Table of Contents
Foreclosure
Foreclosure is the means by which a creditor gains the right to sell real property that secures a due and unpaid debt. The debt can be in the form of a mortgage, a note and trust deed or a lien on the property. Whatever the instrument, foreclosure under Oregon law is the only way the creditor can force the sale of real property to pay the debt.
There are two kinds of foreclosures in Oregon. One is called judicial foreclosure. The other is called non-judicial foreclosure. Judicial foreclosure is typically used to foreclose mortgages and other liens on real property. Non-judicial foreclosure is typically used to foreclose interests under a trust deed by a process known as "advertisement and sale."
All foreclosures are closely regulated by statute under Title 9 of Oregon Revised Statutes. The judicial foreclosure of mortgages is governed by the provisions of ORS Chapter 88. Liens are covered in ORS Chapter 87. The non-judicial foreclosure of trust deeds is governed by the provisions of ORS Chapter 86.
Generally, foreclosure laws and procedures are beyond the scope of a real estate licensee's expertise. Extreme care should, therefore, be taken when marketing property that is in foreclosure or in danger of foreclosure. Click HERE for a discussion of Marketing Property in the Face of Foreclosure. Foreclosure is always a factor in a short sale. Click HERE for a detailed discussion of Short Sales.
return to top Statutory Provisions Involved
ORS Chapter 86 Mortgages; Trust Deeds
ORS Chapter 87 Statutory Liens
ORS Chapter 88 Foreclosure of Mortgages and Other Liens
return to top Judicial Foreclosure
Judicial foreclosure requires a lawsuit in circuit court brought under the provisions of ORS 88.010 et. seq. The mortgagee or lien holder sues to have the mortgage or lien foreclosed. If the suit is successful, the court will issue a decree and order the property sold by the local sheriff at a public auction.
In order to sue for judicial foreclosure, the owner of the property must be in "default." "Default" means they have failed to meet the terms of a mortgage or otherwise failed to pay a debt when due which is secured by the property. Like any lawsuit, a foreclosure suit requires service of the filed complaint. Service will serve as notice to the property owner that the legal foreclosure process has begun.
Once the suit is filed, the owner can avoid the foreclosure only by satisfying the debt. This right to satisfy the debt ends when the property is sold. How long it will take for the court to order foreclosure is hard to predict because it depends on whether the default is contested as well as how full the court's docket is with other cases. Typically, a judicial foreclosure will take six months or longer.
Foreclosure sales are conducted according to the public sale provisions of ORS 18.924. The provisions require notice and publication, including posting notice on the property (usually taped to the door) and serial publication in newspapers. Once sold, the former owner has a six-month statutory right of redemption. That means they can get the property back for up to half a year after the sale by paying the purchaser the purchase price, taxes, interest and other costs.
Oregon is a "non-recourse" state when it comes to most residential property. "Non-recourse" means the mortgage holder cannot collect a default judgment if the sale does not produce enough proceeds to pay off the entire secured debt. The mortgagee takes the loss if the property is not worth the loan value As a general rule in the judicial foreclosure of residential property in Oregon, the mortgagee will have no recourse because under ORS 88.070 most residential mortgages are what are called "purchase money mortgages."
A purchase money mortgage is one in which money is borrowed to purchase the property to which the mortgage is attached. There is, however, no general non-recourse rule for all liens and mortgages on real property. Mortgages on residential property taken for reasons other than for purchase may be subject to default judgments. Real estate licensees should, therefore, never advise clients about default judgments and should instead always refer clients to a lawyer, accountant or other financial professional.
return to top Non-Judicial Foreclosure
A trust deed is a real property security instrument created by statute. The relevant statute is the Oregon Trust Deed Act, ORS 86.705-86.795. A trust deed is similar to a mortgage but usually gives the security holder a "right of sale." This "right of sale" allows the security holder to foreclose on the property without having to file a lawsuit in court. This process is called "foreclosure by advertisement and sale" and is found in ORS 86.735.
Trust deeds are called trust deeds because the deed is held by a third-party trustee. When the grantor (the property owner) pays the debt owed to the beneficiary (the lender), the trustee re-conveys the property back to the grantor. If, however, the grantor defaults, the beneficiary can elect to have the trustee foreclose on the trust deed. When that happens, the foreclosure is accomplished by the non-judicial procedures set out in the Oregon Trust Deed Act.
As with judicial foreclosure of mortgages, foreclosure of a trust deed by advertisement and sale requires a default. Unlike mortgages where the security holder can accelerate the entire debt, the property owner on a trust deed can cure the default by paying the amount delinquent under the trust deed. This right to cure by paying the delinquency instead of the entire debt is a powerful right. The right to cure is, however, cut off on the fifth day before the date set for the sale.
Non-judicial foreclosure is commenced by the recording and service of a Notice of Default. The contents of the Notice are set out in ORS 86.745. Among other things, the Notice will state the names of the parties involved, the sum owing on the obligation and the date, time and place of the sale. The notice starts the foreclosure clock running.
A non-judicial sale cannot be set for less than 120 days after the Notice is given. To this time must be added the time necessary to process the paper work and complete service -- generally two or three weeks. The Notice must also be published in a newspaper of general circulation in the county for four consecutive weeks. The last publication must be at least twenty days prior to the sale. Taken together, these notice and publication procedures make it difficult to complete a non-judicial foreclosure in less than six months. Five months from the date of notice is pretty much the minimum time required for a non-judicial foreclosure.
According to ORS 86.770, "[a] guarantor of an obligation secured by a residential trust deed may not recover a deficiency from the grantor or a successor in interest of the grantor" "Residential trust deed" is defined in ORS 86.705(3) as “a trust deed on property upon 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 a trust deed foreclosure is commenced" There is no right of redemption following a non-judicial sale.
Whether a trust deed is a "residential trust deed" is determined at the time of foreclosure and, therefore, may change depending on who is occupying the property. Thus, what started out as a residential trust deed may become a non-residential trust deed. This can expose the grantor to a deficiency judgment. It is for this reason that real estate licensees should never make statements about whether a particular owner will or won't be exposed to a deficiency judgment in a particular non-judicial foreclosure.
return to top Marketing Property in the Face of Foreclosure
Marketing property in the face of foreclosure is different from marketing property generally in several important ways. First, foreclosures are public. Judicial and non-judicial foreclosures are public events in the sense that the details, including the owner's name, the property address, the amount due on the loan and so on, are public information. There are companies and individuals who make their living churning the distressed property market. Dealing with these people, usually representing themselves as "investors," is something to consider before taking on the marketing of property in the face of foreclosure.
The distressed property crowd creates issues for real estate agents in a number of related ways. People trying to make money on distressed property can be pushy low-ballers who upset sellers, complicate your marketing and generally take up time. Not all of them are ethical. A few are crooks. On the listing side, having a good relationship with your seller will help you keep yourself and your seller out of the worst that the distressed property market has to offer.
Forewarned is very much forearmed when it comes to marketing distressed property. The first step is to gather information. The Internet can be a source of information on foreclosure problems. For instance, a good deal of information on mortgage foreclosure rescue scams can be found at: http://www.fraudguides.com/mortgage-foreclosure-rescue-scam.asp The Oregon Department of Consumer and Business Services publishes a booklet entitled: "Foreclosure You Can Avoid It." Click HERE for a copy of the booklet. Further, the Oregon Department of Justice has helpful information HERE. Finally, agents should make themselves aware of what is going on in the local foreclosure market. The foreclosure market fluctuates and varies from area to area. Local knowledge is a huge advantage when marketing property in the face of foreclosure.
Knowledge is the key to marketing property in the face of foreclosure because it can be used to control expectations. Expectations (whether those of the seller or the buyer) are controlled by timely disclosure. There are two types of disclosures involved. The first is the disclosures the agent makes to their own client for risk management purposes. The second is the disclosures made to the other side as a matter of legal duty. These two different disclosures are not well understood.
return to top Risk Management Disclosures to Clients
Marketing property in the face of foreclosure means marketing on a short timeline that ends with the client losing control of the property. Since the property is in foreclosure, the seller's distress is public. These factors argue in favor of below market pricing. Such pricing should be carefully documented so that it is clear the decision was an informed one made by the seller. That means a good CMA/BPO and written documentation of how the listing price was established. Written documentation, whether in the form of emails or client letters or more formal pre-printed documents, showing how pricing was determined is the first step in disclosure for risk management purposes.
Pricing documentation may raise the issue of a "short sale" if the listing price is near or below the seller's payoff. If a short sale is a possibility, short sale disclosures should be made as soon as the listing is taken. Click HERE for a detailed discussion of short sales and short sale disclosures. Property priced to move quickly to avoid foreclosure can also raise multiple offer issues, even in a down market. Therefore, it is a good idea to have talked to the seller about multiple offers and have a plan for how they will be handled already agreed upon. It is absolutely critical that the buyer's agent explain multiple offer issues to their client, and document having done so, as soon as multiple offers become likely. Click HERE for a detailed discussion of multiple offers.
Risk management disclosures are really just the documents an agent uses to show the client was fully informed about the situation and the agent's actions. A client faced with foreclosure is looking for someone to save them. If that proves impossible, they may turn on the savior. Residential buyers in the pre-foreclosure market are looking for a deal. Getting that deal may prove a lot more difficult than expected. The potential for dashed expectations is high on both sides. The wise agent will control expectations by disclosing early and disclosing often.
return to top Disclosures to the Other Party
Oregon law imposes the obligation of good faith and fair dealing on all parties to a contract. Oregon real estate law demands disclosure of material facts known by an agent and not apparent or readily ascertainable to a party. Click HERE for a detailed discussion of Agency Duties. Together, these obligations can create a duty to disclose the existence of a foreclosure or, in some circumstances, problems on the selling side. These disclosures are mandatory in the sense that they are demanded by law. Click Here for a detailed discussion of the Disclosure Duties.
Mandatory disclosure on the selling side is rare. The pre-foreclosure market being what it is, however, there may be situations when an agent learns the buyer is being dishonest to the seller -- for instance, a buyer who is running a foreclosure scam. An agent who discovers their buyer is involved in a scam and has no intention of performing as required by the sale contract, can find themselves stuck between their duty of loyalty and confidentiality to the client and duty of honesty to the other party. At the first hint that such a situation may develop, the agent should take the matter to their principal broker. There may be time to end the agency relationship. If not, the duty of honesty must always take precedent after, of course, full disclosure to the client.
Far more common than questions of honesty on the selling side are questions of disclosure of material facts on the listing side. Here, the disclosure question is when and if the foreclosure itself must be disclosed to potential buyers. Such disclosures are serious matters because disclosing a pending foreclosure will tend to drive down offers both in number and price. Fortunately, the mere fact that the seller is in default and facing potential foreclosure is not material and, therefore, need not be disclosed.
Although not well understood by agents, foreclosure itself is not material. That is the case because, until the sale takes place, the owner retains full ownership in the property and can sell it with clear title at anytime by simply paying off the loan. Thus, a foreclosure becomes material only if and when an offer is accepted with a closing date that is beyond the foreclosure sale date (or involves a short sale or other third-party approval e.g., a bankruptcy trustee). That is the case as long as the seller can stop foreclosure and deliver clear title at closing.
Disclosure of a pending foreclosure in the MLS, or in ads or simply by word of mouth from the listing agent raises serious loyalty and confidentiality issues. It may be that the seller wants to signal distress in order to attract bargain hunters and "investors," but that is a decision for the seller after full disclosure of the potential consequences. Such decisions should never be made unilaterally by the agent. As long as the seller can deliver clear title without approval of a third-party, there is nothing that requires disclosure of pre-foreclosure sales. Click HERE to review similar disclosure timing issues in short sales.
return to top