Did You Know? Oregon’s Anti-Deficiency Statute Protects Borrowers After Judicial Foreclosures of Residential Trust Deeds
In Oregon, a trust deed may be foreclosed judicially or nonjudicially. After a nonjudicial foreclosure, the borrower is not personally liable for any shortfall if the proceeds are insufficient to pay off the full debt. The protections of ORS 86.770(2) apply even if the foreclosed property is a rental, a second home, or commercial property.
After a judicial foreclosure, whether the anti-deficiency statute applies depends on whether the foreclosed trust deed is a “residential trust deed.” In mid-2013, the definition of “residential trust deed” changed, extending protection to more homeowners while increasing certainty for lenders.
Under current law, a trust deed is residential if both of the following are true. First, the property must have 1-4 residential units. A unit is residential if it is designed for residential use. Second, the property must have been (or was intended to be) the principal residence of the grantor, the grantor’s spouse, or the grantor’s minor child at the time the trust deed was recorded. Most loan documents state whether a loan is for a principal residence, a second home, or a rental.
In plain English, if the loan was for the borrower’s principal residence, the lender is not entitled to a deficiency judgment after foreclosure even if the property is later used as a rental or a second home. If the foreclosure proceeds are not enough to pay off the loan, the borrower owes nothing.
Unfortunately, borrowers have less protection for second mortgages. In Oregon, only “piggyback” seconds are protected. The borrower will not be a liable for a shortfall after foreclosure if three criteria are met: the second mortgage was taken out at the same time as the first mortgage, from the same lender (or an affiliate), and was used to purchase the property. For example, the old 80-20 loans used to avoid private mortgage insurance count if the same lender was used for both loans. Home equity loans do not count.
Homeowners facing foreclosure should consult with an attorney to determine whether they may be liable for a shortfall after the sale and what they can do to avoid or reduce their exposure.