This post originally appeared on Rain City Guide.
For Part 3 in my series I will talk about the local (i.e. Washington State) implications for the national foreclosure mess. Before I do so, though, and as a last word on the “big picture” I recommend reading this NYTimes piece that appeared in the Sunday Week in Review.
Now, onto our own Washington. This state is primarily a “non-judicial foreclosure” state. Virtually every residential buyer purchases a property by signing a promissory note (the document that creates the debt to the bank) and a deed of trust (the document that pledges the house to secure the debt). When the borrower defaults, a lender has the option of foreclosing non-judicially (where the trustee under the deed of trust exercises his legal authority to sell the property in order to satisfy the debt) or foreclosing judicially (lender files a lawsuit and forecloses the deed of trust in a civil action).
Both methods lead to the sale at auction where the proceeds are applied to the debt. However, there are important differences: (1) in a non-judicial foreclosure, the debt being foreclosed is extinguished even if it remains unpaid after the auction; (2) in a judicial foreclosure, once the property is sold a judgment is entered against the borrower for the difference (i.e. the borrower remains liable for the full amount borrowed); and (3) the auction following a judicial foreclosure is less likely to get the “true market value” of the property when sold (because the borrower has a right of redemption following a judicial foreclosure). Also, a nonjudicial foreclosure is quicker and cheaper for the bank.
Given these realities, the vast majority of foreclosures in this state are non-judicial. A borrower always has the option of suing to stop a non-judicial foreclosure if the lender in reality does not have the right to foreclose. Thus, unlike those states where judicial foreclosure is prevalent, here in WA borrowers have the ability to stop a foreclosure if some “Robo-signer” made an egregious error and the bank is attempting to foreclose on the wrong house. In contrast, borrowers in judicial foreclosure states have no such option — they are already in court! They’re getting screwed WITHIN the civil justice system, so obviously the civil justice system cannot act as a brake on the process. Accordingly, since our borrowers have the right to escalate and seek the protection of the courts, the significance of lying “robo-signers” is greatly reduced in this state. That said, non-judicial foreclosure still requires statements made under penalty of perjury, so “robo-signers” are not completely off the hook.
Second, the vast majority of foreclosure auctions lead to repossession of the property by the bank. The bank then resells the property by listing it on the MLS (this is an “REO”, for “Real Estate Owned”, property). At the resale, the buyer almost always obtains a policy of title insurance, which then protects the purchaser from any claim to the property as a result of some irregularity in the foreclosure process. A local title expert believes that, as a result, there will be little impact on the local market.
Finally, the bad news: lenders did suspend their foreclosures here in WA (although, sadly, I am unaware of the current state of affairs in this regard), and investigations are continuing. Any delay in foreclosures just delays the inevitable downward pressure on prices until the excess inventory is absorbed by the market. So while we managed to avoid the worst of the “foreclosure mess,” we will still feel its effects.