In a recent post we explained how Oregon’s anti-deficiency statute applies after a judicial or nonjudicial foreclosure. A reader asked whether the anti-deficiency statute also applies to short sales and deeds-in-lieu. The answer, sadly, is ‘no.’ The anti-deficiency statute, ORS 86.770(2), expressly applies only “after a trustee’s sale” or “after a judicial foreclosure of a residential trust deed.”
Unlike a foreclosure, a short sale is a voluntary sale of real property to a third party. The sale is “short” because the lender agrees to release its lien on the property without receiving full payment of the debt. The borrower will still owe the balance of the loan unless the lender also agrees to forgive the debt. If the lender will not agree, then the borrower can always walk away and let the lender foreclose.
Similarly, a deed-in-lieu is a voluntary transfer of the property to the lender in lieu of foreclosure. Oregon law does not require the lender to forgive the debt as part of the transfers, so the agreement must provide for debt forgiveness or, just like a short sale, the borrower may still owe the lender. If the lender refuses to forgive the entire debt, the borrower can always walk away and let the lender foreclose.
In fact, so long as the trust deed is residential, the borrower can always avoid a deficiency by walking away if the lender demands a “contribution” or refuses to cancel the debt. Of course, liability for the residual debt is only one consideration a struggling homeowner must take into account. Other considerations include the potential tax liability and how long the borrower will have to wait to buy another home.