The Foreclosure Mess Explained – Part III
Craig on 11 2, 2010
For Part III in my series I will talk about the local (i.e. Washington State) implications for the national foreclosure mess. Before I do so, though, and as a last word on the “big picture” I recommend reading this NYTimes piece that appeared in the Sunday Week in Review.
Now, onto our own Washington. This state is primarily a “non-judicial foreclosure” state. Virtually every residential buyer purchases a property by signing a promissory note (the document that creates the debt to the bank) and a deed of trust (the document that pledges the house to secure the debt). When the borrower defaults, a lender has the option of foreclosing non-judicially (where the trustee under the deed of trust exercises his legal authority to sell the property in order to satisfy the debt) or foreclosing judicially (lender files a lawsuit and forecloses the deed of trust in a civil action).
Both methods lead to the sale at auction where the proceeds are applied to the debt. However, there are important differences: (1) in a non-judicial foreclosure, the debt being foreclosed is extinguished even if it remains unpaid after the auction; (2) in a judicial foreclosure, once the property is sold a judgment is entered against the borrower for the difference (i.e. the borrower remains liable for the full amount borrowed); and (3) the auction following a judicial foreclosure is less likely to get the “true market value” of the property when sold (because the borrower has a right of redemption following a judicial foreclosure). Also, a nonjudicial foreclosure is quicker and cheaper for the bank.
Given these realities, the vast majority of foreclosures in this state are non-judicial. A borrower always has the option of suing to stop a non-judicial foreclosure if the lender in reality does not have the right to foreclose. Thus, unlike those states where judicial foreclosure is prevalent, here in WA borrowers have the ability to stop a foreclosure if some “Robo-signer” made an egregious error and the bank is attempting to foreclose on the wrong house. In contrast, borrowers in judicial foreclosure states have no such option — they are already in court! They’re getting screwed WITHIN the civil justice system, so obviously the civil justice system cannot act as a brake on the process. Accordingly, since our borrowers have the right to escalate and seek the protection of the courts, the significance of lying “robo-signers” is greatly reduced in this state. That said, non-judicial foreclosure still requires statements made under penalty of perjury, so “robo-signers” are not completely off the hook.
Second, the vast majority of foreclosure auctions lead to repossession of the property by the bank. The bank then resells the property by listing it on the MLS (this is an “REO”, for “Real Estate Owned”, property). At the resale, the buyer almost always obtains a policy of title insurance, which then protects the purchaser from any claim to the property as a result of some irregularity in the foreclosure process. A local title expert believes that, as a result, there will be little impact on the local market.
Finally, the bad news: lenders did suspend their foreclosures here in WA (although, sadly, I am unaware of the current state of affairs in this regard), and investigations are continuing. Any delay in foreclosures just delays the inevitable downward pressure on prices until the excess inventory is absorbed by the market. So while we managed to avoid the worst of the “foreclosure mess,” we will still feel its effects.
About the Author: Craig Blackmon
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Thanks Craig. I personally think the difference between non-judicial and judicial foreclosure is HUGE and very important and interesting. But given most States largely have one or the other vs a combination of both, the media and people generally usually disregard the implications.
Your explanation is important, and anyone writing national stories on “foreclosures” really should note the differences from State to State and Coast to Coast. Florida, as example, has had many more instances of vacant property for long and longer periods of time, than CA or WA for that reason. That does not necessarily mean WA is better off than FL, just that foreclosures here can generally be dealt with more swiftly, thus reducing the number of empty properties in limbo for lengthy periods of time.
Ardell — that is certainly one of the advantages of a non-judicial foreclosure (typically much quicker, as well as easier and cheaper). I’ll defer to you as to the actual duration on market in those various states, but at least conceptually I agree. Also, and as I noted above, if the foreclosure is NON-judicial, then the borrower/owner has recourse if the foreclosure is illegal or inappropriate — he/she can file a lawsuit to stop the foreclosure. Where the foreclosure is judicial, the borrower/owner has nowhere to turn to “escalate” the issue so as to get the right result.
“I’ll defer to you as to the actual duration on market in those various states…”
It’s not a matter of being “on market”, Craig. The houses are not always put on market as a short sale. Often the owners just leave. They do not even do a Deed in Lieu. So the house just sits there (in a judicial foreclosure state) deteriorating for at least 12 months and often 2 years. The bank can’t sell it because they don’t own it. So it is not on market at all…just lots of vacant houses.
Usually the period is 12 months to foreclose, but often when an owner consults with an attorney it is suggested that they file for bankruptcy, which adds another layer of time to the empty house sitting on market. In Florida it’s really bad because alligators camp out in the green abandoned swimming pools and illness causing mosquito infestation becomes rampant.
AZ is similar to some degree. Many people don’t bother trying to do a short sale because the number of distressed properties is overwhelming, with no hope of there being enough buyers to buy them. So they just sit there vacant without being listed for sale at all.
I’m surprised no national reporting services have picked up on the difference between Trustee Sales and Sheriff Sales.
I stand corrected: I will defer to you as to the actual number of abandoned properties in those various states. Does that work for you?
Works for me!
Picture a buyer running from an alligator and the listing agent yelling “How do you like the house!?”
Craig, thank you for this most excellent series. I’m referring my students to this blog post as we speak. Question: are you seeing an uptick, even small, of homeowners in Wa State or in the greater Puget Sound region filing a lawsuit citing the “robo-signer” issue?
Thanks.
No stats for you Jillayne, but I submitted an offer on a bank owned over a month ago…no response. I’m hearing that one of these suits may be the reason the bank seller has not accepted one of the three offers. It doesn’t usually take that long for a bank to respond…it’s acting like a short sale.
Jillayne — I have not heard of any such suit. The last time this topic was bandied about on the Bar Assoc Real Property Listserv (attorneys who practice in the area) the general consensus was that this defense would not work here in WA given the flexibility afforded the “lender” in the foreclosure statute (in particular RCW 61.24.030(7)(a)):
That said, this conversation occurred before “Robo-Signer-Gate” erupted on the scenes, and robo-signers violate this specific statute (i.e. they do NOT have actual knowledge that they are the actual holder, although they so state under penalty of perjury).
Ardell may be right. It may also be that, in this particular case, there was some irregularity with the foreclosure that might impair subsequent title. Or it may be some other aspect of the whole “foreclosure mess.” Or, for that matter, it might even be an incompetent bank (or servicer, or broker, or whoever has their hand in the process of this REO sale) — I’ve seen that as well…
[...] promised to link to an excellent series of articles on Rain City Guide by Craig Blackmon on the recent foreclosure-gate/robo-signer scandal. Notice the differences Craig [...]
Craig and Jillayne,
What I am seeing is not a suit, but what is called a “push back” to the original note holder. I think rather than sort out the legalities, the new note holder is pushing the note back to the original note holder…who is out of business. So the foreclosing party becomes the successor of the original note holder vs the entity that bought the paper from that original note holder.
Jillayne may know more about this than I, as I only see the net impact after the action is taken, and do not know how or why the end note holder can push it back that way.
[...] a link to an excellent series of articles on Rain City Guide by Craig Blackmon on the recent foreclosure-gate/robo-signer scandal. Notice the differences Craig [...]
Craig:
Thanks for your summary! Just the right length.
May I suggest you add links to previous pieces in the series? Makes it a little easier to navigate.
Also, is there any differences in the process for investment properties (non- owner occupied residential homes), or for 2nd homes? How about for smaller commercial properties?
I recall an article you did quite a while back that discussed 2nd liens, and that they might be treated differently in WA state than 1st liens in a foreclosure. Do you have a link for that?
Really nice bit of work here, and timely too. THanks!
[...] was a request for more to read on the robo-signer fiasco. Attorney Craig Blackmon has a great blog post and so does attorney Dwight [...]