In the previous articles in this ‘My Mortgage is Underwater. Now What Do I Do?’ series, we discussed Option 1 – Sit Tight in the first article. Then we discussed some options you might pursue if you didn’t have the income or the savings to be able to continue to make your mortgage payment: Option 2 – Loan Modification, Option 3 – Short Sale, and Option 4 – Deed in Lieu of Foreclosure. Then we talked about an alternative to Option 1, even if you could still manage to keep up your payments, called Option 5 – Strategic Default.
In this post we will talk about Option 6 – Foreclosure, voluntary or involuntary. The better you understand the foreclosure process, the better able you are to manage it and minimize the negative effects on yourself and your family. In many ways, the foreclosure laws are set up to protect you, the borrower, as well as your lender, and so it is an orderly process that you can work within to try to minimize those negative effects, other than the basic big ones of giving up your house and getting a very big black mark on your credit.
Washington state has provision for two kinds of foreclosure, called Judicial Foreclosure and Non-Judicial Foreclosure. Almost all mortgage foreclosures in Washington are Non-Judicial foreclosures, and that is what is described in these notes. The key to understanding the process is the required notices and statutory minimum timelines.
Please keep in mind that foreclosure is a legal process, and I am not an attorney. So this is meant to be a overview guide to the process and some of the issues. If you think you are going to have to go through foreclosure, read this guide and then talk with an attorney – I think it will help you to ask better questions and make more sense out of the answers.
Almost all residential ‘mortgages’ written in Washington are actually ‘deeds of trust’, and it is the deed of trust that sets up the non-judicial foreclosure capability. Unlike a true mortgage, which is a two-party document, the deed of trust has a third party ‘trustee’ who actually holds the deed to your house. The deed of trust includes an ‘acceleration clause’ which allows the lender to demand payment in full ‘immediately’ if the borrower defaults on the payments, and a ‘power of sale clause’ which says that if the borrower has defaulted, and cannot pay, then the lender can initiate Non-Judicial Foreclosure. A Non-Judicial Foreclosure is executed by the ‘trustee’, meaning it doesn’t have to go through the courts; the trustee can simply follow the notification procedures and minimum timelines defined by state law, and proceed to sell the property at a public foreclosure auction held at a county courthouse.
Here are the key terms, notices and timelines:
- Default – the date your mortgage payment becomes overdue, and you do not pay it
- State law says the Trustee’s Sale, i.e. the foreclosure sale of your property, cannot occur sooner than 190 days after the actual Default date.
- Notice of Default – at any time after you default, your lender can send you a Notice of Default and statement of intent to Foreclose. The lender decides when to send this notice and start the foreclosure process, and it could be soon after default, or delayed for weeks or even months. They must first correspond with you and assess your ability to pay the debt and explore with you other options for avoiding foreclosure – a new statutory requirement as of 2009.
- Notice of Trustees Sale – this is a public document which is recorded in the County Recorders Office and published. It is a public statement that your home is being foreclosed and will be auctioned to the highest bidder unless you stop the process by some payment agreement with the lender. The lender does not have to agree to anything other than payment in full. It cannot be issued sooner than at least 30 days after the Notice of Default is sent to you.
- Trustee’s Sale – the actual sale of your home on the county courthouse steps. The sale cannot occur sooner than 90 days after the Notice of Trustee’s sale is recorded and published, and also not sooner than 190 days after the original Default, whichever comes last. Once the sale is done, you cannot redeem the property.
- After the sale, the law provides 20 additional days for you to move out. If you are paying attention to the timelines, you will have already planned, and perhaps executed, your move to your new home on your own schedule.
In Washington state law, when a home is sold at a Non-Judicial Foreclosure Sale, the lender cannot later pursue you, the borrower, for a deficiency judgment for the difference between the value of the property and what you owed them at the time of foreclosure. Your debt on the original ‘mortgage’ is simply wiped out, along with most liens on the property, and you no longer have any rights or obligations to the property. In the past, the IRS has said that you have to count forgiven debt as taxable ‘income’; however, the Mortgage Forgiveness Debt Relief Act of 2007 changed that so at least for now, and through 2012, you can generally exclude that debt-forgiveness ’income’.
Note that the lender also has the right to instead choose to pursue a Judicial foreclosure, through the courts, and in that case they can also pursue a deficiency judgement. The main reason lenders don’t do this is that in a Judicial Foreclosure, you retain the right to redeem the property for a period of one year. While it is pretty unlikely that you would do that, the possibility of such a redemption claim would certainly create a big problem in the mind of a potential buyer when the lender tried to re-sell the property, so generally lenders don’t try to go the Judicial Foreclosure route.