Can Banks Seek Deficiency Judgment in Washington State?

Over the weekend the Washington Post published a story about former homeowners who find themselves owing money on a home they lost to foreclosure years earlier: Lenders seek court actions against homeowners years after foreclosure. It’s a process called “deficiency judgment,” and it’s not really news to anyone who has paid attention to housing over the last few years. Many similar stories have been published, such as this 2010 CNNMoney story: You lost your house – but you still have to pay.

However, since this is obviously a topic of interest that we haven’t covered here before, I thought it would be worth explaining when you can and can’t find yourself at risk of deficiency judgment in Washington State. Note that this is not legal advice, just my best interpretation of the available information on the subject.

State Capitol at Olympia, WashingtonThe most authoritative resource I found that details the nuances around deficiency judgment in Washington is this page on short sales from the Washington State Department of Financial Institutions. You can also go straight to the law and read the Revised Code of Washington, specifically RCW 61.24.100.

You could face deficiency judgment in the following scenarios:

  • You had loans with two banks but only one foreclosed. The other bank may pursue deficiency judgment.
  • Your home was foreclosed in a judicial foreclosure (most foreclosures in Washington are non-judicial via a Trustee Sale).
  • You sold your home in a short sale and did not receive a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
  • You gave your home back to the bank via a deed-in-lieu of foreclosure and did not receive a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
  • You trashed your home so thoroughly as to reduce its “fair value.”
  • You collected rent for your home after the foreclosure sale.

You should not face deficiency judgment in the following scenarios:

  • You had just one lender, and they foreclosed in a non-judicial foreclosure (via a Trustee Sale).
  • You sold your home in a short sale and received a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
  • You gave your home back to the bank via a deed-in-lieu of foreclosure and received a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.

Again, this is not legal advice, and I make no guarantee that the scenarios above are comprehensive, but this should be a guide to at least give you an idea if deficiency judgment is a risk you might be exposed to.

For the most part deficiency judgment is relatively rare in our state, but if you’re worried about it and any of the scenarios in the first list above apply to you, you should contact an attorney (I recommend both Craig Blackmon and Marc Holmes).

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

10 comments:

  1. 1
    3rd Generation says:

    Ah.

    Legal ‘opinions’ now from the Great Unwashed.

    Perfect.

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  2. 2
    Erik says:

    RE: 3rd Generation @ 1
    Tim is just trying to help us out man.

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  3. 3
    Saulac says:

    There is a related discussion on the open tread recently.
    http://seattlebubble.com/blog/2013/06/17/weekly-open-thread-2013-06-17/
    Hope it is OK to link it here. Hope to hear more from others.

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  4. 4
    erik says:

    RE: 3rd Generation @ 1
    Calling us people that have to work for what we have “the great unwashed” is something you trust fund babies should leave at the country club. Especially calling tim that!

    Rate this comment: Thumb up 0

  5. 5
    ricklind says:

    RE: 3rd Generation @ 1
    And quick twitch smart azzholio comments from a clueless dink trollio.

    Fel Temp

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  6. 6
    ricklind says:

    This is good, stimulating, educational content. Last I knew, this was a site for discussion about real estate in Seattle and about real estate and related topics in general. I have been a member here for only 3 years but appreciate learning from The Tim’s topics and particularly from the Open Threads.

    Fel Temp Reparatio

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  7. 7
    whatsmyname says:

    RE: 3rd Generation @ 1

    This is why you want to use “canaille” instead. They never speak French; wink, wink.

    Rate this comment: Thumb up 0

  8. 8
    S-Crow says:

    I can’t recall any short sales our office has been involved with over the years that has ever had an open ended question regarding debt forgiveness of a 2nd mtg with the exception of our local BECU. All the 2nd mtg lenders had language in the short sale approval removing all liability of the borrower and recorded reconveying/releasing the 2nd mtg. However, reporting the amount forgiven to the IRS is certain although tax liability was a question of the Mortgage Forgiveness Debt Relief Act of 2007 and subsequent extensions Congress passed through 2013.

    From the IRS: “The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

    This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition”

    In my opinion, this program regarding encouraging short sales (thus benefiting sellers and all those who profit from a sale including me) along with HARP/DU REFI PLUS/OPEN ACCESS, FHA/VA Streamline (no income verification or appraisal required) relief refinance programs coupled with abnormally low interest rates is the primary reason I have concluded that our market is heavily subsidized and the “hot market” has me skeptical. Although not knowable for certain, it is probable that without this stimulus the financial health of citizens and economy would be quite dire. On the other hand, when 71% of all purchase transactions our office closed in 2006 were 100% financed, it led me to believe the market was not normal then.

    Off topic Hoop Fans: San Antonio wins in overtime tomorrow for the Championship. Love em or hate em, Ray Allen has ice in his veins—his trey to tie it up last night was for the ages.

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  9. 9

    Great stuff, Tim, and thanks for the shout-out! I suspect you and I could talk about some of the finer points of the post, but overall right on and great information for homeowners/debtors in this state.

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  10. 10

    I’d like to hear from the bankruptcy/legal community to see if we are seeing second mortgage lenders pursuing homeowners after the first mortgage loan went through non-judicial foreclosure….Are people being pursued for repayment of the second after foreclosure?

    What about the judicial system? Are we seeing more banks/lenders decide to foreclose judicially?

    Where’s Kary when we need him?

    I will ask Jonathan Smith to pop in and help out if he can.

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