Thursday, September 26, 2013

Foreclosure 101: The good, the bad and the ugly—understanding foreclosures under the Oregon Trust Deed Act

When you borrow money to purchase a home in Oregon, the loan is usually memorialized in a written promissory note that contains your unconditional promise to pay a certain sum on a certain date by a certain time.  Borrower and lender also generally enter into a separately-memorialized security agreement at the same time the promissory note is executed. This “security agreement” does exactly what it sounds like—it secures your promise to repay the loan. Traditionally, the security agreement of choice in Oregon was a mortgage. If you defaulted on your mortgage, your lender could then exercise its right to sell your property to satisfy the obligation, but it could only do so by bringing a judicial action against you in court. This is what is known as a "judicial foreclosure" because judicial involvement is required in order to foreclose on a home.  However, as any lawyer worth his or her salt will tell you, lawsuits in any forum for any reason can be slow, expensive and uncertain. Lenders wanted a faster, easier, more streamlined process.

Enter the Oregon Trust Deed Act (commonly known as the OTDA).

The OTDA was enacted in 1959 to provide a nonjudicial alternative to the long-standing judicial foreclosure process. This nonjudicial alternative would be available if the parties first used a trust deed instead of a mortgage to secure their loan.  What is a trust deed? A trust deed works much like a mortgage, except that instead of two parties to the security agreement (the borrower/mortgagor and the lender/mortgagee), there are three parties: (1) the "grantor" of the trust (the borrower), (2) the "beneficiary" of the trust (the lender), and an independent "trustee" of the trust who has the power to sell the property without court approval in the event that the borrower defaults on the note. This process—when a trustee appointed under a trust deed sells a piece of property without court involvement after a borrower default—is known as a "nonjudicial foreclosure."

Nonjudicial foreclosures under the OTDA were much faster, much easier and much cheaper than traditional judicial foreclosures. The result? Lenders in Oregon stopped using mortgages as the security instrument of choice (real shock here) and started using trust deeds instead. So if you are a homeowner with a “mortgage,”, it is almost certainly the case that you do not actually have “a mortgage" (even though your lender and everybody else might refer to it as a mortgage), but have a trust deed securing your loan instead. (For more information, read our blog What Do You Mean I Don't Have a Mortgage?").

So here’s a brief recap in a nutshell.

OTDA created in 1959.

If lender uses trust deeds, lenders  have right to use the nonjudicial foreclosure process under the OTDA.

Nonjudicial foreclosure = trustee sale (a means of foreclosing on a piece of property without having to go to court.

But there are rules.
If a lender wants to use the faster, nonjudicial process available under the OTDA, there are explicit conditions that the lender must follow. Substantial compliance is not enough. These conditions must be followed to the letter. These conditions include:
  • Recording the trust deed, and any assignments of the trust deed, in the county where the property is located (much more on this "recording" requirement later)
  • An actual default on the obligation, "the performance of which is secured by the trust deed;"
  • Recording a notice of default containing the trustee's or beneficiary's election to sell the property to satisfy the obligation; and
  • The absence of any other pending or completed litigation for recovery of the debt (with limited exceptions).
 In addition to those conditions, the OTDA prescribes the notice requirements that protect trust deed grantors (you) from unauthorized nonjudicial foreclosures and sales of your property. Among other things, a trustee is required to provide you at least 120 days advance notice of the trustee's sale. This 120-day advance notice period is designed to give you time to seek judicial intervention if need be. You also have the right to “cure” your default at any time up to five (5) days before the date last set for the sale (more on “curing” a default below).

Here are a few more important facts.

One of the biggest differences between a judicial and nonjudicial foreclosure involves what is referred to as the "statutory right of redemption." In a judicial foreclosure action, the borrower has the right to redeem (i.e., buy back) the property for up to six months after the foreclosure for the amount that the property was sold for at the sheriff's sale. No such right exists if the property is sold at a nonjudicial trustee's sale. Seems kind of unfair on its face, right? That lenders can use a much faster nonjudicial foreclosure process AND the borrower has no statutory right of redemption?

Well...yes and no. In the law, there are always trade-offs. The trade off here is in how a borrower can “cure” a default in a judicial versus nonjudicial action.

In a judicial foreclosure, in order to cure a default and stop a foreclosure action, the borrower must, in most instances, pay the full amount of the loan plus costs. As you can well imagine, this is an almost impossible burden for most homeowners in default to meet. However, in a nonjudicial action, the borrower can cure the default by simply paying all amounts past due (meaning the arrearage), plus costs. This obligation is much more manageable. So while the timelines are much shorter with the nonjudicial foreclosure process, the burden for curing the default is much lower.

That is a good thing.


In the aftermath of the OTDA, the foreclosure process here in Oregon looked much the same. Judicial foreclosures were extremely rare. A “foreclosure on my mortgage” really meant a nonjudicial trustee’s sale pursuant to the rights given to a trustee under a trust deed. These nonjudicial foreclosures went largely unchallenged for decades.

Then everything changed.

In 2012, the State of Oregon Court of Appeals dropped the legal equivalent of a megaton bomb on the nonjudicial foreclosure process in the case of Niday v. GMACNiday exposed fundamental flaws in what had become standard operating procedure in the nonjudicial foreclosure process and the erroneous assumptions of large commercial loan servicers. As a result, lawyers for Oregon banks were forced to go back to the old practice of judicial foreclosures for most Oregon home loans.

So stay tuned. Coming up next....

Next post: To record or not to record—The fate of nonjudicial foreclosures after Niday.

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