ALERT!
July 23, 2013
THOUGHT YOU KNEW EVERYTHING THERE WAS TO KNOW ABOUT A LENDER'S RIGHT TO A DEFICIENCY CLAIM? THINK AGAIN.
HB 3389 was signed by Governor Kitzhaber on July 19, 2013, and took effect immediately. It changed the definition of a "residential trust deed", and has once again altered the landscape as to when a lender may recover a deficiency claim from a borrower.
Before addressing what HB 3389 does, let's start with a discussion of the basics.
Deficiency Basics.
What is a deficiency? A deficiency is the difference between the amount the lender is owed on a mortgage loan, and the amount the lender realizes, either from a short sale, or from a foreclosure. If the loan amount is $200,000, and the property sells at a short sale or at a foreclosure sale for $150,000, the deficiency is $50,000. A deficiency claim is the right of the lender to seek recovery of the deficiency (in this example, the $50,000) by suing the borrower on the debt.
In a short sale, a lender will have a right to proceed with a deficiency claim unless it is expressly waived by the lender, as foreclosure laws will not apply. If a lender elects to proceed with a nonjudicial foreclosure (also known as a foreclosure by advertisement and sale), the lender is not entitled to a deficiency claim. This is so without regard to the nature of the collateral or the occupancy of the property.
But, what happens with a judicial foreclosure action (where the lender files a lawsuit in state circuit court, seeking to obtain a judgment of foreclosure and then a sheriff's sale of the property)(and the apparent current preference of lenders - over 90 judicial foreclosures were filed in Deschutes County alone in the period of July 1 through July 19, 2013).
This is where the definition of what is or is not a "residential trust deed" becomes critical, as this definition controls whether, in a judicial foreclosure action, the lender can obtain a deficiency claim or not. HB 3389 represents the third legislative change in the definition of a "residential trust deed" in the past three years. If the trust deed being foreclosed is deemed to be a "residential trust deed", then the lender can not obtain a deficiency claim.
Brief Legislative History.
In 2011, the legislature, through Senate Bill 519, amended the definition so that a "residential trust deed" was defined as a one to four unit residential property occupied by the grantor (generally this is the borrower), or the grantor's spouse or minor or dependent child, at the time a trust deed foreclosure is commenced. With this change, the focus was on the timing of the foreclosure action.
If the borrower had been renting out the property, then moved in to the property and occupied it as the primary residence before the lender started a foreclosure action, then the lender would be barred from a deficiency claim. However, if the borrower had been occupying the property as the primary residence, but then had to move out for some reason, and rented out the property, if the lender did not start a judicial foreclosure until after the property was being rented out, the lender could now obtain a deficiency claim. Further, if a lender started a nonjudicial foreclosure action, the borrower, thinking there is no right to a deficiency claim, then moves out and rents out the property, the lender could terminate the nonjudicial foreclosure action and start a judicial foreclosure and seek a deficiency claim. All of the foregoing were viewed as the "gaming" of the law or unfair to those homeowners who had to move out of their homes before a foreclosure action had been started - say, because of a job change. Basically, in order to be assured that no deficiency claim would be brought, a borrower had to occupy the property as the primary residence until the conclusion of a short sale or a foreclosure sale, no matter how long that took, which left the decision making solely in the hands of the lenders.
In 2012, the legislature, through Senate Bill 1552, amended the definition again, and now focused the determination of whether a trust deed was a "residential trust deed" or not, on the conduct of the borrower. The key was whether the borrower (or spouse or qualifying children) occupied the property as the primary residence "at the time a default that results in an action to foreclose the obligation secured by the trust deed first occurs." Now, if the borrower defaults on the loan by failing to make a payment, for example, and later moves out of the property, it doesn't matter when a foreclosure action begins, as the definition was fixed as a result of that default, and the lender would not be able to pursue a deficiency claim. The borrower who had to move because of a job change was no longer chained to the property. (Note there are inherent ambiguities in this definition, but that's for another story).
The New Definition of a Residential Trust Deed.
Under HB 3389, a "residential trust deed" is now defined as "...a trust deed on property on which are situated four or fewer residential units, one of which the grantor, the grantor's spouse or the grantor's minor or dependent child occupies as a principal residence at the time the trust deed is recorded or, in the case of a purchase money loan, one of which is intended to be the principal residence of the grantor, the grantor's spouse or the grantor's minor or dependent child after the trust deed is recorded." Note the shift. The focus is now on what the original purpose was of the loan, and any subsequent change of usage is irrelevant.
Note that there is no prospective effective date language in HB 3389, and it has an emergency clause, so the definitional change took effect immediately on July 19, 2013.
Presumably, therefore, the change could apply to any trust deed in Oregon as to which no judicial foreclosure action has started, as well as to any judicial foreclosure action which has started but has not yet been concluded through a sheriff's sale (and this even if a lender's pleadings reflected an agreement to waive the deficiency claim, as the lender's attorney can file an amended pleading and change position regarding the deficiency claim).
This may come as a significant shock to a borrower who had placed reliance upon the existing laws and was proceeding as if it was a certainty that no deficiency claim could be obtained. Here is just one example of the potential impact of the new law:
Borrower purchases the property initially as a rental property. The trust deed is recorded. Several years later, the renter moves out, the borrower moves in to the rental property and occupies it as the primary residence. The borrower then defaults under the loan, and the lender commences a judicial foreclosure action. Under the prior law, this borrower was safe from having a deficiency claim made against him or her. Under the new law, that is not the case, and a deficiency claim could be made against the borrower.
A borrower who is now facing either the threat of a judicial foreclosure action, or is the subject of a pending judicial foreclosure action, should review the new law with their legal counsel, and determine what impact the law may have on the lender's right to pursue a deficiency claim.
DISCLAIMER: This column does not constitute the giving of legal advice, and your reading this column does not create an attorney/client relationship. You are encouraged to consult a lawyer or accountant should you have questions about how this information may be applicable to your particular situation.
David R. Ambrose
Principal, Chief Executive Officer
Ambrose Law Group LLC
Direct Dial: 503.467.7217
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