who aren't afraid to litigate the matter if necessary, is critical. McFarlin & Geurts, LLP has the expertise to resolve your probate and foreclosure issues quickly and aggressively if necessary.