Homeowners, and even attorneys, are often confused about the difference between a residential and a non-residential trust deed under Oregon law. The distinction is not intuitive and the Legislature has substantially amended the statute that defines “residential trust deed” twice since the foreclosure crisis began.
What is a Residential Trust Deed?
Under current law, a trust deed is “residential” if the trust deed is on property:
upon which are situated four or fewer residential units, one of which the grantor, the grantor’s spouse or the grantor’s minor or dependent child occupies as a principal residence at the time the trust deed is recorded or, in the case of a purchase money loan, one of which is intended to be the principal residence of the grantor, the grantor’s spouse or the grantor’s minor or dependent child after the trust deed is recorded.
A close reading of the definition shows that it is not the residential character of the property that matters most but the actual or intended use of the property at a particular time. Under the old statute, the use was determined at the time foreclosure commenced. Unless and until a foreclosure commenced, the character of the trust deed could not be determined. Under the current definition, the character of the trust deed is fixed at the time the trust deed is recorded and depends on whether the property is or is intended to be used as a principal residence.
In other words, it does not matter if the property is used today as a rental rather than a home. The question is whether, at the time the trust deed was recorded, the borrower was using or intended to use the property as a principal residence.
Why the Distinction Matters
The character of the trust deed matters because, under Oregon law, residential trust deeds are generally treated more favorably than non-residential trust deeds under the anti-deficiency and foreclosure mediation statutes.
When a lender elects to foreclose non-judicially, the lender gives up the right to collect any amount still owed by the borrower if the sale proceeds are insufficient to pay off the loan. The outcome does not depend on whether the trust deed is residential or non-residential. But when a lender elects to foreclose judicially, the anti-deficiency statute applies only if the trust deed is residential.
Similarly, the requirement to participate in the Oregon Foreclosure Avoidance Program, a mandatory foreclosure mediation program, applies only to residential trust deeds. A lender is not barred from requesting mediation for a non-residential trust deed, but the lender is not obligated to request mediation either.
For example, assume that Barry Borrower takes out a loan to purchase a rental property as an investment. Years later, Barry moves into the property and uses it as his primary residence. Because the property was not used as Barry’s principal residence at the time the trust deed was recorded, if Barry defaults he will not be entitled to request mediation with his lender. And if the lender decides to foreclose judicially, Barry could be liable for the deficiency if the sale proceeds are insufficient to pay off the loan.
Meanwhile, Harry Homeowner takes out a loan to purchase a new home. Years later Harry moves into a bigger house and rents out the old home. This time the trust deed is residential because Harry intended to use the property as his personal residence at the time the trust deed was recorded. Even though today the property is a rental, if Harry defaults he will have the opportunity to participate in mediation and, even if his lender forecloses judicially, Harry will not be liable for any deficiency.
An Unanswered Question
When the Legislature amended the definition of “residential trust deed” in 2013, the Legislature did not state whether the new definition applied retroactively or merely prospectively. For homeowners with judicial foreclosures pending when the definition became effective, there remains uncertainty about whether the new definition will apply. However, since most borrowers are unable to repay any deficiency and are likely to file bankruptcy if a judgment is entered against them, most lenders have taken a practical approach and agreed to waive a possible deficiency in exchange for the borrower stipulating to entry of the foreclosure judgment.