Many of our agents are seeing their clients go through judicial foreclosures, something that we almost never saw a few years ago. If you were wondering why this is and what it means to you and your clients, here are some answers.
First some background. Mortgages existed in England since at least 1190, so there was already a good understanding of how they worked when people started arriving in America. When borrowers default, the lender who holds a mortgage is allowed to foreclose, which is the legal process of taking title from the borrower and giving it to the lender. This is a powerful remedy, one that lenders were allowed to use because a court was monitoring everything, making sure that the foreclosure was proper. The court determined whether the owner was properly notified of the foreclosure, whether the owner had an opportunity to respond, and whether the owner was actually in default, while simultaneously requiring the lender to prove that it still owned the loan on the property and followed all the procedural steps entitling it to foreclose. Once the foreclosure was complete, the borrower had a period of time to “redeem,” or get the property back, if it could pay back the expenses of whoever bought the property at the foreclosure sale.
Many lenders in the United States were not entirely happy with this foreclosure process. They argued that using courts took too long, that borrowers didn’t have the money required to hire a lawyer so that they could participate meaningfully in the litigation process, that redemption periods were a waste of time because borrowers rarely had the money to redeem, and that a quicker and less expensive process would be easier for everyone and lower the cost of credit. In response to these concerns, about thirty states, including Oregon and Washington, have adopted the use of trust deeds (or deeds of trust) and nonjudicial foreclosures. Since lenders prefer nonjudicial foreclosures over judicial foreclosures, trust deeds usually become the most common “debt instrument” in the states where they are allowed. But mortgages are still used in all fifty states.
Trust deeds are the same as mortgages in most ways: both are recorded as liens on property, both require the borrower to take care of the property and protect the priority of the lender’s lien. The major difference between them is that with a trust deed there is a third party, a “trustee,” who has the power to sell a property at a public sale if the owner defaults on their loan, but with a mortgage the foreclosure is handled by a court. And there are other differences between mortgages and trust deeds when it comes to foreclosure. The most important difference is that the lender doesn’t have the right to pursue the borrower for a deficiency (the difference between what the lender is owed and what the lender receives at the foreclosure sale) after a nonjudicial foreclosure. If you think about it, that makes a lot of sense: the nonjudicial foreclosure process isn’t monitored by a judge, so there is nobody around to make sure that the trustee and lender properly publicize the sale and get a good number of bidders show up. It would not be fair to require the borrower to pay a deficiency if nobody actually had the opportunity to bid at the foreclosure sale. That is the price that lenders paid when they were given the right to foreclose nonjudicially. There are other important differences between judicial and nonjudicial foreclosure. Talk to a real estate attorney if you have questions about the other differences.
Everybody was mostly happy with nonjudicial foreclosures before MERS and “robo-signing” came along. MERS was set up to allow lenders to transfer loans between themselves electronically, without recording assignment documents in county real estate records. But some states, including Oregon, have statutes calling this practice into question. Oregon requires all assignments of a trust deed to be recorded before the nonjudicial foreclosure process can be used (ORS 86.735(1)), which doesn’t happen with MERS loans. Washington requires that the foreclosing party be the holder of the promissory note (RCW 61.24.005(2)), but MERS never holds the note.
Lawyers for homeowners have begun to file lawsuits challenging nonjudicial foreclosures, claiming that the foreclosure isn’t valid if it doesn’t comply with all of the statutes. These lawyers have achieved mixed results across the county, but on July 18th they were successful in the Oregon Court of Appeals (Niday v. GMAC Mortgage, LLC), and on August 16th they were successful in Washington (Bain v. Metropolitan Mortgage, MERS, et al.). Until something changes (such as a revision to the statutes), a lender will have to foreclose judicially if the trust deed is a MERS trust deed in Oregon or Washington.
So if you hear someone say that Oregon or Washington is a “nonjudicial state,” or that we never use mortgages here, you now know that it isn’t so simple anymore. Anything can happen as we continue to deal with the changes brought about by the financial crisis.
written by: Jeff Davis, General Counsel RE/MAX equity group