Important Information About Foreclosure Law Changes

In February 2010, the Oregon legislature passed House Bill 3656 (“HB 3656”) amending ORS 86.770. The passage of HB 3556 brought clarity to the foreclosure laws. Specifically, ORS 86.770, as amended by HB 3656, makes clear when a deficiency judgment, which is a judgment against a debtor (i.e. borrower) for the unpaid balance of the debt when a foreclosure sale fails to yield the full amount of the debt due, can and cannot be sought following foreclosure. Here’s a quick guide to ORS 86.770.

The first question to ask is whether the trust deed is a residential or commercial trust deed. Under Oregon law, a residential trust deed is defined as a trust deed on property with four or fewer residential units, one of which is occupied as the principal residence of the grantor (i.e. borrower), the grantor’s spouse, or the grantor’s minor or dependent child at the time foreclosure is commenced. ORS 86.705(3). A trust deed not meeting the residential trust deed description is considered a commercial trust deed. Accordingly, trust deeds can change from residential to commercial (and vice versa) depending on the borrower’s use. For instance, a trust deed for a duplex that was originally a commercial trust deed could become a residential trust deed if the borrower resides in one of the units when the trust deed foreclosure is commenced.

Once you have determined the category of the trust deed, a review of ORS 86.770 provides the answer to whether a deficiency judgment against the grantor can be sought.

Let’s analyze what happens if a residential trust deed is foreclosed. There cannot be a deficiency judgment against the grantor, the grantor’s successor in interest, or any other person obligated on the promissory note, bond, or other obligation secured by a trust deed whether the residential trust deed is judicially foreclosed (i.e. through a court order) or nonjudicially foreclosed (sometimes referred to advertisement and sale; foreclosure that occurs via a trustee’s sale).

Moreover, no action is allowed on any other note, bond, or other obligation secured by a residential trust deed (i.e. a second trust deed) on the property subject to the judicial or nonjudicial foreclosure if: (1) the other debt obligation was created on the same day as, and used as part of the same purchase or repurchase transaction as, the debt secured by the foreclosed trust deed; and (2) the other debt is owed to or was originated by the same beneficiary (i.e. lender) or an affiliate of the beneficiary as the foreclosed trust deed.

Now, let’s examine what happens if foreclosure of a commercial trust deed takes place. If a commercial trust deed is foreclosed non-judicially, no deficiency action may be brought, nor judgment entered against, the grantor, the grantor’s successor in interest or another person obligated on the promissory note, bond, or other obligation secured by the trust deed that was subject to non-judicial foreclosure. However, the carve-out for other promissory notes, bonds, and other obligations executed the same day as part of the same purchase is not included for commercial trust deeds. Accordingly, a debtor would be liable for sums owing under the other debt. For commercial trust deeds, the practical reality is that if a trustee’s sale occurs with regard to one of several loans by the same lender, the lender could then seek a judgment against the borrower based on the other loan(s).

The borrower’s situation in a judicial foreclosure of a commercial loan is worse. If a commercial trust deed is foreclosed judicially, the borrower is completely exposed. Simply put, when a judicial foreclosure of a commercial trust deed occurs, the lender obtains a deficiency judgment against the debtor if the net sale proceeds are insufficient to satisfy the loan secured by the trust deed foreclosed.

What about the liability of guarantors of loans? While the rights of guarantors of residential loans against the borrower are limited (a guarantor of an obligation secured by a residential trust deed may not recover a deficiency judgment against the grantor or a successor in interest of the grantor), lenders have unlimited rights to pursue guarantors if trust deeds are judicially foreclosed (lenders can bring deficiency actions against guarantors of trust deeds after judicial foreclosure, including judicial foreclosures of residential trust deeds). ORS 86.770(5). Thus, guarantors of residential trust deeds are at risk for deficiency if the trust deed is judicially foreclosed. To make matters worse, the guarantor cannot pursue a claim against the residential trust deed debtor for any deficiency. On the commercial side, the guarantor will also be on the hook after judicial foreclosures but will at least be able to pursue the debtor.

The current economy dictates that attention be paid to the changes in foreclosure laws, whether you are an investor with rental property or a homeowner. It is important to realize that foreclosure law, like all law, is constantly evolving and undergoing revisions. Moreover, even without a change in the law, the foreclosure process continues to be in a state of ux. For example, on October 8, 2010, Bank of America announced that it was suspending all foreclosure actions in all 50 states as it investigates flaws in its foreclosures system (specifically, employees failing to properly review documents before the bank initiated foreclosure actions). J.P. Morgan Chase, Ally Financial (previously known as GMAC), and other banks may also announce similar moratoriums on foreclosures. If so, the recovery of housing prices will likely be stalled for some time.

Should you need any assistance in the foreclosure arena, please do not hesitate to contact us. We are here to help.
Betsy A. Cooper’s legal practice focuses on real estate law, in which she handles a variety of legal matters for clients. Named an Oregon Super Lawyers Rising Star in 2009 and 2010, she works with clients on issues relating to the sale and acquisition of real property, real estate foreclosures, general real property matters, commercial landlord tenant matters, and loan workouts. Contact Betsy directly at bcooper@SamuelsLaw.com.

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