Querin Law: Foreclosure FAQs (2013) – Parts One & Two

Creditcard and the houseAs noted in my post immediately preceding this one [Querin Law: Short Sale FAQs (2013)], the FAQ Section on the Q-Law homepage has been changed.  The FAQs on short sales that resided there for several months has been move to the Q-Law Real Estate Articles Section on the homepage [here], and I have substituted foreclosure Q&As in the FAQs Section.  Parts One and Two are below, and also located here in the FAQs Section of the homepage. There will be a total of three parts, with 30+ FAQs on foreclosures, current as of 3Q 2013.  ~PCQ

1.      What is a “judicial foreclosure”?  This is a foreclosure the lender, bank or servicer[1] files against the borrower using the court system. The “plaintiff” is the bank, and the “defendant” is the borrower. From start to finish, the process is directed by the court.  The date of the foreclosure auction is set at the end of the process.

2.      How does it differ from a “non-judicial foreclosure”?  A “non-judicial” foreclosure is conducted outside of the court system.  It consists primarily of the recording of a Notice of Default (“NOD”) in the county records, and mailing and service of a Notice of Sale (“NOS”) to the borrower, advising him/her that a foreclosure of the property has been commenced.  The NOD and NOS identify the date of the auction.

3.      Are banks doing both? Banks are primarily doing judicial foreclosures in Oregon, due to a state court ruling last summer that placed into question the quality of the title that resulted when a non-judicial foreclosure was completed.  In other words, there was a concern that title to the foreclosed home might be subject to attack by the former owner/borrower, claiming that he/she still retained title to the property.  Rather than take a chance, most banks cancelled their pending non-judicial foreclosures, and commenced doing judicial foreclosures.  Those banks that are still conducting non-judicial foreclosures are generally the smaller ones that retained ownership of their loans, rather than selling them, as the big banks did.

4.      How long does it take to conduct a non-judicial foreclosure?  This is governed by state statute.  Generally, from commencement of the non-judicial foreclosure [i.e. when the NOD is filed and a Notice of Sale is mailed to, and/or served on, the borrower] to the date of the auction, the time frame is around 130 – 135 days. By law it can be no sooner than 120 days.

5.      How long does it take to conduct a judicial foreclosure? This not governed by state statute.  It is really a function of how fast the lawyers can process the paperwork, once they receive it from the bank.  Generally, with the big banks and servicers, from commencement of a judicial foreclosure [i.e. when the complaint is filed in court and served on the defendant/borrower] to the auction, the process can take a year or more.  Small banks, with fewer foreclosures, are generally faster.

6.     Can I stay in my house during the judicial or non-judicial foreclosure process?  Yes, subject to the following: With both judicial and non-judicial sales, you should be out no later than the day of the scheduled sale.  As noted above, in a non-judicial sale, the auction date is included in mailings to the homeowner/borrower. If the sale will be postponed, Oregon law requires that you are to be provided with not less than 15 days prior notice if the postponement exceeds two days. With a judicial foreclosure, you will receive written notice at least 28 days in advance of the sale date.  In theory, whether it is a judicial or non-judicial sale, you could remain in the home up to ten days following the sale, but that would invite a lockout and/or eviction by the lender or purchaser at the sale.

7.    Will I have to pay property taxes during the foreclosure?  No. Property taxes are a charge [i.e. a lien that carries a right of foreclosure] against the property, but not a personal debt of the property owner/borrower.  If they are not paid, the bank advances them and adds the sum to the promissory note secured by the trust deed.  But if you don’t intend to cure or reinstate the indebtedness to the bank, past-due property taxes are not something you will have to pay.

8.      What about casualty insurance?  If you do not pay the insurance, it will be advanced by the lender. [It is called “force-placed” insurance, because the lender has the right, under the trust deed, to place it on the property to avoid a lapse in coverage.] But the coverage secured by the lender only covers the monies due to it under the loan.  Since most properties in foreclosure are worth less than the total indebted ness due [including taxes and insurance] normally, homeowners have no equity to insure, i.e. they are “underwater.”  If the house burned to the ground, all of the insurance proceeds would go to the lender.

9.      What about homeowner association or condo association dues?  Under Oregon law, this is a personal debt.  This means that it is something you want to keep current.  Homeowner Association (“HOA”) attorneys are very aggressive about securing not only the unpaid dues, but also the costs and attorney fees incurred in doing so.  Even if the property has been foreclosed by the bank [meaning that the HOA’s lien for the unpaid dues has been extinguished along with the borrower’s interest] the personal indebtedness for the unpaid dues remains, and they can seek collection from you.

10.     What is a Lis Pendens?  This is the name of the document that is frequently filed in the public records to give notice to all third parties that litigation affecting title to the property is pending. It is only recorded in judicial foreclosures, not non-judicial foreclosures. Typically, contemporaneous with the filing of a foreclosure complaint in court, banks will file a Lis Pendens on the public records in the county where the property is located. The effect of the Lis Pendens is that it “clouds” title to the property, and will prevent the owner/borrower from selling it to a third party, or encumbering it with a new loan.

11.    Can the bank obtain a deficiency judgment against me?  Potentially, depending on the type of trust deed you have.  If the trust deed is a “residential trust deed,”[2] Oregon law prohibits the bank from getting a deficiency, i.e. the difference between what you owe and what the bank recovers upon foreclosure.  In most situations in which the owner lived in the home as a primary residence, the banks do not seek a deficiency in Oregon. It makes no difference whether the foreclosure is conducted judicially, or non-judicially – the bank cannot get a deficiency judgment against you. However, note the answers to questions Nos.12 and 13 below.

12.    Will a judicial foreclosure automatically result in a judgment against me?  Today, in the Portland tri-county area, the courts appear to be requiring bank foreclosure attorneys to seek a “personal judgment” against the defendants. Initially, many bank attorneys only sought a judgment against the property and not borrowers personally.  That appears to be changing, such that at the conclusion of the foreclosure, there will be a “judgment” in your name – even in those cases in which the bank cannot, under Oregon law, collect against you personally. I cannot comment on the other 33 counties, but the answer should be readily available by asking the foreclosure attorneys filing in those counties.

13.    Will the judgment be removed, and if so, how will I know?  In theory, the bank attorneys automatically enter a “Satisfaction of Judgment” once the property sells in foreclosure, assuming it is a “residential trust deed.”  However, I would not depend upon that occurring as a matter of course, since foreclosure attorneys are up to their eyebrows in paperwork. If you are legally represented, you should ask your attorney to check with opposing counsel.  Otherwise, you can call the attorney who signed the foreclosure complaint you were served with.  Note that some foreclosure attorneys might wait until the right of redemption has expired, i.e. 180 days following the date of the foreclosure sale. This is why you want to check, or have your attorney do so.

14.    Will there be any tax consequences from my foreclosure?  There could be.  I am not a tax attorney, and you should always verify the consequences with your tax counsel or CPA.  The general rule is that any cancellation of debt results in the assessment of income tax.  See, IRC 108. However, federal law has forgiven the tax if it arises from a distressed housing event (e.g. short sale, deed-in-lieu, and foreclosure) if the loan(s) was/were used to buy, build or substantially improve the home and the taxpayer lived in it as a primary residence for two of the last five years.  Note that this forgiveness law is scheduled to expire at the end of 2013, unless extended.  We have no word yet that it will be extended, but (hopefully) that will occur at the end of 2013 or early 2014.

15.    What bout credit impact from a foreclosure?  As in all distressed housing events, there is a credit impact.  However, the extent of the impact is dependent upon your own personal credit history and other facts, such as the amount of debt you carry relative to your available credit, etc.  You should go to www.myfico.com to learn more.  My experience over the past three years (2010-2013) has been that for purposes of obtaining another loan, the consequences are not as bad at the GSEs (i.e. government sponsored entities, Fannie and Freddie) initially said.  In other words, as the credit and foreclosure crisis has become more prolonged, the “credit bar” seems to have been lowered, i.e. it’s been more forgiving – of those that had an adverse housing event.   The rationale is simple: Due to the high numbers of folks with a short sale or other such event in their past, and the fact that frequently, this single credit event, was the only “black mark” on their history, it has become more apparent that many of these folks are not, per se’, credit risks for another housing loan. The wait is not necessarily 5-7 years.  There is hope!  

16.    How can I stop a judicial foreclosure?  If by “stop,” you mean have it dismissed so you can keep your loan and resume making payments, there is only one way to do that:  You need to contact the attorney who filed the foreclosure complaint and ask: (a) If they will permit you to “reinstate” the loan, and (b) If so, ask for a reinstatement calculation.  The reason you have to ask if they will allow you to reinstate is because technically they do not have to agree to do so.  In a judicial foreclosure, upon default, the lender “accelerates” the entire remaining unpaid indebtedness, thus, “calling the loan” immediately due and payable. In other words, after acceleration, there is technically no right to “cure” by bringing the loan current by paying all of the unpaid arrearages, late fees, accrued attorney fees and costs.  However, my experience has been that most lenders will permit reinstatement, although they will not likely negotiate on waiving accrued late fees, attorney fees and costs.

17.    How can I stop of non-judicial foreclosure?  Non-judicial foreclosures are governed by statute in Oregon.  See, ORS 86.705 – 86.737.  The right to “cure,” i.e. reinstate, is permitted from the date of commencement of the foreclosure up until five (5) days prior to the scheduled sale date.  After that, technically, the entire unpaid principal balance is immediately due and owing.

18.    What if I am marketing the home for short sale – will the bank stop the foreclosure to permit me to short sell the home?  Most banks will not “stop” a foreclosure while the borrower-owners tries to short sell, but they will cooperate if a closing is scheduled, which means the lender who is foreclosing has approved the short sale buyer.  You must look at the foreclosure process and the short sale process as proceeding down two separate tracks. On the one hand, the banks’ attorneys are charged with conducting a foreclosure. They are not involved in the short sale process – that is something the short seller’s real estate agent handles directly with the short sale “department” of the bank.  Once the bank formally approves the short sale transaction and has sent a letter setting forth the terms of closing, it is time for the seller-borrower’s agent (or attorney) to notify the bank attorneys so they can coordinate the dismissal of the foreclosure action with the closing of the short sale.

19.    How will I know when the home will actually be sold in a judicial foreclosure?  The lender will post a notice on the property from the county sheriff’s office identifying the time and place of the sale.  This notice will also be mailed to the occupant of the home.  The notice must precede the scheduled sale date by at least 28 days.  See, ORS 18.924.

20.    How will I know when the home will actually be sold in a non-judicial foreclosure?  By law, the date of the foreclosure sale will be disclosed both in the Notice of Default filed in the public records preceding the sale by approximately 130+ days, and the Notice of Sale sent to, and/or served, on the defaulting borrower.  Note that non-judicial sale can occasionally be postponed, i.e. meaning that the date identified in the Notice of Default and the Notice of Sale will be superseded by a new date.  In such case, if the postponement is more than two days, the borrower must be given at least 15 days’ advance notice.

[To be continued!]

[1] In these FAQs, the terms “lender” or “bank” denote either the entity that made the loan, or another entity that acquired the loan.  The term “servicer” refers to the entity – which may or may not be a lender or bank – whose sole responsibility is to process and account for payments if the loan is “performing,” or to handle the foreclosure if it is “non-performing.”  For purposes of these FAQs, I will use the terms interchangeably.

[2] A “residential trust deed” is legally defined under Oregon Revised Statutes. This Q&A is not intended to constitute “legal advice,” so I am not going to try to give the technical definition. Suffice it to say, that if you lived in the property as a primary residence, even if it doesn’t fit the technical definition of a “residential trust deed” today, I have not seen the banks try to seek a deficiency judgment – even if they might be entitled to do so.  This is not a “guarantee”  – just my experience to date.