Although there is an abundance of useful information on the Internet, it can become confusing to many. So I thought I’d post some of the most common questions I receive. It is my hope that perhaps those folks who are worried about a possible foreclosure of their home, will read this post and find that the information is generally not all bad. While foreclosure can be unpleasant, and a serious hit to one’s credit score, the actual legal outcome of a completed nonjudicial foreclosure of a primary residence in Oregon is not as bad as some people fear. In short, knowledge can be very enabling. It also makes for a better night’s rest. – PCQ
QUESTION: How do lenders foreclose property in Oregon?
ANSWER: If the property is the borrower’s primary residence, the foreclosure process is almost always done nonjudicially. This is a foreclosure that is initiated by recording on the public record a “Notice of Default” (“NOD”) – rather than the filing a lawsuit in court. Immediately after recording the NOD, the borrower is sent a Notice of Sale which contains much the same information contained in the NOD. It identifies the foreclosing entity, the amount of the arrearages, the foreclosure sale date, and the borrower’s right to “cure” the default by paying the arrearages.
QUESTION: How long does this process take?
ANSWER: The Notice of Sale must precede the scheduled auction date by not less than 120 days. This does not count the time prior to the filing of the NOD, which can involve several months of borrower nonpayment before the NOD gets filed.
QUESTION: How many months of nonpayment normally occur before the bank commences the foreclosure?
ANSWER: There really is no “normal.” Much depends on the lender and their backlog at any point in time. Certain lenders had less problems with their foreclosures than others. There seems to be a direct relationship between the size of the lender and their foreclosure delays. That is, the larger the lender, the larger their backlog, and the longer their delay in filing NODs. I would expect a delay of at least five months, although eight, nine, ten or more months is not unusual. In all cases, borrowers should read their mail from the bank. While most of it contains the standard payment demands, normally, when the lender warns that they will accelerate the indebtedness in the next 30 days, it signals the final stage of letter writing, and one would expect the NOD to be filed soon.
QUESTION: Can I stop the foreclosure, and if so, how?
ANSWER: In Oregon, we are a “Trust Deed” state. This means that the lender (known as the “Beneficiary”) secures their right of repayment of the promissory note by a trust deed, rather than a mortgage. While there are technical differences between mortgages and trust deeds, the primary one is the method of foreclosure. Trust deeds are foreclosed “non-judicially,” meaning that the process occurs outside of court. The best way to stop a trust deed foreclosure in Oregon is for the borrower (known as the “Grantor”) to pay the amount of the current arrearages, including late fees and statutorily limited attorney fees. When the foreclosing trustee receives full payment, he/she will discontinue the sale. This right to “cure” the default continues until five days before the scheduled auction date. Within the five day period, the borrower must pay the entire debt due under the promissory note, plus fees, etc. in order to stop the sale.
QUESTION: What if the property is not my primary residence? Am I at any greater risk in a foreclosure?
ANSWER: Non-primary residences, e.g. a second homes, vacation homes, investment properties, etc, may legally be treated differently under Oregon foreclosure law. That is, even though the lender took a trust deed to secure repayment of the promissory note, ORS 86.770 provides that the lender has the option of foreclosing it judicially, i.e. by filing a complaint in court. Once they get a judgment for the money due, the property will be sold at auction, and if the entire indebtedness is not recovered at that time, the borrower can be held liability for the “deficiency,” that is, the difference between the amount owed to the bank, and the amount it actually recovers through foreclosure. However, in my experience, most non-primary residences in Oregon are foreclosed nonjudicially, i.e. just the same as trust deeds on primary residences. In such cases, following the nonjudicial foreclosure, there will be no liability to the foreclosing bank for any deficiency.
QUESTION: What if I am being foreclosed by the holder of the first trust deed, but I also have a second trust deed on my property? What happens to the second following the foreclosure?
ANSWER: The second trust deed is “second” because it was recorded after the first. This means that that second lender’s interest is “inferior,” or “subordinate,” or “junior” to the first lender’s trust deed. As such, unless the second bank pays the first, the second will be foreclosed along with the defaulting borrower. When this happens, the second loses its secured position in the property, but retains an unsecured claim against the borrower under the promissory note. The only exception to this rule is when the first and second trust deeds were taken out from the same lender and at the same time. In such cases, promissory note liability on the second will be extinguished just the same as the first trust deed. However, this assumes that (a) the property is a primary residence as of the commencement of the foreclosure, and (b) the money on the second loan was “purchase money,” i.e. it was used to acquire the home rather than for other expenses such as debt consolidation. For more discussion on the issue, see my post here. Lastly, if the property is not a primary residence that has been occupied for two of the last five years, there may be a tax consequence, as discussed in my post here.
QUESTION: What if there are no bidders at the foreclosure sale?
ANSWER: The bank makes an initial bid, sometimes called a “protective bid” or “minimum bid.” This bid may be less than the amount due from the borrower, although it should reflect the current fair market value of the property. All bidders attending the sale must bid more than that initial bid. The property will be sold to the highest bidder for cash. If there are no bidders besides the bank, it will take title to the property.
QUESTION: What if I have a short sale and the property is in foreclosure? Can I get the lender to postpone the auction so that my short sale can close?
ANSWER: Generally, yes. You should contact the person in charge of handling the foreclosure. They are identified on the Notice of Sale. They are called the “Trustee” or “Successor Trustee.” They can contact the lender and ask for the postponement. If you are told the auction is postponed, confirm this by going on the Trustee’s website to make sure that it shows the scheduled foreclosure date has been postponed. Postponements are usually for 30 days. If the website does not show that the auction has been postponed, immediately contact the Trustee. Never “assume” that an auction date has been postponed. Always verify. There will normally not be any written notice to you from the bank or the bank’s trustee notifying you of a postponement.
QUESTION: I have heard recently that in some parts of Oregon, lenders have halted their foreclosures. Do you know why – and when will they start back up again?
ANSWER: It is correct that during the first few months of 2011, certain lenders quietly cancelled or rescinded their foreclosures. Although the lenders never made a public announcement as to why, it is my opinion that the answer was based upon two major factors. First, some recent Oregon federal court and bankruptcy court rulings had sent a pretty clear message that some judges believe most nonjudicial foreclosures conducted in this state had been performed without following the law – specifically, ORS 86.735(1), which requires that all of the successive assignments of the trust deed must first be recorded before commencing the foreclosure. The second reason for the foreclosure halt is believed to be that the lenders are waiting to see if there might be a legislative fix in this 2011 Session, which would pave the way for them to continue their foreclosures without having to comply with ORS 86.735(1). A complete explanation is beyond the scope of this answer, but I have addressed it in posts here, and here. Today, it appears that some lenders have re-commenced the foreclosures they had put on hold. It remains to be seen if the Oregon legislature will oblige the banks, but at the present time it does not appear likely.
QUESTION: When the bank starts their foreclosure against me, do they have any right to grab money out of my savings or reach other assets I have. Should I move some of my savings into an account under my relative’s name?
ANSWER: I admit that I am always surprised to hear that some people think a creditor has a right to reach assets or money before first having a judgment issued from a court. But this is a concern of many people. First, as pointed out above, it is a rarity that the bank will foreclose any other way than nonjudicially. Without a court judgment, the bank cannot reach any of your assets. You can have a million dollars in the bank. But if you stop making your home loan payments, the only thing the bank can reach is the property that is described in the trust deed. This is the deal they struck when they secured your promissory note by a trust deed, which to most lenders, is perceived as cheaper and faster than a judicial foreclosure. [Note, however, if you have a second loan on your property, and there is a risk of foreclosure by the holder of the first trust deed, you really should talk to your attorney about financial exposure on the second trust deed. – PCQ] There is never any reason to start shifting assets around, which could be far worse than the problem itself. Most states, including Oregon, have laws against such activity. It is called a “fraud on creditors” and creates a risk that the relative to whom you moved your money or bank account could be named in a lawsuit with you.Posted in Deficiency Liability, Foreclosure, Legislation - Oregon, Lenders, Market Conditions, Real Estate General, Real Estate/Distressed, Tax Issues, Trust Deeds | Tagged Banks, Credit, Distressed Transactions, Foreclosure, Legislation - Oregon, Market Conditions, Oregon, Real Estate, Trust Deeds