One of the common statements made to me when new clients call to discuss their foreclosure, is the following: “I don’t care if there is a deficiency when the bank forecloses on my property because Washington is a non-recourse state,” implying that he or she is free of having to pay a deficiency should the house sell for less than what is owed. The response I always give to that proclamation is “it depends.”
Banks may choose between two options when deciding how to foreclose on property. The most common (by far) is the non-judicial foreclosure. This type of foreclosure is straightforward: the bank uses its leverage under their Deed of Trust on the home (think of the Deed of Trust as a very powerful lien…which it is) to compel a sale by the trustee that services the Deed. This sale is called a trustee sale. Once the property is sold to an innocent third party purchaser at the trustee sale, the bank is barred from collecting any deficiency on the collateral. For example, if your home is worth $300,000 and the bank forecloses on the property through the non-judicial foreclosure method and nets only $200,000 in the sale, the balance of the $100,000 cannot be collected from the borrower. Thus, while the credit standing of the borrower may have taken a big hit, he or she no longer has to worry about satisfying that debt obligation.
As you might expect, foreclosures are not always that rosy: there lurks another option that banks may use at their discretion: the judicial foreclosure.
A judicial foreclosure is executed through the courts and is easily identified because it is an actual lawsuit against the homeowner. How is this possible, you ask? Why doesn’t the bank just go after the Deed of Trust and sell the property? A judicial foreclosure goes one step further than regular non-judicial foreclosure: it not only allows the bank to compel a sale of the property, but it provides an avenue by which the bank can obtain a deficiency judgment for whatever balance was lacking in the sale. Going back to our example above, if that individuals home is sold for the $100,000 deficiency, the bank can move the court to have that sum converted into a judgment against you. Judgments are nasty because they become automatic liens on all real and personal property. With a judgment a bank can garnish wages and pursue other avenues against the borrower’s assets.
It is still a mystery to me why some people are pursued via judicial foreclosure rather than non-judicial foreclosure. However, if I had to guess why they choose that option, I would have to say it’s because they suspect (right or wrong) that the borrower has money to cover the judgment.