Foreclosure

Key Takeaways

• Foreclosure is the process a lender uses to force the sale of property pledged as security when the borrower defaults, applying the proceeds to the debt.
• Nonjudicial foreclosure runs through a trustee under a power of sale and needs no lawsuit; judicial foreclosure is a court action ending in a court-ordered sale.
• In Washington, a residential loan secured by a deed of trust is normally foreclosed nonjudicially by trustee's sale under chapter 61.24 RCW.
• A Washington borrower may reinstate the loan and stop a trustee's sale at any time before the eleventh day preceding the sale date.

What It Means

Foreclosure is the legal process by which a lender forces the sale of real property pledged as security for a debt, after the borrower defaults, and applies the sale proceeds to what is owed. It is a form of involuntary alienation: Title moves without the owner agreeing to move it.

Two routes exist, and which one applies depends on the security instrument rather than on the lender's preference. A mortgage is foreclosed judicially, meaning the lender files a lawsuit, obtains a decree, and the property is sold under court supervision. A Deed Of Trust contains a power of sale, which lets a neutral third party, the trustee, sell the property at public auction after giving the notice the statute requires, with no lawsuit at all. That second route is nonjudicial foreclosure.

The practical differences matter more than the labels. Judicial foreclosure is slower, usually leaves the borrower a statutory period to redeem the property after the sale, and can support a money judgment for any shortfall between the sale price and the debt. Nonjudicial foreclosure is faster and cheaper, and in exchange the lender gives up remedies it would otherwise keep.

How It Works in Washington

In Washington, nearly every residential loan is secured by a deed of trust rather than a mortgage, so foreclosure normally happens by Trustees Sale with no lawsuit. Chapter 61.24 RCW governs the process. Under RCW 61.24.040 the sale may not take place less than 190 days from the date of default, the trustee must record and mail the notice of sale at least 90 days before the sale, publish it twice in a legal newspaper in each county where the property sits, and post it on the property or serve an occupant.

Two provisions do most of the work for a broker helping a distressed seller. RCW 61.24.090 lets the borrower cure at any time prior to the eleventh day before the date set for sale by paying the amount then due plus the trustee's expenses, reasonable fees, and recording costs. On receipt, the proceedings are discontinued, the deed of trust is reinstated, and the obligation stands as though no acceleration had taken place. RCW 61.24.100 then bars a deficiency judgment against a borrower, grantor, or guarantor after a trustee's sale under that deed of trust, except to the limited extent the statute allows for commercial loans.

The sale is final. RCW 61.24.050 provides that after a trustee's sale, no person has any right, by statute or otherwise, to redeem the property sold. Foreclose judicially under chapter 61.12 RCW instead and the lender keeps its shortfall claim, but the borrower gains a post-sale redemption period of one year, or eight months where the creditor has expressly waived any deficiency on property not used principally for agriculture (RCW 6.23.020). Speed costs the lender the Deficiency Judgment, and in Washington most lenders take that trade.

Example

Ray buys in Tacoma with a $340,000 loan secured by a deed of trust. Cascade Savings is the beneficiary and Evergreen Title is the trustee. Ray loses his job and misses the March 1 payment. His monthly payment is $2,150 and his principal balance is $312,400.

On August 4 the trustee records and mails the notice of trustee's sale, setting the sale for November 6. That is 94 days out, clearing the 90-day minimum, and 250 days after the March 1 default, clearing the 190-day minimum. Ray's cure window runs through October 26, the eleventh day before the sale. On October 20 he brings the loan current: eight missed payments at $2,150 each is $17,200, plus $3,400 in trustee's fees and costs, for $20,600. The proceedings are discontinued and the loan continues as though it had never been accelerated.

Now change one fact. Suppose Ray cannot raise the money. The property sells at auction on November 6 for $295,000 against a $312,400 balance, leaving Cascade Savings $17,400 short. Because this was a trustee's sale on a residential loan, RCW 61.24.100 bars the lender from collecting that $17,400 from Ray, and RCW 61.24.050 leaves Ray no right to redeem the house afterward.

Common Mistakes and Exam Traps

• Nonjudicial foreclosure is a trustee's sale under a power of sale in a deed of trust. Judicial foreclosure is a court action on a mortgage. The security instrument decides the route, not the lender.
• A Washington trustee's sale leaves no right of redemption after the sale. The redemption period students remember belongs to judicial foreclosure.
• Reinstating is not the same as paying off. Reinstatement cures the arrears and restores the loan; a payoff retires the entire debt.
• A lender who forecloses by trustee's sale in Washington gives up the deficiency judgment. Speed and the shortfall claim are a trade, not a package deal.