August 17, 2015

The Deed of Trust Act is Dead. Long Live the Deed of Trust Act?




Through various amendments to Washington’s Deed of Trust Act (“Act”), and the subsequent court decisions that have followed, the potential for a non-judicial foreclosure (also known as foreclosure by advertisement and trustee’s sale) on residential property in Washington has all but vanished.  Why should Washington residents care?  Because a judicial foreclosure costs them money–both in the loans that still exist, and in new loans that are offered.


A cost of a non-judicial foreclosure to existing borrowers was limited to the loss of their home.  No additional direct costs were exacted by the current lender.  Sure, some ancillary costs came along with it, such as the hit to individual credit scores, but monetarily the foreclosure brought an end to that obligation. 


Under the system that now exists, mortgage companies have to go through the judicial foreclosure process to foreclose on a residence.  Judicial foreclosure requires a court proceeding.  The mortgage companies can seek a “deficiency judgment,” which leaves the borrower and former homeowner responsible for all money that the mortgage company did not recoup in the judicial sale, plus all of the costs and fees, including attorney fees that were incurred by the mortgage company to foreclose on the property.  For someone who just lost their house to foreclosure, this total amount can be staggering, as foreclosed houses generally sell at distressed prices and not at fair market value.


The cost to new borrowers also adds up to a significant amount.  A brief perusal of the interest rates charged in non-judicial foreclosures versus judicial foreclosures shows judicial foreclosures at a higher interest rate by a difference of about .10%.  One tenth of one percent may not seem like much.  But based on a $400,000 loan, the extra amount paid is $25 a month.  As interest rates grow, the difference grows.  The total paid on a 30-year fixed mortgage is approximately $9,000. 


When considering the number of mortgages in the state of Washington, the total cost to the homeowners and the state for judicial foreclosures is staggering.  How did it get to be this way?  The Act started out with the best of intentions, of course.  However, once the great recession hit, the legislature attempted to fix the Act’s shortcomings, with unscrupulous lenders taking advantage of the unwary as the largest cause for the legislature to act.

Unfortunately, the Legislature went too far.  The “feel good” measures coupled with inartful drafting of the legislation created an uneven act that the appellate courts were forced to interpret.  For instance, the requirement that lenders mediate before foreclosing seemed like a good idea at first glance.  But the extra time it takes to comply with the extra notices and mediation coupled with the Department of Commerce directive to find a certain percentage of lenders mediating in bad faith led to the first wave of lenders opting for judicial foreclosure.  The inconsistent, contradictory language led to the appellate courts causing the demise of almost the entire remainder of non-judicial foreclosure cases.  Very few mortgages are now eligible for non-judicial foreclosure and those that are eligible seldom go through the non-judicial process because of the administrative burdens.


Now, the legislature has an opportunity to go back to the drawing board and strike an even balance between the lenders and borrowers.  Shortening, not doing away with, the notice requirements would be a good start.  Changing the mediation process to be fair to both sides would be another.  Likely that would mean getting the Department of Commerce out of the middle.  Consistent language between the various sections would also be a positive start. 


By making these and other changes, the Washington State Legislature can bring reason back into the Deed of Trust Act, allowing non-judicial foreclosures, saving families from deficiency judgments, and in effect lowering the interest rates for borrowers in the state of Washington.  The $25 a month per household being spent in Washington could provide a nice economic boost.  It is certainly a better alternative than potentially paying a deficiency judgment for years to come.

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