In today's economic environment, rising default rates pose significant challenges for secured real estate lenders. For lenders operating in Washington state, foreclosure and other enforcement actions may become essential to preserving financial interests. This article outlines critical considerations, practical steps, and best practices that Washington state lenders should follow when facing borrower defaults.
Foreclosure Options
Washington state offers two main avenues for foreclosing deeds of trust: judicial and non-judicial foreclosure. The choice between these methods depends primarily on the circumstances surrounding the loan and collateral.
- Judicial Foreclosure
Judicial foreclosure requires filing a lawsuit under RCW Chapter 61.12. Although typically longer and more costly due to court involvement, this process provides judicial oversight beneficial for resolving complex title disputes or issues regarding lien priorities. Judicial foreclosure also allows for deficiency judgments in certain circumstances. It should be noted, mortgages must always be foreclosed judicially.
- Non-Judicial Foreclosure
Non-judicial foreclosure, governed by Washington's Deed of Trust Act (RCW Chapter 61.24), is faster and generally less costly. Conducted by a trustee without court supervision, non-judicial foreclosure mandates strict compliance with notice requirements and statutory timelines. Notably, this approach generally does not permit deficiency judgments, except under specific circumstances involving borrower misconduct, such as property damage or waste.
Choosing between these two paths depends on several factors, including collateral type, potential lien priority disputes, borrower conduct, and the existence of personal guaranties.
Preparing for Foreclosure
Lenders should meticulously organize loan documentation prior to initiating foreclosure. Critical documentation includes:
- Original promissory note (or a valid lost-note affidavit).
- Properly recorded deed of trust accurately identifying all parties and the secured property.
- Any loan modifications, forbearance agreements, or workouts clearly documented and executed.
Incomplete or incorrect documentation can result in procedural delays or legal challenges to foreclosure actions.
Procedural Steps and Potential Borrower Defenses
- Notices and Timelines
Both foreclosure methods in Washington involve stringent statutory notice requirements:
- Under non-judicial foreclosure, a Notice of Default must precede a Notice of Trustee's Sale by at least 30 days. The trustee's sale itself cannot occur until at least 120 days following the recording of the Notice of Trustee's Sale.
- Judicial foreclosures require serving the borrower with a
summons and complaint, obtaining a judgment, and subsequently
providing notice of a sheriff's sale. Judicial sales may also
include redemption periods allowing borrowers the opportunity to
reclaim the property.
For residential properties up to four units, lenders must comply with Washington's Foreclosure Fairness Act, providing borrowers the chance for mediation and foreclosure counseling. Failure to follow these extra measures can invalidate foreclosure actions.
- Common Borrower Defenses
Borrowers commonly assert defenses such as wrongful foreclosure, predatory lending practices, or violations of Washington's Consumer Protection Act (RCW 19.86). Even unfounded claims can significantly delay the foreclosure process. Lenders must maintain detailed records of regulatory and procedural compliance to effectively defend against these tactics.
Regulatory Compliance Considerations
Compliance with state and federal regulations remains paramount during foreclosure proceedings. Key compliance areas include:
- Washington Consumer Protection Act (CPA): Lenders must avoid actions potentially viewed as unfair or deceptive. Violations can result in treble damages and attorney fee awards to borrowers.
- Fair Debt Collection Practices Act (FDCPA): Applicable when third-party collectors or attorneys communicate with borrowers, ensuring communications comply with federal debt collection standards.
Establishing rigorous compliance protocols reduces the risk of regulatory violations and provides evidence against borrower allegations.
Post-Foreclosure Responsibilities and Receivership
Foreclosure completion results in new responsibilities, particularly if the lender acquires the property via a successful credit bid.
- Acquiring and Managing Foreclosed Property
Upon acquiring title, lenders must secure, maintain, and ensure compliance with state and local ordinances. Properties with occupants require adherence to landlord-tenant laws, including formal eviction processes. Many lenders engage professional property management to efficiently manage these responsibilities post-foreclosure.
- Asset Disposition Strategies
Once ownership is obtained, lenders must decide between selling the property immediately or holding it within their Real Estate Owned (REO) portfolio, depending on market conditions and institutional capacity for property management.
- Appointment of a Receiver
Under RCW 7.60, lenders can petition courts to appoint receivers to manage distressed properties during foreclosure. Receivers assume responsibility for collecting rents, maintaining property conditions, addressing necessary repairs, and potentially facilitating property sales under court supervision, thus preserving asset value throughout the foreclosure process.
Foreclosure Alternatives
Alternatives to foreclosure, such as deeds in lieu or short sales, provide additional avenues to resolving default scenarios and may offer more expedient and less costly outcomes.
- Deed in Lieu of Foreclosure
In this arrangement, borrowers voluntarily transfer property ownership to lenders in exchange for debt release. Considerations include potential junior liens, title clarity, and carefully documented negotiated terms to ensure the transfer achieves intended outcomes.
- Short Sale
Short sales involve borrowers selling property for less than the outstanding loan balance with lender approval. Such sales require careful coordination among lenders, borrowers, and potential junior lienholders. This alternative can minimize lender losses, reduce asset-management burdens, and mitigate reputational risks associated with foreclosures.
Conclusion
Washington lenders facing borrower defaults must navigate complex foreclosure laws with diligence and strategic foresight. Thorough documentation, careful compliance with statutory processes, and awareness of borrower defenses and regulatory pitfalls enhance outcomes. By proactively considering alternatives to foreclosure and carefully managing post-foreclosure responsibilities, lenders can better protect their financial interests and navigate the challenges inherent in the enforcement and foreclosure landscape.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
