Making Sausage – Observations on Some Recent Oregon Legislation

Posted on by Phil Querin

Making Sausage

A quick note on what appears to be a source of confusion among consumers and others about their personal liability on home loans that go into foreclosure.

Before the credit and housing boom and bust, Oregon protected homebuyers on their first mortgage if there was a shortfall in loan repayment (a “deficiency”) following foreclosure.  The law said nothing about such protection if there was a second mortgage.

During the boom times in Oregon and elsewhere, “piggy-back” loans were not uncommon. Piggy-backs were two loans, that is, a first and second mortgage, say, for 80% and 20% of the purchase price.

When Oregon real estate values collapsed in the third quarter of  2007, this left many lenders unpaid…and borrowers fearful of collection action being filed against them personally.  The lender on the first mortgage could not recover for the deficiency, but the lender on the second could.

In the 2010 special legislative session, Oregon law was changed to say that lenders foreclosing a first and second mortgage against one’s primary residence cannot pursue their borrower for the deficiency.  However, this comes with some conditions: (a) The first and second loan must both have been obtained as purchase money to acquire a primary residence (not applied toward other purchases or applied toward credit card debt, etc.); (b) Both loans must have been obtained from the same lender (or an “affiliate”); and (c) Both loans must have been obtained at the same time.

Between 2005 and late 2007 it was not unusual for mortgage brokers to obtain piggy-backs for their clients from separate lenders.  For examle, the interest rate for the second loan may have been more attractive at a different bank, rather than the same bank.  So if a borrower obtained their piggy-back loans from the same lender, they now have protection against a deficiency on both loans – but if they obtained their loans from two different lenders, they may only have protection against a deficiency on the first mortgage, but not the second.  There is one notable, but as yet untested, exception: The actual legislation requires both loans to be from the same lender or an “affiliate“.  This exception to the “same lender” requirement, may provide borrowers with different lenders at closing a chance to argue (in court, no doubt) that as long as it was a piggy-back loan, the legislative intent was to provide protection on both.  However, we can’t be sure, because that term was never defined in the legislation.

The logic for giving one set of homeowners (those with the “same” lender) protection and not others (those with two different lenders), defies rational explanation.  The Oregon legislature should correct this inequity.

Posted in Legislation - Federal, Legislation - Oregon, Miscellany, Real Estate/Distressed | Tagged , , , , ,
  • Categories

  • Archives