Options for Homeowners Facing Foreclosure

This is Part Two of a series of articles on the foreclosure process.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.

Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral.  Reduced or free legal aid may be available in some states. Ask for a referral from the state bar association or through a LOCAL HUD-Approved Housing Counseling Agency.

For homeowners who are facing financial hardship, denial is a warm, safe comfortable place to stay, where tough decisions can’t hurt and the decision-making process is put off one day at a time.  There is FREE help available from your local state non-profit agencies.

Local, HUD-Approved Housing Counseling Agecies received 1.5 million dollars from Washington State when Gov. Gregoire signed SB 6272. State agencies are already whining that they are “overwhelmed”. Hmmm. How much of that 1.5 million dollars was spent hiring and training competent counselors and how much went into executive salaries, high paid consultants and task force meetings?  There are plenty of out-of-work mortgage production people who are (at this point) probably willing to work at non-profit agencies. Put them to work.  Perhaps I am in denial as to the extent of the problem at our state agencies. If so, agencies: please enlighten me and RCG readers.  If the problems are with the banks and their ability to handle the calls, that doesn’t mean we throw more money at the state agencies.  In part five of this series, I will ponder about massive government intervention. For now, we’re left dealing with the problems at hand.

If you are a homeowner reading this article, that means you’re starting to come out of denial.  Maybe a friend or relative forwarded this to you.  Welcome to raincityguide.com  How are you? Don’t say “fine” through tears or clenched teeth.  Not so good, right?  Okay then. Is your financial distress temporary or long term?  THIS is perhaps the most important question you’ll need to answer. This is going to require that you get real with where you are in life.  Long term, permanent financial distress situations are going open up options that might be different for a homeowner who has a short term financial distress problem.  Let’s try to break things down even more.  Long Term: You’ve been laid off and have been unable to find work at your former pay level for along time and you have third party confirmation that the chances of being able to reach that pay level again are very low. Short Term: You’ve been laid off and have been unable to find work at your former pay level but your prospects are good or you’ve recently been re-hired at a similar pay level.

If you are payment or two behind, which may happen with temporary financial distress, your lender will be thrilled beyond your wildest expectations to accept the total amount owed in a lump sum.  Reinstatement often happens simultaneously with a forbearance agreement.

Forbearance Agreement
Your lender agrees to reduce or suspend your payments for a short period of time.  These two options are good for people whose financial distress situations are temporary.

Repayment Plan
Your lender helps you get “caught up” by allowing you to take missed payments and tack them on to your existing payment each month until you are caught up.

If your financial distress is long term and will permanently affect your ability to continue making your payments:

Consider Selling
With home values going down, if you do have some equity remaining in your home, you may be better off selling NOW rather than waiting until next year when scads of REOs (already foreclosed-upon homes that the lenders must dispose of) will continue to hit the market, driving inventory up and home values down.  If you owe more on your home than what the home can be sold for in today’s market, you have probably already heard of the term Short Sales.  In this case, the lender is asked to reduce the pricipal balance and allow the loan to be paid off in order to facilitate a sale.  Most lenders are not radically motivated to approve short sales unless foreclosure is imminent.  This author does not recommend that you stop making your mortgage payment in order to force the bank to approve your short sale. All homeowners in financial distress should have an attorney holding their hand the entire time.  If you have assets, you do not qualify for a short sale. Short sales are reserved for homeowners with NO MONEY and you will be asked to provide proof that you have no money.  If you have money, this is a different kind of transaction. It’s called “Making Your Downpayment in Arrears” and you’ll be asked to bring that money at closing.  Don’t ask anyone to help you hide your assets. Doing so may constitute mortgage fraud which is now a class B felony in Washington State. I could go on and on about short sales. If you need more education in this area, we’ve covered the topic in these RCG articles:

Short Sales
Question From Today’s Short Sale Class
Should You Buy a Short Sale Property?
Is a Short Sale a Bargain?
Why Do Banks Take So Long to Approve a Short Sale?

Maybe you would prefer not to sell. Consider taking on a tenant or moving out into more affordable living quarters and renting out your home.

Refinancing is a tough road for homeowners in financial distress. On the one hand, they have been hit by some kind of financial hardship and this typically affects their credit score, which means lender’s rates and fees will be higher.  In addition, tightening underwriting guidelines is something banks do in order to help stop the rising tide of foreclosures. People who hold mortgage loans today might not be able to re-qualify for that same loan if they had to requalify under today’s guidelines.  Income and assets must be fully documented. Find a licensed, local mortgage lender with FHA-approval to see if you might qualify for an FHA loan.  For people who made the conscious decision to state their income higher than reality are out of luck, unless they can prove that they were coached to do so by their lender.  Consult a local attorney for further guidance.  Since refinancing might only be yesterday’s dream for some, Loan Modifications are all the rage in my spam bin. We’ll cover Loan Mods in Part Three.

While doing research for this blog post, I stumbled upon even more money that went from our state government’s rainy day fund, into a state fund to help low to moderate income Washington State homeowners in foreclosure refinance into new loans through the Wash State Housing Finance Commission.  Read more here. I sent an inquiry asking the WSHFC how many WA State Homeowners have been helped this far by this new law and they said, emphasis mine:

Dear Ms. Schlicke:

Thank you for your interest in the Smart Homeownership Choices Program. To date, we have not made a loan to a prospective applicant.  The good news is that when we have talked to the delinquent homebuyers, it seems they have not been able to make contact with their lenders to discuss foreclosure options.  So, we have been able to facilitate getting them to the right person for loan modifications, etc.  There have also been homeowners who have not been pleased with the fact that the assistance is in the form of a loan and not a grant.  They believe the government should be giving them the money to save their home. While we cannot respond positively to these folks, we do send them to one of our homeownership counseling partners to help them with other options that   might be available.

If you know someone who might benefit from the program, please feel free to give them my contact information.

Dee Taylor
Director, Homeownership Division
Washington State Housing Finance Commission
1000 Second Avenue, Suite 2700
Seattle, WA 98104-1046
(206) 287-4414

Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding

89 thoughts on “Options for Homeowners Facing Foreclosure

  1. You mention denial several times. I’d call it procrastination. It’s a big problem with people in financial distress.

    Often they’ll get around to calling a bankruptcy attorney the day before the foreclosure. Once I had a woman do that and I had her filed into Chapter 13 by noon the same day (full schedules). That probably wouldn’t happen today. In any event, it’s best to see a bankruptcy attorney at least 3 months prior to a foreclosure date (assuming it’s not a bankruptcy mill), even if you don’t need a bankruptcy. Time is not your friend.

  2. Well written article. I second the sentiments of the previous poster, if facing foreclosure – shouldn’t wait until the last minute. It’s never a good idea to show up at the office of an attorney 24 hours before your house is going to get foreclosed. Don’t stay in denial, even though sometimes it feels better to pretend it’s not happening to you. There are plenty of people out there that can help, seek professional advice when the time is right.

  3. Hi Seattle Bankruptcy Lawyers,

    Thanks for stopping by RCG. I typically hear the following excuse: “Attorneys are so expensive.” I have found that there is often a range of fee-for-services. How much does bankruptcy typically range? Chapter 7, Chapter 13?

    Next question: Do you think that we’ll see the federal laws changed to allow principal balance cram-downs in bankruptcy?

  4. Jillayne, a bankruptcy mill is simply a place (law firm or document preparer) that does a large volume of bankruptcies. There are two important questions a bankruptcy attorney needs to answer for a client: (1) Whether you need a bankruptcy; and (2) When? With a mill the concern is the answer is likely to be yes and right now, no matter what the client’s circumstance. As I mentioned somewhere else, back when I was practicing well over half the people that contacted me didn’t need a bankruptcy, and those that did few of them needed one immediately. Timing and pre-bankruptcy planning is often very important, so that’s why I suggested avoiding a mill. Foreclosure situations, however, would be more constrained as to timing.

    As to the cost, SeattleBankruptcyAttorney could probably answer more current information, but I believe the new act made things a bit more expensive. Chapter 7 you’re probably looking at $1,000 and up (more expensive doesn’t necessarily mean better), but be sure to review the agreement. I once took over a case for a client unhappy with services, and reviewed their old agreement. It was over $1,000 base (prior to the act change) and then had additional charges for things that were almost certain to occur. Chapter 13 you’d be looking at the same for initial cost, but when they go 3-5 years the total cost can be much higher. It’s very seldom the debtor can go that long without anything happening that will run up costs.

  5. Oh, and two more things. First, I’m not sure what the status of document preparers is in the Seattle area (the US Trustee monitors them for unauthorized practice issues), but I would recommend avoiding them entirely, especially if a house is at stake. Use an attorney.

    I once had a case referred to me by a trustee because a rather elderly old man had used a preparer, and they had turned what should have been a simple case into a mess. But for this guy being probably in his 80s, things might not have turned out so well for him. The trustee might not have referred him to me, and the court might not have allowed his case to be dismissed.

    Second, some people try to do Chapter 13 cases pro se (without an attorney). That leads to almost certain disaster because of the complex procedures. Even a non-bankruptcy attorney wouldn’t be qualified to do their own Chapter 13.

  6. I’m listening to Obama call for a 3 month moratorium on foreclosures and wondering if there will be a distinction, should that ever come to pass, between judicial “foreclosures” and “trustee sales”. We have a tendency to call them all foreclosures, and I’m wondering if the splitting of hairs will leave the West Coast out of a moratorium, should there be one.

  7. Well, finally….Obama’s singing my tune. I know I suggested this before, however it may be too late. If the banks had just started modifying loans without forgiving any debt LAST YEAR, I believe the melt down in the financial markets would not have been this severe.

  8. “They believe the government should be giving them the money to save their home”
    This suggests a complete lack of understanding of the situations people get themselves into and their responsibilities.
    If the government were to bail anyone out like this it would set a terrible precedent.
    At least as loans the money will eventually return to the “rainy day fund”

  9. “Homeowners in financial distress should always hire legal counsel.”

    I know it is popular, and possibly required, that everyone repeat this mantra. But where are all the stories of how that actually helped anyone? The perception is that it just piles another $3,000 to $5,000 of debt on top of an already bad situation, and doesn’t really help matters in the long run.

    If someone is in a situation where income is less than obligations, it just doesn’t “feel” wise to go out and incur another significant obligation. The lower your monthly payment, the less realistic it becomes. If someone is two months behind on a $1,500 monthly mortgage payment, how realistic is it to say “spend $3,000 on an attorney EARLY” instead of take that $3,000 for an attorney and pay two mortgage payments with it.

    Someone who is foregoing $40 on a haircut, so as to hopefully be able to catch up with their mortgage payment, is going to have a very hard time justifying spending many hundreds on an attorney. So as to Kary’s comment #1…it isn’t denial OR procrastination…it just doesn’t seem like the wise choice barring a HUGE list of proven benefits for having seen an attorney. I have yet to see that list.

    In many cases people who have called the help lines report that the person at the other end is saying “sounds like you are already doing everything you can do”. Beyond more expense, what can an attorney bring to the funeral? What does bankruptcy vs. foreclosure do for someone? What does short sale vs. bankruptcy or foreclsoure do for someone?

    For temporary situations like, “lost job but have a new one now”, people can work directly with the lender. For “things are never going to get better and the home price is not going to grow either”, what can an attorney (fee) really do to improve that situation? How can the attorney fee not simply make it worse? I think people need to see a list of potential benefits for laying out that kind of money besides “you should consult with an attorney”.

  10. I don’t see a moratorium being a solution. Some people simply have no chance of saving their house or obtaining a modification. To allow them a moratorium only hurts lenders and will make it more difficult to obtain financing in the future because a precedent will have been set of restricting lender remedies.

  11. Kary,

    I don’t suggest that a moratorium to be an end all solution. It should have many variables. It should only apply to a occupied primary residence. I believe that the banks would fare much better keeping someone in their home and generating monthly payments as a better solution to taking the home through foreclosure and losing tens of thousands to hundreds of thousands of dollars in losses.

    Could you explain how it hurts lenders by making it more difficult to obtain financing in the future… I didn’t understand that…

  12. Ardell, by going to an attorney early they could very well save their house!

    Just an example, and I’m not sure this information is current, but in Chapter 13 if you’re in default on a mortgage you need to pay it through the trustee, and pay 1/36th of the delinquency, plus maybe 5% for trustee’s fees.

    Let’s say someone’s payments are $2,000 a month, and they’re $6,000 in default at the point in time that they get a notice of trustee’s sale. Let’s also say they have credit cards with $600 a month in minimum payments on credit cards.

    If they go see a bankruptcy attorney when the notice of default comes out, they’ll have to pay the trustee $2,275 a month, which is less than the $2,000 mortgage payment and $600 minimum payment.

    If they wait until just before foreclosure, the deficiency will double, which will increase the payment to $2,450 a month (and they may have wasted $1,800 on paying credit cards). That is only a difference of $175 a month, but that can often be the difference between success and failure.

    If they went to see a bankruptcy attorney even earlier, their minimum payment could be even less.

    There may be other options too. Going to an attorney will give you those options, and won’t cost $1,000.

  13. Julie wrote: “Could you explain how it hurts lenders by making it more difficult to obtain financing in the future… I didn’t understand that.”

    With banks (or government entities) typically selling off mortgages, the threat of government modifying remedies will make investors less likely to buy, thus making it harder for banks to lend.

  14. Hi Julie,

    “If the banks had just started modifying loans”

    From part one of this series:

    “many loan servicing agreements prohibit the Servicer from modifying loan agreements entirely, or limit such modifications to no more than 5-10% of a total pool. Further, loan modification may run afoul of FASB rule #140, (2), which says that if a bank alters the terms of a loan it has pooled, it cannot keep the loan off its books. It must repurchase the loan, return it to the books, set aside a reserve for losses, and actively manage it.”


    Asking the banks to “just start modifying loans” is a simplified answer to an extremely complex problem.

  15. Adding on from Kary’s list of possible consequences, forcing banks to modify everything will mean eventually we will be seeing much higher interest rates in the future as banks try desperately to make up their losses.

  16. Julie asks, “Could you explain how it hurts lenders by making it more difficult to obtain financing in the future… I didn’t understand that…”

    forcing banks to modify loans, along with higher interest rates means we’ll be seeing even tighter underwriting guidelines than we are now seeing. Banks must make loans to survive, but they have to make good loans, with a low risk of default.

    20% down, 800 credit score, owner occ, everything verified: Assets, cash to close, credit, income.

    Everyone else is pushed to an FHA loan.

    Those who cannot qualify for a conforming loan will go to a finance company or hard money lender and pay much, much higher interest rates, much like the 1980s.

  17. Hey everyone, Phil makes a funny in comment #9:

    “If the government were to bail anyone out like this it would set a terrible precedent.”

    This is why so many Americans were opposed to the bailout bill and are opposed to continued bailouts that are likely headed our way in the days, weeks, and months to come.

    The precedent bailouts set for corporations is that corporations will continue to take risks and expect more government bailouts in the future. This is called a moral hazard in economics. This is the same point Phil is making.

    Some folks, like Julie and others, are wondering if we can just modify all loans. The hazard is that people may make the decision to default on their loan in order to obtain more favorable terms. Chances of this happening? Who knows, but the hazard is there.

    I’m wondering what our housing industry will look like in 2011 when everyone who received a 3 year loan mod will be facing another rate increase. Do we continue to modify? If so, this spreads out the recovery of the housing industry that much longer.

    No wonder these homeowners expect a bailout.

  18. Jillayne wrote: “From part one of this series: “many loan servicing agreements prohibit the Servicer from modifying loan agreements entirely, or limit such modifications to no more than 5-10% of a total pool. . . ..”

    I tried to comment on this earlier, but I don’t think it was a spam filter issue, so . . ..

    Part of the reason I liked the 4 page bailout proposal over the 400+ page legislation is that it only allowed the government to buy mortgage backed securities. This would have allowed them to modify the loans. Pumping money directly into banks doesn’t do that. Buying mortgages individually does, but at a higher cost to government (because the pooled mortgages might actually be undervalued at this point).

    Modifying mortgages where there’s a review of the facts makes a lot more sense than a straight 3 month moratorium.

  19. To me the moratorium is not so much about keeping people in their homes out of goodness but more about who pays the bill for lending more money than the borrower can afford to pay. If it goes to foreclosure a big part of the bill ends up with the lender and the financial institutions involved in securing the mortgage. If modifications are made the majority of the bill stays with the borrower who ends up paying for it for most of his life.

    I would argue that the borrower has paid a suffiicent price if he has no money and no equity left. Better to foreclose, rent, rebuild and buy a home that he can afford a couple of years from now ( it could endup being a nicer home than he has today ) and live with good cash flow from there on without being slave to a weird mortagage that could endup sapping all his reserves for the majority of his life.

  20. What we do know is that the higher risk premium rates, did not cover the risk.

    Let’s take an example and see how it plays out, and propose a loan mod.

    Family qualified for their current home based on $80,000 a year. $60,000 was salary and $20,000 was two years of consistent bonus or overtime. That was considered conservative lending guidelines “two years of proven history on bonus or overtime”. Maybe they even had a letter from the employer saying bonus and overtime monies were expected to continue (no guarantees, of course). Regular and conservative underwriting guidelines, so far. They also have zero debt.

    Now that family goes out to buy a house, and they buy a beat up rambler built in the 60s in Bellevue or Redmond for $475,000. That $475,000 includes closing costs. Not being greedy. Not needing granite counters. The cheapest thing on market with at least 3 bedrooms and more than 1 bath and a yard close to work.

    Ratios are: $80,000 equals $6,666 gross a month. No debt for the backend. They have a 720 credit score. Zero down gives them an 80/20 with 5.5% on the first and 7% on the second. Payment including taxes and insurance is $3,100. Oops…back up. $3,100 divided by $6,666 is 47% of gross. Now they are subprime because of their ratios. Now they are still approved for the mortgage, but the rates go up due to high ratios. The first mortgage jumps to 6% and the second mortgage jumps to 8.5%.

    The remedy for higher risk was higher interest rate, which increased the risk by increasing the payment to $3,300 which is now 50% of gross income including bonus and overtime. Let’s call this February of 2007.

    (Remember, with no rate cap in the Finance Contingency, the buyer has no legal out for rate and payment going up during the loan process. So suck up the higher payment or lose your Earnest Money is the order of the day. If rates are at 5.5% and there was a rate cap of 6%, the buyer would have a legal out when it jumped during loan processing to 6.5%. I know I harp on that, but remember, most of my career there was a rate cap and this area “used to” have a rate cap. No rate cap in the Finance Contingency is one of the culprits responsible for the housing crisis.)

    Jump ahead one year. The employer cancels all overtime. Sales are down so bonuses disappear. Income drops form $80,000 including bonus and overtime to $60,000. Payment is up $50 to $3,350 due to RE tax increase 2007 vs. 2008. New gross income is $5,000 with no job change. Mortgage payment is now 60% of gross income.

    (What people fail to consider is that even without insane and exotic issues or stated income, or job loss, relatively conservative underwriting guidelines as those noted above, that have been in place for many years, result in crisis when businesses cut overtime. People also erroneously blame crisis on low teaser rates adjusting upward, when in fact no teaser rate scenarios like the one above, also resulted in default.)

    Since the higher risk premium did not cover the risk, and the high rate of the second mortgage did not cover the 20% on the top vs. PMI, maybe we should retroactively eliminate the risk premiums.

    Let’s say the owner paid their payments on time for 2/08 through 4/08 and are now behind 2 payments because they were short May through October when overtime went caput. They made a payment every month, but not the full amount, so they are now cumulatively 2 months behind without ever having made no payment in any given month.

    Loan Mod:

    Let’s go back to day one in February of 2007. Let’s keep the total of their indebtedness at $475,000, 100% financing. Let’s remove the risk premiums and call the loan $475,000 at the then going rate of 5.5%. This reduces the payment to $2,700 with no risk premiums vs. $3,000 with risk premiums (not including RE taxes and insurance). That gives us a retroactive credit of $300 a month by turning in the risk premiums that were ineffective and actually exacerbated the problem. Bank still gets the then going rate of 5.5% on all monies borrowed. No shortfall for the bank…just no risk premium funds.

    $300 credit to borrower from February of 2007 to present is $6,000. That covers the amount the borrower is currently behind and brings the borrower current as to payments, simply by forgiving the risk premium. That covers the past. Now to the future.

    New payment is $3,000 including taxes and insurance at 5.5% and that is too high with gross income reduced from $6,666 at time of loan vs. $5,000 without overtime and bonuses. Let’s call the lender at least half responsible for thinking the overtime and bonus income was going to continue for several years and drop the rate to half from 5.5% to 2.75%. Remember the bank is not losing a dime of principal yet…just interest. Let’s also turn the 30 year loan into a 40 year loan. What does that do for us?

    $475,000 at 2.75% interest over 40 years equals a payment of $1,630 plus takes and interest equals a payment of $2,000 which is 40% of gross. The family can handle this payment. The lender loses not a dime of principal and doesn’t need the bailout funds to replenish lost principal.

    Less interest retroactively by eliminating risk premiums, solves the need for foreclosure, lost homes and depleted monies caused by forced selling at less than face amount of the loan. Make the lenders fully responsible for assigning risk premiums that didn’t work anyway, by cutting the rate retroactively to no risk premium. Further, make the lender at least half responsible for using ancillary income that didn’t continue long term, by cutting the then going rate in half.

    You can make that a five year loan mod to be revisited in 5 years and adjusted upward if annual income increases. You can also add a “shared equity” term to the new loan so that the forgiven interest, not the risk premium, but the 2.75% vs. 5.5%, is recaptured if the home is ever sold at an appreciated level.

    Sorry for the long comment, but reality is that solutions exist that are complex. Everyone’s looking for a “sound bite” fix, and that will just cause more problems. Serious problems need serious solutions, not quick fix bandaids.

    Why do we need a 3 month moratorium on foreclosures? We need a YEAR moratorium on foreclosures, as individual complex loan mods will NOT be accomplished in 3 months time. A short sale can take 4 months! No bank or government agency can staff to the extent that 3 months time is enough to work out suitable solutions. 6 months minimum would be needed to work out real solutions. 3 months will simply delay the inevitable.

  21. Why would any sane, rational person agree to pay a mortgage amortized over FORTY years? That’s a huge amount of money to be paying in interest alone.

    Why not walk away, start rebuilding your credit NOW, rent a good home and be out from under the burden of that mortgage, especially if bonuses will not likely continue into the forseeable future.

    With Ardell’s loan mod scenario, the likelihood of these borrowers re-defaulting is extremely high, IMHO, and supports TJ’s comments as well, (located just above Ardell’s long scenario.) Thanks Ardell, that really puts it into perspective.

  22. Ardell, how would the situation look if in the example above the home is foreclosed and in 5 years he purchases a similar home for $250k? I think it’s a chance worth considering for people in that situation. He could then have a fixed mortgage without any surprises.

  23. Ardell — the benefits of seeing an attorney start with getting some informed advice about the best means of addressing the homeowner’s financial distress. As you note in #10, “What does bankruptcy vs. foreclosure do for someone? What does short sale vs. bankruptcy or foreclsoure do for someone?” An attorney — and particularly a bankruptcy attorney — is uniquely able to answer these very questions. Indeed, you ask “What can an attorney bring to the funeral?” The attorney can identify the “funeral” best suited to the client’s situation so as to minimize both the short and long term harm to the debtor.

    Plus, everyone admits that someone in financial distress is also going to be in some degree of emotional distress. The debtor’s fear (and resulting procrastination) arises at least in part from not understanding either the situation or the possible resolutions (including their long-term impact on the debtor). An attorney can explain the situation to the debtor and thus provide at least an understanding of the situation, which should at least alleviate some of the emotional stress.

    I think the first two comments are right on target. A logical attorney to contact when in severe financial distress is a bankruptcy attorney. There may be issues that the debtor (or even some other professionals) do not appreciate. For example, if there are two mortgages on the property, then simply allowing the house to go to foreclosure could be a problem. Assuming the first lienholder forecloses, the second debt would be unsecured but would remain in existence and the debtor would remain liable. Thus, the debtor would face a potential collections action for the full amount of the second mortgage, plus late fees, plus collection costs (including attorney fees). That could be quite a surprise two or three or more years later. By consulting with an attorney, the debtor will avoid this surprise.

    Finally, I don’t think that consulting with an attorney will cost $3-5k. That sounds pretty high to me. I think a debtor could at least get some input on the best course of action for something significantly less. I am unable to make a specific referral here, but I do know that the King County Bar Association Lawyer Referral Service charges $35.00 for an initial consultation with a bankruptcy attorney. That would at least provide the debtor with a preliminary opinion as to the debtor’s best options (for less than the cost of a haircut).

  24. Thanks, Craig.

    I keep hearing opponents of attorneys spouting off like it’s going to cost tens of thousands of dollars to hire an attorney for help. $35 for a quick consult is a great start. The consumer may hear options that they normally would not have heard had they just hired a real estate agent or lender.

  25. “Finally, I don’t think that consulting with an attorney will cost $3-5k. That sounds pretty high to me.”

    That estimate comes from previous and often made advices of:

    1) see an attorney before you list your home for sale
    2) have an attorney hold your hand every step of the way

    These things can easily take 6 or more months for that period of time to expire, from before list date to close of escrow. 6 months of an attorney “holding your hand every step of the way” has got to cost at least $3,000…no?

    Maybe $3,000 is a high estimate, but $35 will not help much either. Realistically to have any real and positive impact, it’s got to be at least $1,500 I would think.

  26. I certainly don’t recommend this for everyone, but as I’ve pointed out on this site before, there IS another option for people who can’t afford their mortgage payments: staying in the house rent-free (as it were) until the lender gets around to actually foreclosing.

    There are definitely examples where lenders are either so backed up with delinquencies, or unwilling to take ownership of more under-water properties, that they will just delay actual foreclosure proceedings indefinitely. As I’ve mentioned earlier, my sister in Florida is a case in point. She has been living in her house for a year after cessation of payments and the lender still hasn’t foreclosed or done anything other than keep nagging her about late payments.

    Again, I am NOT recommending this as a solution for anyone, and your specific circumstances may dictate something else (e.g. you may have equity in the home). Nevertheless, the option of living rent/payment free for a long time is not something to just completely ignore.

  27. Hi Sniglet,

    Glad to hear your sister is enjoying rent-free life. Has she researched the foreclosure laws in FL? Maybe they’re waiting and will pursue a deficiency judgement in court after a certain number of months?

    I can’t advocate that. The long term consequences for the most number of people do not equate to a good outcome: higher bank losses, higher interest rates, a longer housing recovery.

    For a single person who might be able to jump into an apartment quickly…..but for a family?

    It’s not good for the kids to take them out of their environment on an emergency basis.

    Personally, I couldn’t handle the stress of “not knowing” what was happening and not knowing the possible consequences of my actions. The stress load would put me in the red zone.

    But that’s just me. To each his/her own.

  28. Ardell, the costs you mention for attorneys are more for specialized things. If I recall correctly, Craig indicated that he’d probably charge something like 2-3k for putting together your lease-purchase deal. The reason that would be so expensive is because it would require research and custom drafting.

    In contrast, getting advice on a foreclosure situation is something an experienced bankruptcy attorney could usually do off the top of their head, except for unusual issues (and believe me, people do get themselves into unusual situations sometimes). How much the attorney costs after getting the advice would depend upon what route the client takes, and what assistance they need getting there.

    Once when I was practicing the fees to help the client in foreclosure were over $5,000. But that was because they needed a Chapter 11 rather than a Chapter 13, and Chapter 11s are expensive procedures.

  29. Sniglet, again in Washington the property has to have been in default for six months prior to the foreclosure. So at the very least someone gets six months of living “rent” free. So unless they get into trouble as a result of drastically reduced income (e.g. unemployment, disability, illness, etc.) they should have plenty of money to consult an attorney and move.

    However, this is another good example of where seeing an attorney early would be a good idea. Often people don’t realize the hole they’ve dug themselves into, and they’re just scrambling trying to get out. During that six month period they could be wasting money on paying credit cards, when during that entire period it was obvious they’d be filing Chapter 7, absent winning the Lotto. Spending $300 to consult with an attorney could save them $600 a month on credit card payments. Quite the return.

  30. Jillayne, I don’t see anything wrong with what Sniglet is suggesting, and unless the bank will take a deed in lieu, it’s probably better that they continue to live in the house. Abandoned houses don’t help anyone. Being able to live in the house during the foreclosure process is a valuable right, and they shouldn’t just give that up.

    But I do agree with your advice that Sniglet’s sister should see an attorney.

  31. [Note: This comment is a tangent to this interesting thread.]

    I’m not sure what you mean when you say that my “estimate comes from previous and often made advices.” What are “advices”?

    Sure, I encourage people to have a listing agreement reviewed by an attorney before they sign it — but for good reason. Did you know that, if the seller was responsible for damage to the listed property — even if it was completely unintentional — such that it “materially impairs” the listing agent’s ability to sell it, then the seller is liable for the commission? That hardly seems fair, but on the other hand this was a contract written to protect the listing agent/broker, not the seller. So should the seller have someone who can perhaps “suggest” a change so that the contract is equitable to all parties? You bet’cha.

    As for having an attorney “hold your hand” through the entire six month process (not sure what “process” you’re talking about): frankly, that sounds a lot more like a “full service” agent. And that will cost a WHOLE LOT MORE than $3-5k.

  32. Hi Craig,

    Seems to me that the antideficiency provision in WA applies to the foreclosing lienholder, and that the owner is not absolved from deficiency on the 2nd IF the 2nd is not the foreclosing lienholder. But what if they are one in the same, and the 1st and 2nd are with the same lienholder who is the foreclosing lienholder?

  33. Craig,

    Can’t find the “get an attorney and have him hold your hand every step of the way” comment, but here’s the one on 80/20 loans:

    “This lack of a deficiency does not apply to any junior debt holder that does not foreclose. So those with an 80/20 loan package would typically still owe money on the 20 if the 80 forecloses.

  34. Ardell, re 37, I don’t think the law is clear there. Most deeds of trust have what is called a “dragnet” clause, where they secure the debt of the note and future debt. You could try to argue that where the 20 is made by the same lender, that it is future debt covered by the 80, and thus part of the foreclosure. On the other hand, the bank could argue that where the second deed of trust was done simultaneously, that the parties clearly didn’t intend the 20 to be covered by the first. I’ve never seen that argument raised in this context, meaning I don’t think there’s any binding authority on it, so relying on that would be rather risky. (I also don’t remember whether the fairly recent Washington case involved the same lender, but I’m assuming it didn’t.)

    As to 38, therefore, your assumption is incorrect regarding the 80/20 situation. As to the rest of it, the point isn’t to solve your problem for a small amount of money. The point is to analyze your problem and give options and information. Solving the problem might take a lot of additional work depending on the solution (e.g. the Chapter 11 example I gave). The client would have to decide which option to take and how to proceed, given the potential liabilities and the costs. That’s a much better course of action than just remaining ignorant as to the law, letting things run their course, and then try to determine where you are after the fact. That place could be a very dark place.

    Maybe an old-time analogy would help. If you’re in foreclosure, asking an attorney for advise is like being lost and asking a service station attendant for advice. Obviously the cost of that advice is different, but so are the risks.

    Craig, Ardell uses “advices” as a form of “advice” and I seem to remember that is actually a proper use of the term.

  35. Kary wrote: “But I do agree with your advice that Sniglet’s sister should see an attorney.”

    No disagreements here. I have suggested my sister see an attourney, and believe that is good advice for everyone. Even if you decide to just wait it out in the house until the lender gets around to actually foreclosing.

    However, there is a reluctance for some people who intend on “milking the system”, as it were, to speak with an attourney for fear that person will just advise them to do the “ethical” thing.

  36. Thank you, Kary, for pointing out that “advices” is indeed a word. I stand corrected. Still, I take exception to ever giving the second of the two advices identified by Ardell.

    On another (and relevant) note, I have not done the research, so this is off the cuff: I would be surprised if the 1st and 2nd somehow “merged” just because they were held by the same lender. Each loan is evidenced by a separate promissory note, and each is secured by a separate deed of trust. They are separate and distinct obligations, regardless of the fact that the parties are the same (same lender, same borrower). It is my understanding that foreclosure of the first would not extinguish the second, only the first.

    The point of seeing an attorney (in this instance or any other) is not necessarily to “fix” the problem. Rather, the point is to get informed advice as to the scope and extent of the problem, the possible short and long term implications, and input on the best way to solve it. It may be that an attorney is required to “solve” the problem. If that is the case, then certainly the bill may run into the thousands of dollars. Assuming the attorney is ethical, though, the attorney will only recommend attorney involvement if the costs to the client are outweighed by the benefits. If not, then the client can proceed to address the problem as best she can without incurring the additional costs of an attorney. At the least, though, the owner should make an INFORMED decision. That is the point of consulting an attorney.

    Finally, any attorney who gives specific legal advice via a blog — and thus creates an attorney/client relationship, with the myriad of ethical obligations that attach — is out of his or her mind. Not only that, but each case is unique, and I don’t think an attorney can gather the information necessary to provide meaningful insight or advice via a blog.

  37. Sniglet — Per the Attorney Rules of Professional Conduct (RPC 1.2): “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.” So, an attorney can and should discuss with the client the legal consequences of living “rent free.” That is exactly the sort of input that an owner should get before deciding to do so.

  38. I use advices when the advice comes from more than one source. Several pieces of advice from one source…I would say Kary’s advice or Jillayne’s advice, even if they were several comments from the same person. But given some were Kary’s and some were Jillayne’s…I call that group of comments, of which they are many, “advices” so as to incorporate two or more sources of advice. 🙂

  39. Craig, I’ve done a fair amount of research on dragnet clauses over the years, because in bankruptcy creditors are often trying to take advantage of it, not get out of it as they would be here. As I recall, the cases are all over the board. Absent a binding case dealing with this precise situation, I do think getting out of the liability in this type of instance would be a long shot, absent the “right” judge.

  40. Sniglet, your sister’s situation would be dependent on Florida law, but I’m not aware of any reason why an attorney in Washington would advise a client to move out early for “ethical” reasons where the only reason the property wasn’t being foreclosed was the creditor dragging their feet. Being allowed to stay is not expressly part of the homestead rights, but it would be if they were judicially foreclosing, and the non-judicial remedy is merely an alternative to that, and doesn’t require that you move out until after the sale. So arguably, in Washington, staying is part of the homestead rights granted to owners of residences.

    One other thing does come to mind, however. It is possible that the process is proceeding and your sister simply doesn’t know about it for some reason. Finding that out would be another reason to see an attorney.

  41. I think if either of you look up the “antideficiency provision” you will be more inclined to agree with me (see paragraph 3 below). If an attorney cannot flat out give an opinion on the antideficiency provision as it applies to their situation, then the owner should not be hiring that attorney. It’s a good question to ask at the initial, cheap or free interview with an attorney, and if he has to go look it up, get a different attorney.

    The main advantage of signing a Deed of Trust, and agreeing in advance to a Trustee Sale vs. a judicial foreclosure, is the antideficiency provision. People also need to know what happens when the lender chooses judicial foreclosure vs. Trustee Sale (non-judicial foreclosure), for this same reason.

    It would appear that exceptions to the antideficency provision have to do with the junior lienholder not having any say in the acceptance price at the sale. Since that lack of control is what kicks in the exception to the antideficiency provision for the junior lienholder, the junior lienholder really can’t make that claim if they are both the senior lienholder AND the junior lineholder. If that sale is a foreclsoure vs. a Trustee sale…that could and likely does make a difference as well.

    A HUGE reason for someone to speak to a QUALIFIED attorney, it seems to me, is that where there is one lender on both the first and the second, the potential for total forgiveness is possibly greater as a result of a Trustee Sale. So anyone listening to agents telling them to short sell and sign an unsecured note for the shortfall, is getting really, really bad advice. Of course the agent makes no commission if the owner decides on Trustee Sale vs. short sale, and so would likely be pushing the owner to sign the unsecured note in order to close the deal and close it more quickly.

    If there is, a difference as to Trustee Sale vs. Judicial Foreclosure (and I suspect there is) with regard to the antideficiency provision, then everyone has to stop calling them both “foreclosures” as I see people doing now. A Trustee Sale and a “foreclosure” are not the same thing, and may not have the same consquences to the owner.

    Bottom line…attorneys absolutely need to know if the 2nd is forgiven if the 2nd lienholder is the same as the first if it is a Trustee Sale, and if that changes if it is a judicial foreclosure vs. a Trustee Sale.

    1) Because it can make ALL the difference as to whether someone should short sell or foreclose

    2) Because anyone who was pushed into a short sale, and signed an unsecured note on an amount that could have been totally forgiven had it gone to Trustee Sale, can be sued.

    I’m sure number 2 will be of great interest to Craig 🙂

  42. Ardell, they are judicial foreclosures and non-judicial foreclosures. Just saying foreclosure is ambiguous.

    As to your other point, there are countless situations where the legal result is not clear. That is the case more often than not. You’re simply not going to get an attorney to tell you that your $40,000 debt is going to go away in return for a fee of $300 (or any other reasonable fee) because there most likely is no clear answer. As I indicated, I think the most likely result is the owner would still be liable, but that doesn’t mean that if you went to King County Superior Court ten times in front of different judges you wouldn’t win twice. The law is a lot less certain that most people realize, because the result often turns on tiny facts.

  43. P.S. to readers, talk about antideficiency provisions likely do not apply at all if you refinanced the original purchas loan. For more info…consult an attorney. I’m just trying to give enough info so that you know what questions to ask when you do see an attorney, and to help you in choosing one.

  44. WHAT?!? Ardell, you can’t have it both ways (well, YOU can because you’re special — but I still have to call you on it). In #10, you rail on attorneys and demand a “HUGE list of proven benefits” before you will admit that seeing an attorney is a good idea. In #48 you say, “For more info…consult an attorney.” So which is it? Are attorneys a monstrous waste of money? Or should they be consulted under these circumstances? Perhaps this thread constitutes a HUGE list of proven benefits to consulting an attorney…

    As for the actual question, the WA Supreme Court only recently ruled definitively on the effect of a non-judicial foreclosure on a junior lien. In Beal Bank, SSB v. Sarich, 161 Wn.2d 544 (2007), the Court squarely held that foreclosure of a senior lien does not extinguish the obligation underlying a junior lien, it only extinguishes the lien on the junior lien on the property. Without doing any real research (although I did enough to find out that no WA case uses the phrase “dragnet clause” — federal bankruptcy cases undoubtedly do, but they do not necessarily interpret state law), I continue to strongly suspect that the junior debt obligation survives, in part based on the “THAT deed of trust” language in the statute (which also was determinative in the Sarich case).

  45. Craig, in the Beal v. Sarich case, the first and second were different banks. But I agree with your conclusion that it’s unlikely the debt would be discharged if it were the same bank. From memory of the dragnet clause cases, I think you’d have a better chance if it was a loan made with the same entity at a later time than the first loan, rather than contemporaneous loans.

    But one other thing! In the Beal v. Sarich case the Superior Court found that the second was discharged. Prior to the Supreme Court’s decision I thought it was settled law that the second wouldn’t be discharged, but some attorney managed to convince the Superior Court otherwise.

  46. Kary,

    “When a foreclosing lender opts for the nonjudicial option, then the act’s antideficiency provision limits his recovery to the foreclosure sale price. RCW 61.24.100.”

    Judicial foreclosure vs. non-judicial foreclosure is not semantics. The benefit of signing a Deed of Trust is the antideficiency provision. Otherwise buyers should not be signing them.

    It seems to me the only issue as to the junior lienholder is whether or not the junior lienholder is ALSO the senior lienholder, and thus “the foreclosing lender”.

    Were borrowers advised at time of purchase, that if they signed the loan papers with the 2nd lender being different from the first lender, that they might be foregoing their rights under the trade off for the Deed of Trust as to the second mortgage?

    Every buyer buying a home is asked to sign a Deed of Trust. There are certainly loans available that do not require a Deed of Trust, and if the benefit to signing them is nil…then people should stop signing them.

  47. Craig, you seem to be right about the lack of dragnet clause cases in Washington, at least after 1939. I did some “Google research” and found this link: http://www.bankersonline.com/lending/mbg_dragnet.html

    If you click the name of the case, it pulls up a PDF of what purports to be a published decision. Two loans made at the same time, one on a residence and one for commercial. The residence loan had a dragnet clause. The court found a question of fact as to whether the commercial loan was also secured by the residence.

    Anyway, this just goes to show why an attorney cannot give a definative answer on this topic. First, there’s no Washington law. Second, if you look at the law of other states, the rule might be: “It depends.”

  48. Kary — you need to re-read the case. The Court specifically held as follows: “the nonjudicial foreclosure of a senior lienholder’s deed of trust under RCW 61.24.100(1) . . . does not preclude an action by a nonforeclosing holder of a junior deed of trust to recover on a debt secured by a junior deed of trust on the same property.” Prior to the case, this was somewhat of an open question given the language of Washington Mutual Savings Bank v. United States, 115 Wn.2d 52 (1990). The Sarich case resolved the issue. As a result, the debt to a junior lienholder survives foreclosure of a senior lien, although the security interest in the property (i.e. the lien) is extinguished.

  49. Ardell, the holder of a deed of trust has at least three options. 1. Non-judicially foreclose. 2. Judicially foreclose. 3. Sue on the note. Completing the first will prevent doing the second or third, but until they do complete the process, the can do any of the three. So it would be erroneous to think that by signing a deed of trust you have a non-recourse note.

    I’ll get back to a point I made before. I’ve never liked 80/20 loans because of the liability issues. Unfortunately, mortgage brokers and clients had a hard time understanding my concerns. I’m not sure I ever convinced anyone to pay slightly more per month with a single loan.

  50. Craig, re #55, I was unaware of the earlier case until Beal came out. It was a 1990 case, and I never saw it raised in bankruptcy court as a defense to a claim.

    Prior to Beal, I thought the result of Beal (the debt surviving) was the clear answer. But Beal still doesn’t answer the question of the result where the bank is the same.

  51. Craig,

    “Perhaps this thread constitutes a HUGE list of proven benefits to consulting an attorney…”

    BINGO! You can’t just tell people they should or should not have an attorney the same way that you can’t tell them they should or should not have a real estate agent 🙂 LOL! Either can be a waste of money if you have the wrong agent or attorney. If the agent is not going to help you value the property you are buying…if the lawyer is not going to advise you regarding release from the deficiency…either is a waste of time if they are just shuffling papers around. Every buyer and seller should have an agent the same as everyone facing default should have an attorney. Can’t have it both ways, Craig. The key is the correct one…no? And if the attorney doesn’t know if Trustee Sale provides release from deficiency vs. short sale, what good is it to see him before you list the property as a short sale? So he can play with some stupid commission clause no one ever reads or invokes? Not good enough.

    In the Beal vs. Sarch case it clearly states that the reason they did not hold the antideficiency provision on the Junior lienholder is because the Senior lienholder was Yakima Federal Savings and the Junior lienholder was WAMU. They do point to “that deed of trust”, BUT if you read the opinion by Sanders you will see the rationale was that WAMU was not “the foreclosing lender”. Where the foreclosing lender on the first is the same as the lender on the second, you would not likely have had that ruling for the reasons outlined in detail by Sanders that I noted in my comment above, control of sale price.

    Again…read the provision “When a foreclosing lender opts for the nonjudicial option, then the act’s antideficiency provision limits his recovery to the foreclosure sale price. RCW 61.24.100”

    The key being “foreclosing lender” not “that Deed of Trust”. When the “foreclosing lender” ( the foreclosing entity) is one in the same, the rationale used in Beal vs. Sarch would not apply.

  52. Ardell — several comments:

    1. Nobody — at least no attorney — claims that the difference between “judicial foreclosure” and “non-judicial foreclosure” is simply “semantics.” They are very different legal procedures with very different implications for the borrower.

    2. Buyers do not sign a Deed Of Trust for their own protection. The DOT secures the loan made by the lienholder. Thus, the lienholder would not loan the money if the buyer refused to sign it. That would be an unsecured loan, which is VERY frowned upon (outside of a loan shark, anyway). The lender needs an asset that can be used to satisfy the debt if the borrower fails to repay it. I am anxious to hear of a loan that does not require a DOT (or some other security instrument)…

    3. I think the term “antideficiency provision” is not used in WA — at least I am not familiar with it. Regardless, a DOT does not have such a provision. A DOT can be foreclosed non-judicially, in which case the underlying debt is extinguished even if the proceeds from the foreclosure are insufficient to pay it entirely. A DOT can also be foreclosed judicially. It is the lienholder’s choice. If the debtor has significant assets — other than the security for the loan (i.e. the home subject to the DOT that secures the loan), then a lender may be inclined to foreclose judicially, as that can result in a deficiency judgment (i.e., a judgment for the remaining amount owed to the lender after sale of the property that secured the loan). On the flip side, a judicial foreclosure is more expensive and takes longer. Most DOTs are foreclosed non-judicially for this reason.

    4. I must note that your misunderstanding of these principles nicely illustrates the problems with your #10. Attorneys know these things and therefore can give meaningful consel and advice. Mortgage brokers, real estate agents, title officers — they have just enough understanding of these issues to be dangerous to a distressed owner looking for advice…

  53. Ardell wrote: “And if the attorney doesn’t know if Trustee Sale provides release from deficiency vs. short sale, what good is it to see him before you list the property as a short sale?”

    Because they can tell you the correct answer–that the result is uncertain. And then they can help guide you toward the result you want, if possible.

    This isn’t like calling up an attorney and asking them what the speed limit is on I-5 between 50th and 45th. There’s a clear answer to that. This one doesn’t have a clear answer.

  54. Ardell — busting OUT with the practice of law! Better watch out — some enterprising attorney looking for a CPA claim could be reading this blog… 🙂

    I’ve now read the decision in some depth. First, I admit that the term “antideficiency provision” is used in WA. I apologize for that oversight.

    As for your interpretation of the case, The “opinion” that is the basis for your analysis is the concurring opinion of Justice Sanders. The holding of the court was signed by 8 justices — that holding is the law, not the concurring opinion of Justice Sanders. Unless and until the Supreme Court has four other justices who share Justice Sanders’s views, the law is as stated in the court’s decision, not the concurring opinion.

    Regardless, I think you (along with Kary) need to re-read the case, and in particular the concurring opinion on which you rely. The case itself involved a WaMu first and a Beal Bank second. In contrast, the “Washington Mutual” case I cited in #55 involved a Yakima Federal first and a WaMu second. If you read it, Justice Sanders’s concurring opinion is devoted entirely to criticism of that earlier case. (The second sentence of the his opinion is, “I write separately, however, to note my dissatisfaction with our holding and analysis in “Washington Mutual.”)

    Your argument is interesting, but I’m pretty sure it has no legal authority and is simply wrong. Two other attorneys agree with me: Even if the first and second are held by the same lienholder, foreclosure of the first does not extinguish the obligation under the second.

    I incorporate by reference Kary’s many good comments above.

    I will reserve for its own post your comparison of attorneys and agents…

  55. “Two other attorneys agree with me: Even if the first and second are held by the same lienholder, foreclosure of the first does not extinguish the obligation under the second.”

    Thank you Craig. I just love goading you into answering my question. As an agent it is MEGA important to me, as every time a buyer client of mine uses an 80/10 or an 80/15 or in the old days an 80/20, it would be part of my job to see if they were the same or different lenders, if one had an advantage over the other (I still think it does BTW) As Kary said, and I concur “But Beal still doesn’t answer the question of the result where the bank is the same.” And I totally agree with Kary that one loan with PMI, even if it’s a 95% LTV, might make more sense.

    Buyers clearly deserve to know this, and part of blogging is giving them the opportunity TO know it and understand it. Not so that they do not go to an attorney, but so that they know what issues to bring up and what questions to ask when they get there.

    I don’t think East Coast has Deeds of Trust, Craig. So I doubt you can’t get a mortgage without signing one. The speed at which the lender can take your house is greatly accelerated by a Deed of Trust and Trustee Sale, so I totally disagree that the buyer should have no advantage when signing one. Without the antideficiency benefit…they should not sign them.

  56. Craig,

    “I am anxious to hear of a loan that does not require a DOT (or some other security instrument)…”

    Other security instruments are available and do not have the speedy recovery provision…thus the tradeoff for speedy recovery is the antideficiency provision.

  57. That is the trade off. The lender gets the property faster, but they have to give up the deficiency if they go that route. So when the loan is made using a deed of trust it benefits both parties.

    FYI, if they foreclose judicially, and it’s homestead property, the debtor gets to live in the property for 12 months after the sale, unless the creditor waives the deficiency, in which case it’s 8 months. They also have a right of redemption during that period, which reduces the amount that would be obtained at the sale. Off the top of my head I can’t think why a creditor with a proper deed of trust would go judicially and waive the deficiency, so that process would probably be mainly for creditors with straight mortgages or defective deeds of trust (e.g. one that doesn’t contain a “not used for agriculture” clause.

  58. That’s why it seems so totally awful that the 1st lender closed via Trustee Sale and the owner lost their right to antideficiency as well, just because the 2nd lienholder was not the same as the first. Any bets on whether or not anyone warned them that could happen when they got the loan? If there was a loan broker, which there likely was, they likely didn’t even know there were two different lenders. Good luck suing the broker though…they’re probably out of business.

  59. Ardell wrote: “That’s why it seems so totally awful that the 1st lender closed via Trustee Sale and the owner lost their right to antideficiency as well, just because the 2nd lienholder was not the same as the first. Any bets on whether or not anyone warned them that could happen when they got the loan?”

    Ardell, you seem to be assuming the result would be different if the lender was the same. Until our Supreme Court comes down with that decision, that’s not at all clear. I think I said above that you might win 2 out of 10 times in Superior Court with that argument. It certainly wouldn’t be something you’d rely on before the fact, but might be something you’d rely on after the fact.

    As to mortgage brokers mentioning it, I remember asking one about the new tax law, where PMI was again deductible for certain people and whether people were taking that route (100% with PMI instead of an 80/20). Even after explaining the benefits, I don’t think it really sunk in. I’d hate to speak for all mortgage brokers, but I’d think the ones that mentioned that factor (or better the benefit of getting a single loan) would be few and far in between.

  60. I went back and read the WAMU vs. US case relied upon by the parties in Beal. What a garbage decision. Here is an excerpt:

    “We do not deem it necessary to determine how a deficiency judgment should be measured in this case since we hold here that none may be obtained by a nonforeclosing junior lienor following a nonjudicial foreclosure sale. There is simply no statutory authority for allowing such a judgment following a nonjudicial, or deed of trust, foreclosure. Indeed, the title to RCW 61.24.100, part of the deeds of trust act, states flatly that “[d]eficiency decree precluded in foreclosure under this chapter”. We decline to create an exception to this statutory bar by judicial fiat. ”

    They based their decision based on the title to 61.24.100! I’ve never, ever seen a court base a decision on the title of a statute, rather than the language of the statute itself. I agree with the concurring opinion, that WAMU vs. US should have been overruled.

    I’d also point out that the statute has been amended twice since the facts occurred in the WAMU case. The title to 61.24.100 is no longer the same. I’m not sure how the body of 61.24.100 read at that time.

    Also, I’d point out that both parties in WAMU thought that WAMU could get a deficiency–they just disagreed as to how to determine the amount. The court sort of went off on its own with it’s holding, doing something neither side argued.

    Finally, I think the facts of the WAMU case do point to a problem with the deed of trust act. There the second bid in none of their debt, but obtained the property by paying off the first. I would think it would be fair to amend the statute to provide that if a junior DOT creditor buys, that their right to a deficiency goes away, no matter what they bid, because they’re taking advantage of the sale process. If they want to maintain their position, they could buy the first out prior to sale.

  61. Kary,

    Theoretically I don’t disagree with the concept that a nonforeclosing lender shouldn’t have to live with the result. If you only look at the law and the parties to the suit, that seems like a reasonable Court decision.

    My problem is that if you put the buyer/borrower into the picture, which these cases do not, it is clear that a quick Trustee Sale is granted by the buyer/borrower in exchange for the lender leaving with what that sale produces. If the first forecloses and the entire monies due the first are covered, and the 2nd gets to pursue the full amount of deficiency, then the buyer/borrower traded quick remedy for the lender without any forgiveness in exchange. Not fair.

    I am told that the owners have 20 days to leave after a Trustee Sale vs. a year on a judicial foreclosure (not sure that’s true) and that a Trustee Sale can be set when the payments are 4 months in arrears (much longer for a judicial foreclosure).

    If that is the case, the trade off was severe in a case where there was a Trustee Sale and yet zero forgiveness. Am I missing something?

    As an agent I am not looking to practice law. I’m merely looking at what buyers are told when signing a Deed of Trust at the beginning of the loan at escrow and at the time they are applying for a loan. To date the rationale for signing a Deed of Trust (and what we as agents learn in licensing classes) is that the quick remedy is granted by the borrower in exchange for the lender leaving that quick sale with whatever he can produce from it. No future liability for the borrower as trade off for the quick capture provided by the Deed of Trust.

    Again, am I missing something? Seems the buyer is the one losing their legal rights, and yet they are not even part of the suit.

  62. I don’t think it was a garbage decision or garbage thinking. I think the court is trying to reconcile the fact that the spirit of the law is to release the borrower from all deficiencies if and when there is a Trustee Sale vs. a Judicial Foreclosure. It is very clear that is the intent of the antideficiency provision. For that reason I don’t think the Court would ever rule that the 2nd was capturable if the lender on the 2nd was the same as the lender on the 1st, that being the foreclosing lender, without regard to “that” Deed of Trust. Not sure what would happen if the original lender sold off one but not the other. Given the borrower has no say in those matters, I’m leaning toward the borrower not being disadvantaged by acts of the lender or the closing involving two separate lenders. Quick sale should equal no deficiency…period. I’m not sure to what extent the Court looks at the spirit of the law and the effect on the borrower who is not part of the suit.

    It would make more sense to require the 1st lienholder to have to go the route of Judicial Foreclosure , if the 2nd is not subject to the deficiency provision. If the borrow is not absolved from deficiency, then Trustee Sale should not be an option for either lienholder.

  63. That was an informative exchange regarding 2nd loans and foreclosures, even if it was not entirely conclusive.

    Jillayne, did the state mention the terms of the loan?

    Seems hard to believe they could not get ONE person to qualify for, or accept, the offered loan.

    Maybe they need to hire out-of-work sub-prime loan originators to sell it 🙂

  64. Ardell wrote: “I am told that the owners have 20 days to leave after a Trustee Sale vs. a year on a judicial foreclosure (not sure that’s true) and that a Trustee Sale can be set when the payments are 4 months in arrears (much longer for a judicial foreclosure).”

    I thought it was 15 days, but it might be 20. The trustee sale cannot be set for a date that is less than 190 days from the date of default, so roughly 6 months.

  65. Ardell wrote: “My problem is that if you put the buyer/borrower into the picture, which these cases do not, it is clear that a quick Trustee Sale is granted by the buyer/borrower in exchange for the lender leaving with what that sale produces. If the first forecloses and the entire monies due the first are covered, and the 2nd gets to pursue the full amount of deficiency, then the buyer/borrower traded quick remedy for the lender without any forgiveness in exchange. Not fair.”

    But conversely, if the second didn’t participate in the sale at all, then why should their remedies be affected by what the first did? They can’t control the first (other than by buying them out).

  66. Ardell wrote: “I don’t think it was a garbage decision or garbage thinking. I think the court is trying to reconcile the fact that the spirit of the law is to release the borrower from all deficiencies if and when there is a Trustee Sale vs. a Judicial Foreclosure. It is very clear that is the intent of the antideficiency provision.”

    But the language of the statute (the 4 words referred to above) is clear an unambiguous, that it’s only “that” deed of trust being foreclosed that is bared. Absent the statute being ambiguous you don’t look for intent of the legislature. That’s one of the primary rules of statutory construction.

  67. A more general comment about the article: why isn’t some of that “rainy day fund” money going towards educating homeowners about their options as you do here. A small marketing piece sent to areas where there are high delinquency rates with phone numbers for ethical agencies and free legal help seems like it could really make a difference.

  68. Jillayne:

    Re my question in #70…

    Jillayne, I think you have me figured out. Rather than do the additional research I request (for free), you wait until I research it myself, and provide the answers! You are one smart cookie 🙂

    So, here are some additional interesting facts about the state’s Smart Homeownership Choices loans.

    1. Loan amount limited to $15,000, must go towards mortgage (not other debt consolidation).
    2. 0% interest, must be repaid upon sale, refinancing, or moving out, other than that, no payments.
    3. You must be able to show that you can still make the existing payment.
    4. Must make only 80% of the median HH income for the county.
    5. You MUST be behind on your payments.

    Here’s the absurd kicker.

    There is a total of $250,000 available. For those of you playing at home, divide that number by $15,000.

    Do you get 16.67? I do.

    That’s how many homeowner’s this would help.

    Fortunately, this is NOT an entirely new department.

    And Dee Taylor does report that they have been able to get some traction on loan mods, particularly with Countrywide.

    Ahhhh, to be the paving contractor for “Good Intentions”….

  69. Hi Roger,

    It’s either that I have you figured out OR that I’ve been on a road trip/out of town doing some heavy training…or maybe a bit of both! This is a heavy training time for me as many LOs seem to always wait until late November or December to do all their CE classes before 12/31.

    Thanks for doing the legwork.

  70. It always gets me when I have people ask me if that free government mortgage money is available yet. They hear about a new bill or read about a short sale and without really diving into it they are ready for a handout too. They have to take some responsibility to be where they are.

    Great information about the REO’s & short sales. LO’s are not realtors but we get asked questions all the time regarding these things. Good to know it is not always what it seems:)

  71. I’m really curious what’s happening with the money that was dedicated to the Washington State Housing Finance Commission. Not even one loan granted? Really?

    This is all very sound advice Jillayne. I always encourage my clients in distress to remain engaged with their mortgagee, and to obtain legal counsel if necessary. The denial thing is spot on, it’s very common, and sometimes people need to be awakened to the reality that they’re making a bad situation worse by ignoring or procrastinating.

  72. Pingback: Does every buyer or seller need an agent? Does every distressed homeowner need an attorney? | Rain City Guide

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  74. I want to know I have a client who tried to catch up now the house is going to be forclosed on and my client tried and tried to get this particular bank to work with her but the person just told my client to bad that there was nothing my client can do. How do we help clients who wants to catch up but still can’t pay the full amount my client was just late 3-4 months because of health reason and loss of job on top of it. Any advice?

  75. CarlaQue–sounds like the perfect situation for Chapter 13. If your client is in King or Snohomish County email me and I’ll send some attorney referrals.

    BTW, unlike real estate matters, attorneys don’t get “referral fees” for giving referrals.

  76. Wow – I am a little overwhelmed by everyones comments on here! 🙂

    In regards to the Smart Homeownership Program (which is new to me) some people in the above comments are unable to believe that nobody has qualified for this loan yet. I personally am happy about this. I dont know how to say this without sounding so harsh, but I am tired of all the people wanting the handouts – and getting them! Thanks Roger for the interesting facts – where did you get them (website?)? I would like to keep my eye on this one:)

  77. Jenn:


    That information was gathered the old fashioned way.

    I picked up the phone, and called them.

    Dee Taylor was very nice and helpful, and yes, was aware of the irony of the surprisingly small amount allocated to the problem.

    Sometimes (usually, I suppose), in politics, appearances matter more than substance.

    Thanks for reading, and appreciating the work that goes into it.

    Contributors are welcome at RCG! 🙂

  78. Pingback: Government Intervention in Foreclosure | Rain City Guide

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  80. Pingback: FAQ for homeowners facing foreclosure in Arizona « Prescott Arizona Area Foreclosure News

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