Wednesday, March 10, 2010
Is Washington a non-recourse state? Can deficiency judgments attach to residential property owners whose property is lost in foreclosure or sold as a short sale?
Washington is a non-recourse state but the answer to this question is not simple. If the first position lien holder non-judicially forecloses the mortgage on seller's residence, that lien holder cannot take a deficiency judgment. A non-judicial foreclosure is a foreclosure that occurs without lender filing a lawsuit against debtor to foreclose the mortgage. The overwhelming percentage of all foreclosures in Washington state are non-judicial.
However, if the first position lien holder judicially forecloses a mortgage, the lien holder can take a deficiency judgment. Of course, a judicial foreclosure means that lender did file a lawsuit against debtor to foreclose the property. Agricultural property must be judicially foreclosed.
Any lien holders who are junior or subordinate to the lien holder who forecloses on a property, judicially or non-judicially, can still seek recovery of any outstanding amounts owing from seller to the junior lien holder after the foreclosure sale. The junior lien holder's rights do not take the form of a deficiency judgment, but junior lien holder can, nevertheless, seek recovery of all amounts still owing.
In a short sale situation, the term "deficiency judgment" has no application. However, if any secured lender does not specifically discharge seller from the obligation to repay the amount not repaid through the proceeds of sale, then lender can pursue collection of the unpaid amounts from seller, after closing. Seller may or may not have a defense to lender's collection efforts, based on seller's situation. This is true of senior and junior liens. Just because the lender "approves" the short sale does not mean that lender discharges the remaining debt. An obligation to repay the outstanding balance to a secured creditor can survive closing of a short sale, even if secured lender releases the security agreement.
Agent should not attempt to counsel sellers on any of the information provided in this answer. Agent is not licensed to do so. Rather, if seller is in foreclosure or considering selling short, agent should advise seller to seek legal counsel before making any final decisions about how to proceed.
Hotline Attorney Annie Fitzsimmons