Judicial Foreclosure and Nonjudicial Foreclosure: the Differences
By Thomas L. Dickson, Esq.
Used together, a promissory note and a deed of trust embody the most common type of mortgage. The deed of trust is recorded on the borrower’s title securing the note and prioritizing the loan’s position on title. There are only two ways to foreclose on this mortgage: judicially and nonjudicially.
Judicial Foreclosure and Redemption
A judicial foreclosure is processed through the courts by filing a complaint for a judgment on the note which accelerates the unpaid balance, and orders the sheriff to sell the property at auction. Because the lender obtains a judgment, the remedies can be any type of collection, foreclosure being one of them. When the sale occurs, interest from default until the date of the auction, costs, legal fees, and other statutory expenses will be part of the sheriff’s opening bid. If, after the sheriff’s sale, the bank takes back the title because no third-party bid, there is an eight-month redemption period from the sale date wherein the loan owed to the bank may be paid off, and the borrower takes full title to the property once again. RCW 6.23.020(1). During the redemption phase the borrower may remain in the foreclosed premises with no rental obligation to the bank or exposure to eviction.
If a third-party places the highest bid at the sheriff’s auction, the redemption period is still in force but if the borrower redeems, he or she must pay the third-party the amount it paid to purchase the property at the sheriff’s sale plus the below costs. As part of either redemption scheme, all post-auction fees and costs incurred by the judgment creditor must be paid, including assessments or taxes, interest from the time of the sale until redemption, prior liens on the property paid by the purchaser provided they were necessary to protect the interests of the judgment debtor or a redemptioner, etc. RCW 6.23.020(2).
If a third-party bids but offers less than the full judgment amount, the bank is entitled to a deficiency judgment which is the difference between the judgment amount and the final bid. RCW 61.12.070. For example, if the original judgment is $200,000, and property sells for only $125,000, the bank retains a deficiency judgment against the borrower for $75,000. It is collected as a personal judgment, where the plaintiff employs wage garnishment, levies on bank accounts or tangible personal property, and/or foreclosure on other real property owned by the debtor.
To keep deficiency judgments under control, Washington foreclosure law allows an “upset price” as part of the judgment. For example, the law prevents a foreclosing plaintiff to accept a bid unreasonably lower than the property’s fair market value because it would leave the debtor with an exceptionally high deficiency judgment. Thus, the court, “in ordering the sale, may in its discretion, take judicial notice of economic conditions, and after a proper hearing, fix a minimum or upset price to which the mortgaged premises must be bid or sold before confirmation of the sale.” RCW 61.12.060. Effectively, then, the property’s fair market value is added to the judgment offsetting the deficiency judgment. If the value is high enough, it may eliminate the deficiency altogether.
Nonjudicial Foreclosure on the Deed of Trust
The closest a nonjudicial foreclosure gets to a court of law is the courthouse steps, but not inside. Where the judicial method requires filing with the superior court, nonjudicial foreclosure is conducted by the beneficiary on the deed of trust (the lender) against the grantor (borrower) independently of any court proceedings. Instead of focusing on a judgment against the promissory note, the nonjudicial procedure exercises rights in the deed of trust allowing the lender to foreclose directly against the borrower’s title. Usually an attorney for the lender assumes the position of trustee of the deed of trust, and serves a Notice of Default on the borrower, followed thirty days later by a Notice of Trustee’s Sale. RCW 61.24.031 and RCW 61.24.040.
Unlike the default notice, the trustee’s sale notice is recorded, and provides a date for the trustee to sell the property on the courthouse steps, always on a Friday, always at 10:00 a.m. RCW 61.24.040(f). The auction date is no sooner than 90 days from recording the Notice of Trustee’s Sale, making service of the notices of default and of trustee’s sale a 120-day event. Like a sheriff’s sale, the trustee commences the auction with a starting bid from the lender representing the borrower’s default, then entertains third-party bidders at the auction.
No Deficiency or Redemption under Deed of Trust Foreclosure
If a third-party bids less than the bank’s opening bid but the banks accepts it notwithstanding, there is no deficiency against the borrower. Put a better way, there is never a deficiency in nonjudicial foreclosure. RCW 61.24.100(1). Nor does a redemption right exist under the Deed of Trust Act, “after a trustee’s sale, no person shall have any right, by statute or otherwise, to redeem the property sold at the trustee’s sale.” RCW 61.24.050(1). Because there is no redemption, the buyer has an immediate right to possession, although the trustee has up to fifteen days to record the trustee’s deed (which in practice is about three to four weeks). RCW 61.24.100(1).
Creditor’s Election on Type of Foreclosure. Nothing in Washington law forces foreclosure attorneys to use one or the other method to foreclose. Creditors can effectively choose, though nonjudicial is the most common because the court system is avoided. However, for various reasons judicial foreclosure is also used. For example, banks are increasingly frustrated at Foreclosure Fairness Acts imposed by the state to assist debtors in challenging or at least slowing the four or five-month pace of a deed of trust foreclosure.
Under RCW 61.24.160 and 163, a good faith duty is imposed on lenders to attempt resolution of the delinquent mortgage with the debtor, including mediation. This process, identified in the Notice of Trustee’s sale, interrupts or can postpone indefinitely the four or five-month stride of the nonjudicial foreclosure. Because it is faster and less complicated, some lenders side-step the mediation programs by entering the court system, and bringing a summary judgment in foreclosure as described above. They may even waive the deficiency if they believe the property’s equity will cover the judgment at the sheriff’s sale.
Under either foreclosure process, when continued default is inevitable, the debtor and his or her attorney are well-advised to start early in making the best out of a bad situation. In summary, there are five primary differences between the two foreclosures. The judicial version starts in the courts, but carries with it the debtor’s right of redemption and availability of an upset price. A deficiency judgment is available to the lender, and it may elect what type of collection procedure it desires, including foreclosure. The nonjudicial course stays out of the courts completely, and bears no redemption right or deficiency. Its end result is foreclosure alone.