Distressed Homeowners’ Bill of Rights

Having counseled approximately two hundred Oregon homeowners drowning in negative equity, I have discovered that many, if not most, believe that somehow their lenders can literally swoop down and take not only their home, but all of their bank accounts, savings, retirement funds, and/or daily wages.  In truth, the only real power most banks have over a borrower, is the ability to negatively impact their credit, and by extension, their future ability to borrow.  On the other hand, one’s credit is a composite of many different data points, not simply a single “black mark” from one distressed property event.  To that extent, a credit rating can be strengthened over time, and like a muscle, it builds up through consistent and prudent use over time.  In today’s rental marketplace (which is populated by many former homeowners coming out of a distressed property transaction), a credit score impacted by a single distressed housing event has little or no bearing on whether a landlord will rent a home or apartment to them.  In an effort to provide some peace of mind, listed below are certain “rights” that all home owners have under Oregon law. These rights cannot be taken away – they can only be voluntarily given away.

The following Bill of Rights assumes the following facts: (a) The home was used and occupied as a principal residence.  A “principal residence” or “primary residence” in my vernacular, is the residence you occupy most of the time, and hold out to the city, state and federal governments (e.g. the post office, DMV, utility companies, etc.) as your “home.”  A second home is not, by definition, a “primary residence.”  (b) There is only one loan on the property and all of the borrowed funds were used to acquire the home.  Second trust deeds can sometimes be problematic.  If you have a second trust deed as well as a first, all is not lost – it just requires a little more planning, and some smart negotiations with the bank.

Caveat: This summary is not meant to be legal advice, as each person’s factual situation is different. No attorney-client relationship is sought or created by this post.– PCQ

  1. Banks cannot “force” you to pay on the loan.  If you cannot afford it – for any reason – banks have the right to foreclose the home (i.e. take it to auction and resell it, or take it back using a deed-in-lieu-of- foreclosure), but there is no Oregon law that gives a bank the ability to recover money from you for the remaining unpaid debt.  Recovery through foreclosure is the sole remedy, assuming you and the bank cannot reach another voluntary pre-foreclosure solution.
  2. The fact that you have a small savings account does not mean you need to hide it or shift it to another’s name.  You should never conceal anything from the bank, if disclosure is necessary as a part of some pre-foreclosure alternative.  If you’re seeking some assistance from the bank, such as a loan modification, or consent to a deed-in-lieu-of-foreclosure or short sale, you need their cooperation.  The worst the bank can do is say “No” and then take the home back through foreclosure. (Note: Foreclosure is not bank “assistance.”  As a part of the foreclosure process, banks have no right to require that you disclose to them anything about your assets, income, taxes, or other financial matters.  While talking with a person in authority at the bank is OK, you should first determine what there is to talk about and whether it will help meet your long term goals.  If the calls are from high-pressure bill collectors or off-shore call centers – neither of whom have authority to actually help modify your payments – you should first ask yourself whether the discussion will be of any real benefit, or whether they will just upset you.)
  3. Retirement accounts, pensions, IRAs, 401Ks, 529s, etc, are generally off limits.  Banks can’t reach them.  Garnishment of wages or bank accounts, and execution on personal assets can only occur if the bank has a money judgment against you for a deficiency.  Oregon law prohibits a lender holding a first note and trust deed from obtaining a deficiency judgment against your after your principal residence has been foreclosed.
  4. Keeping money in a checking or savings account at your lender’s bank may not be a good idea if you are in default on your home loan with them.  This applies to credit unions as well. They may be able to tap the funds in your account.
  5. You generally do not need “advance consent” from your lender to do a short sale.  So far, few if any of the big banks are issuing advance consents.  (These consent purport to set a minimum sale price or minimum net sale proceeds.)  Some banks are talking about it, but they’re not there yet. While checking with your lender up front about their short sale program is advisable (at least to get queued up in line), until you have a bona fide, arms-length offer[1] to submit to them, they can only speak hypothetically.  Unfortunately, even then, you can get misleading or inconsistent information from call centers and staff.  Persons with actual authority generally don’t answer these calls.  However, I’m speaking here of the mega-banks.  The smaller, local and regional banks are much better to work with and usually more reliable.  They may not tell you what you want to hear, but the information is likely to be much more reliable, consistent, and timely.
  6. Not all modification programs are created equal.  The success rates for most of these programs are abysmal.[2] Be very, very, careful about getting into a program if you consistently get contradictory information, broken promises, or where documents are continuously being lost.  In some cases, these “modification programs” are little more than disguised collection schemes to get as much money from you before ultimately denying the modification.
  7. Banks are still doing “dual track” modifications and foreclosures.  This means that if you’re severely behind on your home loan when you ask for a modification, the bank may discuss modification with you, but this won’t necessarily delay or stop a foreclosure.  Participating in a dual track process, could mean that all monies paid under a “trial” modification program will be for naught, if the property ultimately gets foreclosed.  Worse, you could get a denial for a loan modification but not have enough time to gather the funds to cure the default and stop the foreclosure.
  8. Your first responsibility is to your family, yourself, your financial future, and your retirement.  You are entitled to make prudent fiscal decisions about how you will spend your time and money.  Ask yourself,  “With $X of negative equity, how long will it take me and how much will it cost, before I will build up $1.00 of positive equity.”  And remember: Using credit cards or retirement withdrawals to pay on a home loan hopelessly awash in negative equity may not be the best long term use of your funds.  One mortgage is enough – do you want to mortgage your children’s education or your retirement as well?
  9. Although some banks and bank attorneys demonize some delinquent borrowers’ defaults as “strategic,” this is a falsehood, designed to make them, rather than their borrowers, appear to be the victims.  For example, if you’re current on your loan, but need help, the bank will be the first to tell you that to get their “help” you must stop making your payments.  Some banks say the same thing to homeowners who are still current on their loans, but need their payments modified.  The banks don’t call it a “strategic default” but it’s substantially the same thing.
  10. If you’re currently being foreclosed – or foreclosure is imminent – don’t feel guilty about remaining in your home.  In reality, it is the safest thing to do.  While there is no risk of a deficiency judgment if the bank completes a non-judicial sale (for any home – whether it’s a primary or secondary residence), if you were to vacate your primary residence before a judicial foreclosure was commenced, you could be exposed to the risk of a deficiency judgment.  Why?  Because the anti-deficiency judgment protection under Oregon law only applies if you are occupying your home as of the commencement of the foreclosure.  And, even though a non-judicial foreclosure is commenced, if the bank cancelled it and began a judicial foreclosure after you’d left, there is a potential risk of a deficiency judgment.[3]

[1] An “arms-length offer” is one that is between a ready, willing, and able buyer with whom you have no prior relationship, by marriage, blood, or otherwise.  Any collusion with a short sale buyer could be loan fraud, and should be avoided at all costs.  If in doubt, make a disclosure to the bank and see what they say.

[2] Banking or government statistics mean very little.  For example, to say that a lender made 100,000 “offers of modification” says nothing about (a) how long the process took; (b) how good or fair the offer was; (c) whether it was a temporary or permanent modification, or (d) whether the offer was even accepted. If you think modification may be the answer for you, check around to see if you can find anyone who (a) actually received a permanent modification, and (b) if they have anything good to say about what they had to go through to get it.  Many modifications have ultimately failed after a few months.

[3] I agree it would be inappropriate for a bank to seek a deficiency judgment under these circumstances; but it would be equally inappropriate for a lawyer to advise his or her client that it’s OK to vacate their home simply because a non-judicial foreclosure had been filed.  This was not the case several months ago, but today, banks are going the judicial foreclosure route, and in some instances, have cancelled their pending non-judicial foreclosures to do so.