Hey Oregonians, wondering if your mortgage is recourse or non-recourse?

One of the questions that has been on the mind of many struggling homeowners is whether or not their mortgage is recourse or non-recourse?  In other words, if the are foreclosed on or enter into a short sale where they don’t completely pay-off the outstanding mortgage balance, can the lender come after the difference?

I received an email from a local real estate attorney to clear up this question.  The attorney has asked that their name not be identified in the post but here is his response:

The short answer to your question is that there is no short answer.  Let’s start with the fact that it’s a bit misleading for anyone to think of characterizing Oregon, or for that matter, Washington or California even, as strict recourse or non-recourse states.  That is because what a lender can or can’t do is in many respects dependent upon (1) the nature of the collateral, as well as the changing nature of the collateral, (2) whether any of the borrower, or the borrower’s spouse, or borrower’s minor children,  is occupying the subject property as the principal dwelling, and if so, at what point during the foreclosure process, as that can change the available remedies; and (3) the nature of the borrower – i.e, is it an individual, or an entity.

So, here are some general guidelines:

1.  Every loan in Oregon, unless specifically negotiated in advance as being non-recourse (which generally only comes into play in the commercial context, and today, not even in the commercial context), is recourse.  Whether loan is secured by the borrower’s principal dwelling, or by commercial property, is immaterial.  If for whatever reason the lender chose to disregard the collateral, it could sue on the promissory note on an unsecured basis, obtain a judgment, and execute on that judgment against all assets of the parties who signed the note.  By doing so, however, the lender loses the priority security interest it held, through the trust deed, so you generally don’t see this happen, but legally it can happen.

2.  If the loan is secured by a trust deed defined as a residential trust deed, this is a trust deed which encumbers the primary dwelling of the borrower, or the borrower’s spouse, or any minor children, at the time of commencement of the foreclosure proceedings. If the trust deed is a residential trust deed, then the lender can not obtain a deficiency claim against the parties obligated under the note, whether the lender did a nonjudicial foreclosure or a judicial foreclosure.  However, note the timing issue.  Take the example: the trust deed is a residential trust deed.  The lender starts a nonjudicial foreclosure – that take about five months or so.  Then shortly after the foreclosure has started, the borrower moves out of the subject property, and rents it out to get some rental income.  The lender finds out.  The lender could stop the nonjudicial foreclosure and start a judicial foreclosure, and if the judicial foreclosure is started before the borrower figures it out and somehow figures out how to move back into the subject property and occupy it as the primary dwelling, the lender can now obtain a deficiency claim against the borrower, because the trust deed is no longer a residential trust deed.  We advise borrowers that the only way to be sure that a deficiency can not be claimed, if the trust deed was a residential trust deed at the time the foreclosure process started, is to continue to occupy the subject property until the foreclosure sale or other transfer event, such as a short sale.  However, if the trust deed was a residential trust deed when the foreclosure started, even if it becomes a rental property before the foreclosure sale, if the lender still proceeds with the nonjudicial foreclosure, then there is no right to a deficiency.  So the next rule:

3.  The choice of remedy is significant.  Whether the subject property is a residential trust deed or not, if the lender elects to proceed with a nonjudicial foreclosure, and conducts the sale, there is no right to a deficiency claim against the borrower.

4.   If the property is not secured by a residential trust deed, the lender can proceed with a judicial foreclosure and obtain a deficiency claim against the borrower and any guarantors.

5.  If the property is owned by an entity, and the borrower is an entity, such as a limited liability company, by definition it can’t be a residential trust deed, even if the owner of the limited liability company occupies the property as the primary dwelling, because the owner isn’t the borrower – the limited liability company is, so the lender can pursue a judicial foreclosure and obtain a deficiency claim against the borrower entity as well as by any guarantors – usually the owners of the limited liability company.

6.  If the trust deed is a residential trust deed, if the lender pursues a judicial foreclosure, while it can not obtain any deficiency against the borrower, it can obtain a deficiency against any guarantor of the loan.  So, for example, son buys a home, get a loan, secures the loan by a residential trust deed against the home, and his parents provide a personal guarantee of the loan, the lender could proceed with a judicial foreclosure against the son and the parents, get a judgment, conduct a foreclosure sale, get a deficiency, and while not able to go after the son for a deficiency, can go after the parents for a deficiency.

Clear as mud?