White Paper: Foreclosure

Foreclosure Basics

Introduction

What does foreclosure mean?

If a borrower falls behind in his monthly house payments, the seller or lender may try to take his house back. This is generally called foreclosure. If a house is foreclosed, the borrower may lose not only his house, but may also lose all of the money he has invested in it.

How was the home financed?

The foreclosure procedure will vary depending on the type of financing the borrower obtained when he bought his house. Financing of a home is usually done through one of the following methods:

1. Mortgage;
2. Deed of Trust (which is a type of mortgage);
3. or Real Estate Contract.

Look at the documents the borrower signed when he bought his home to determine what type of financing he has.

Types of foreclosures

The foreclosure procedures vary depending on the type of financing obtained. Because the most common type of foreclosure in Washington State involves a deed of trust, the remaining section on foreclosure basics will focus on this type of foreclosure. If a borrower's house was financed by a mortgage (usually a bank or mortgage company) or real estate contract (usually seller-financed), see Northwest Justice Project's web site at www.nwjustice.org for general information.

If the borrower has a deed of trust and he fell behind in his payments, the lender can foreclose on his house without going to court. Non-judicial deed of trust foreclosures are governed by the Deed of Trust Act (RCW 61.24). The majority of foreclosures are done without going to court.

The lender can also foreclose on the deed of trust like a mortgage, by going to court. If the lender judicially forecloses on a deed of trust like a mortgage, he must follow the procedures for foreclosing a mortgage, which begins with serving you with a Summons and a Complaint. The borrower will have the same rights in that foreclosure action as a person with a mortgage-financed home.

What makes a Deed of Trust Non-Judicial Foreclosure unique?

• The last day to cure the default (make your loan current by making up all delinquent payments and related costs) by paying non-accelerated arrearages (only payments and fees that have accumulated since becoming delinquent) is 11 days prior to the sale. RCW 61.24.090.
  
• Last day to file a suit to restrain the sale is five days prior to the sale. RCW 61.24.130.
  
• No redemption period following sale (except 120-day period for IRS liens). In other words, no opportunity to "buy back" the home. RCW 61.24.050.
  
• Successful purchaser at trustee's sale entitled to possession 20 days after sale. RCW 61.24.060.
  
• No deficiency amount generally allowed in consumer context. In other words, if the home sold for less than what was owed to the lender, the lender cannot collect that difference between what was owed and what the lender reaped from the foreclosure sale. RCW 61.24.100(1).

Who are the parties in a Deed of Trust Foreclosure?

The homeowner/borrower is referred to as the grantor. The lender is referred to as the beneficiary. The title insurance company (and/or its successor like the beneficiary's attorney) is referred to as the trustee.

What are some ways that you can prevent foreclosure?

Cure the default.

• The borrower can stop the foreclosure by curing the default - in another words, make up any delinquent payments plus costs related to the foreclosure. The borrower can do this at any time until 11 days before the trustee's sale. If the borrower is able make up the payments, he will also have to pay the lender's expenses related to starting the foreclosure process. RCW 61.24.090.
• After the 11th day, the lender is under no obligation to accept a cure of the defaults.
• Upon cure of the default, the trustee is required to execute, acknowledge and record a notice of discontinuance of the trustee's sale. RCW 61.24.090(6).

Contact the lender and find out about alternative payment options.

• The borrower should contact the lender as soon as he falls behind rather than wait until a foreclosure action has been started. The borrower should explain why he fell behind and ask what arrangements he can make to catch up on his payments. He should ask for a forebearance (commonly known as a repayment plan).
• If the borrower can start making payments again, he can ask the lender for a loan modification which would recast the loan to allow him to increase his monthly payments or the term of the loan so that he can make up the missed payments over time. These monthly payments would not include payment of any accumulated trustee's fees.
• Lenders do not accept all "work out" proposals and are not obligated to do so.
• A lender will most likely not accept partial payments and will send them back. The borrower should not keep sending partial payments hoping that the lender will apply them to his balance. If the lender refuses to take the partial payments, the borrower should put this money aside rather than use it to pay other bills. This will help the borrower negotiate with the lender later, and even if nothing can be done, the borrower will have saved some money for moving expenses.

If the borrower applies for a workout agreement with his lender, he should not let the lender wait until the last minute to give him an answer. The foreclosure process will continue despite the possibility of a workout agreement. The borrower should try to get an answer from the lender early on so he can weigh his options before it is too late.

If the borrower does not agree with the amounts that the lender asserts he owe, he should contact the lender to try and work out the problem. If he is unsatisfied with the resolution or there is an unreasonable delay, the borrower should talk to a lawyer.

Evaluate refinancing options

• If the borrower cannot pay because the payments are too high and he has equity (the amount of payments he has made so far) in his home, he may be able to refinance the loan. A refinance loan would involve taking out a new loan to pay off the balance of the original loan and making new payments based on the refinanced loan. Even though the new loan may have lower monthly payments, it may cost more in the long run.
• Refinancing options should be evaluated carefully because lenders might offer loans with unreasonably high interest rates and other unfair terms. If possible, the borrower should evaluate refinancing options with professional assistance.
• There are reverse mortgage programs for senior citizens that could allow the borrower (if applicable) to lower or eliminate his payments. Reverse mortgage options should be evaluated carefully because they can be expensive and prevent the borrower from using the equity in his house for other financial needs.
• If the borrower has an FHA or HUD insured loan, a VA guaranteed loan, or a FmHA financed home, he may be able to obtain a reduction in his monthly payments or a temporary suspension of his monthly payments. If he has one of these loans, there may be special requirements that the lender must follow if he falls behind in his payments.
• For an FHA loan, the lender may apply for a partial claim where HUD would pay the past due payments and fees (excluding the trustee's fees) and place a lien on the property for that amount. At that point, the borrower would be considered current. If the borrower pays off his mortgage, refinances or sells the home, he will need to pay HUD back for the amount paid to make him current.
• If the borrower is a senior citizen or is disabled, and is facing a foreclosure action because of unpaid property taxes and/or special assessments, he may be eligible to have his property taxes reduced or eligible to postpone payment of his property taxes or special assessments under two programs in Washington. Contact the County Assessor's Office where the borrower lives or an attorney for more information.

File for bankruptcy
(see Bankruptcy Basics in section IV of this handbook for more information)

• If the borrower is unable to arrange a workout agreement with his lender or other solution, he may consider filing for bankruptcy.
• In a Chapter 13 bankruptcy, he can present a plan for catching up on his house payments. He may be able to prevent a foreclosure if the bankruptcy court accepts his payment plan. A Chapter 7 bankruptcy might delay a foreclosure but will not prevent one indefinitely.
• Bankruptcy can be an immediate remedy because upon filing of the petition, there will be an automatic stay (a temporary freeze so that no action may be taken) on the foreclosure sale.

Sell the home

• If the borrower is unable to afford the house long-term, he may sell the house himself before the foreclosure sale and save some of his equity.

Foreclosure procedure

What is the timeline in a non-judicial deed of trust foreclosure?

Through the course of a foreclosure, the borrower is entitled to specific notices that should inform him of his rights and deadlines. Please refer to page VI-6 for a chart that provides an overview of the time frames, starting with the initial default and ending with the trustee's sale. A foreclosure can be completed as early as 190 days (approximately six months) from the date of the initial default so the borrower should act quickly to avoid foreclosure. RCW 61.24.040(8). During the course of the foreclosure process, the borrower can continue to live in the house.

What foreclosure notices should the borrower receive?

Notice of Default

The borrower can receive a Notice of Default after the first missed payment was due. The Notice of Default should be received by the borrower at least 30 days before the Notice of Trustee's Sale is recorded, served or transmitted. RCW 61.24.030(7). He should receive these notices by (1) registered or certified mail, return receipt requested; and (2) posting in a "conspicuous place" on the premises or by having it personally served on the borrower/grantor. Id. Once the borrower receives this notice, this the official start of the foreclosure process. There must be 190 days between the first default and the trustee's sale and 120 days between the actual notice of default being served and the sale.

Notice of Trustee's Sale

The borrower is also entitled to receive a Notice of Trustee's Sale at least 90 days prior to the sale. RCW 61.24.040(1)(b)(i). He should receive these notices by (1) first class mail; and (2) registered or certified mail, return receipt requested. Id. The form is set forth in RCW 61.24.040(1)(f). The Notice must also be posted on the property and recorded at the county auditor. RCW 61.24.040(1)(e) and 61.24.040(1)(a). Finally, this notice must also be published in a legal newspaper in the county where the property is located once between the 35th and 28th day before the sale and once between the 14th and 7th day before the sale. RCW 61.24.040(3).

Notice of Foreclosure

The borrower/grantor is also entitled to receive a Notice of Foreclosure with the Notice of Trustee's Sale that is mailed to him. RCW 61.24.040(2). A copy of the Deed of Trust and Promissory Note or other instrument upon which the secured debt is based must be included with this notice. Id.

What happens if the house is sold in a trustee's sale?

If the house is sold, the borrower must move out within 20 days after the sale or an eviction action may be filed against him. RCW 61.24.060. To start an eviction action, the new owner must serve the borrower with a Summons and Complaint for an unlawful detainer action. If the borrower is served with these legal documents, he should contact an attorney right away. In addition, he can look at www.nwjustice.org for information on eviction actions.

Once the house is sold, the borrower has no right to get it back and the money he put into the house will be lost. This means that the borrower has no redemption rights. RCW 61.24.050. If the house is sold for less than the borrower owes the lender, the borrower ordinarily cannot be required to make up the difference. This means that the lender typically cannot seek a deficiency judgment against the borrower. RCW 61.24.100(1).

The borrower cannot claim a homestead exemption in a non-judicial deed of trust foreclosure. RCW 6.13.080(2).

Foreclosure defense

What are some legal remedies in a foreclosure process?

• Restrain the trustee's sale
  
  
• Grounds for restraining a sale include:
  1. there is no default on the obligation;
  2. the deed of trust has been reinstated;
  3. the notice of default, notice of sale, or proposed conduct of the sale is defective;
  4. the lender has waived the right to foreclose;
  5. a workout/settlement has been agreed to;
  6. there are equitable reasons that would entitle a debtor to close a sale of the property or complete a refinance;
  7. there are government relief programs available or there has been trustee misconduct;
  8. there was fraud on the part o the beneficiary in obtaining the deed of trust; or
  9. there are other defenses that might substantially reduce the debt (e.g., seller misrepresentation, breach of warranty, truth-in-lending violation). RCW 61.24.130.
     
• The right to seek a restraining order or injunction may be contingent upon the applicant making payments or giving security. RCW 61.24.130(1).
  
  
• The trustee must be given at least five days notice of the hearing and the notice must include copies of all pleadings and related documents to be presented to the judge. RCW 61.24.130(2).

Setting aside a trustee's sale

• The Deed of Trust Act does not provide a specific remedy to set aside a trustee's sale, but Washington courts have decided that a party may take action to have a sale set aside based upon appropriate grounds. Cox v. Helenius,103 Wn.2d 383, 693 P.2d 683 (1985).
• Although the court in Cox set aside the sale (based on misleading behavior by the trustee and a grossly inadequate sale price), a review of court decisions shows that there is a preference for pre-sale restraint rather than post-sale action.
• Generally, courts will not set aside a sale if the party knew that they had some basis to restrain the sale and failed to do so. See Steward v. Good, 51 Wn. App. 509, 515, 754 P.2d 150, 153-34 (1988).

Raising defenses in unlawful detainer (eviction) action

• Along the same lines as trying to set aside a sale, a borrower may not be able to argue a foreclosure defense in an unlawful detainer action when he could have filed a suit to enjoin the sale but failed to do so. See Peoples Nat'l Bank v. Ostrander, 6 Wn. App. 28, 491 P.2d 1058 (1971).
• As a general rule, borrowers should not wait until an eviction action to argue their defense(s) against the foreclosure. It is highly unlikely that the borrower will be able to save his home at that point.

Damages for wrongful foreclosure

• There is a damage claim for the tort of wrongful foreclosure and a claim for breach of contract. See Theis v. Federal Finance Co., 4 Wn. App. 146, 480 P.2d 244 (1971), Cox vs. Helenius, supra.

Helpful web sites on foreclosure and referral

• www.nwjustice.org
• www.hud.gov/foreclosure
• www.fremontpublic.org
• www.choc-wa.org
• www.homesightwa.org
• www.urbanleague.org

Conclusion

A foreclosure is very serious. Not only is a home in jeopardy, but also one's credit rating. The borrower should contact a lawyer immediately if he is served with any court papers or notices. The sooner the borrower seeks assistance, the sooner a lawyer can try to deal with the problem. The borrower should not wait until it's too late! If the borrower cannot afford a lawyer, you can try to refer to the local legal services office or county bar association.