I work with a great Attorney, Kate Brooke, and she has recently shared this information with me.

There seems to be a lot of confusion about when a property owner/seller may be liable to pay a short sale or foreclosure deficiency (defined as the difference between what the seller owes and the lender receives).  Although Oregon is an anti-deficiency state (sometimes referred to in error as a “non-recourse” state), the anti-deficiency statutes apply only to foreclosures and, even then, only to some foreclosures.  To clear the air, here are some guidelines:

Before we start, it is important to know that, although we call our mortgages by that name, the vast majority of Oregon home loans are not really mortgages.  They are a combination of a promissory note and a deed of trust.  The note is an unsecured promise to pay and the trust deed is the security (or collateral) for the loan.  Where there are two loans (a first and a home equity line, for example), then there are two notes and two deeds of trust, although sometimes home equity lines use a “security agreement” instead of a deed of trust.  The trust deeds/security agreements are recorded against the property record but the promissory notes are not.

Short Sales.  The subject of short sale negotiations between lenders and owners (usually owners have an agent) is twofold.  First, the question is whether the lender (who will net less than it is owed in the closing of the sale) will remove its trust deeds from the property record in exchange for a reduced payment.  Since promissory  notes are not recorded, the lender need not cancel the notes, i.e. forgive the amounts unpaid, to allow the sale.  Thus, the second subject may be whether the lender will forgive the debt or will reserve its rights to pursue payment from the seller.  Because no foreclosure occurs, the anti-deficiency statutes do not apply to short sales.  The lender may (1) forgive the unpaid amounts (potentially creating income tax obligations for the seller), (2) reserve its rights (in lawyer gobbledegook) to pursue the owner later, or (3) forgive some debt and reserve pursuit of other debt.  If there is more than one loan, each lender gets to make its own decision.

Deed in Lieu.  A deed in lieu of foreclosure occurs when a property owner and lender agree that the owner will convey his/her property to the lender in exchange for the lender waiving its right to collect the deficiency from the owner.  Owners with a hardship (loss of job, divorce or  illness, among others) and one loan are good candidates for this option.  If, however, the owner has two or more loans, a deed in lieu, while possible, is more difficult to accomplish because only one lender will get the property back.  Also, most lenders will require that the owner put the property up for sale for at least a few months.

Foreclosure.  Foreclosure is a legal process by which a lender (via a trustee) forecloses an owner’s interest in real property.  There are two types of foreclosure, judicial and nonjudicial.

Nonjudicial foreclosure is most common.  In that process, the trustee (for the lender) provides legal notice to an owner that the property will be foreclosed on a specific date (any contact before this is usually lender collection efforts).  The trustee must advertise the foreclosure sale a specific number of times, after which the property is auctioned by the trustee on the “courthouse steps.”  Because it is the trustee who is acting, the lender makes a bid (called the minimum bid), as may others attending the auction, and the highest bidder, whether the lender or another bidder, will buy the property.

Only one lender will ultimately foreclose.  In nonjudicial foreclosure, it is the foreclosing lender who is prohibited from collecting the deficiency (here come the anti-deficiency statutes!).  Any other lender (second or home equity line, for example), is allowed to try to collect  its deficiency except in very specific circumstances.

In a judicial foreclosure, the trustee hires a lawyer to file a complaint which, along with a summons, is then served on the property owner in a manner much like you would see on television (you’ve been served!).  A lawsuit ensues and, when it ends, the judge orders that the owner’s interest in the property is foreclosed.

In judicial foreclosure, the anti-deficiency statutes apply to the foreclosing lender (preventing deficiency) only if the owner is resident in the property when he or she is served with the summons and complaint.  Otherwise the lender may ask the judge to order that the owner pay the deficiency and the judge will likely do so. If there is a second or third loan, those lenders may also separately pursue payment from the owner except in very specific circumstances.

What are the specific circumstances?  If all of the owner’s loans were (1) entered into on the same day and at the same time/place (e.g., same signing appointment), (2) for the same purpose (buying the property), (3) were funded by the same or affiliate entities (you have to actually look at the loan documents) and the owner was resident in the property on the date of legal notice or service, then neither lender can collect a deficiency from the owner.  Remember, though, any refinance of one or both of the original loans (unless refinanced together with the same special circumstances applying), adding a second mortgage or a line of credit after the purchase or moving out before the notice/service date will destroy the special circumstances.

Joke of the Month:  Mrs. Applebee, the 6th grade teacher, posed the following problem to one of her classes:  “A wealthy man dies and leaves ten million dollars. One-fifth is to go to his wife, one-fifth is to go to his son, one-sixth to his butler, and the rest to charity. Now, what does each get?”

After a very long silence in the classroom, Little Johnny raised his hand and the teacher called on him.

With complete sincerity in his voice, Little Johnny answered, “A lawyer!”

ABOUT KATE:   Between 2004 and 2010, Kathryn Brooke was General Counsel of RE/MAX equity group, inc., one of the nation’s largest real estate brokerages. Prior to 2004, Kate was an attorney first at Tonkon Torp LLP and then at Schwabe Williamson and Wyatt where she focused on  real estate transactions and business and real estate litigation.   Kate is a member of the Oregon State Bar.  She has one husband, four sons and a dog. Between the boys and the dog, her house is rarely ever completely clean.