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| What is foreclosure? |
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Foreclosure is the legal process a lender initiates to force the sale of a mortgaged property when the borrower has not met the terms of the mortgage. Foreclosures can also be initiated by others having a lien on your property such as the county if you don't pay property taxes.
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| How does the foreclosure process work? |
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There are two common types of foreclosure processes in Oregon - judicial and non-judicial. The most regularly used process in this state is the non-judicial, where the document securing the loan is a deed of trust. The parties involved are the financial institution or beneficiary, which is the institution you owe the money to; the trustee, which is the neutral party to whom you conveyed or transferred temporarily the title of your house to be held in trust until your loan is paid off; and you as a borrower or trustor/grantor.
One of the most important components of the foreclosure process is the proper procedures of notification. For purposes of illustration, we will briefly discuss the process of foreclosure by "advertisement and sale," which will start if you, the homeowner, are not making your mortgage payments as agreed and they have been continuously late for at least 60 to 90 days. After trying to contact you to have you bring your mortgage payments current, the financial institution will give instructions to the trustee to start the foreclosure process or, in lending jargon, "accelerate" the loan. First, the trustee will send out a notification of sale to you and all parties with an interest in the property. This notification lets you know your home is in the foreclosure process and it will be filed in the county or counties where your house is located. At this point the information about the loan in default and the foreclosure process becomes public information.
The notification of sale should include the following:
- Your name(s) and address, the names of the trustee and financial institution.
- The legal description of the property and often the commonly known address
- Information about the records within the county where the notification of sale has been recorded
- The reason why your house is in foreclosure
- The total amount(s) owed
- The decision made to sell the property to satisfy the debt
- The date, time and place of the sale
- Your rights under state law to stop the foreclosure process if you bring your loan current, including paying expenses incurred by the financial institution to cover the foreclosure process.
You have the right to reinstate your loan by bringing your loan current, in addition to paying the expenses mentioned above, but you should do this no later than 5 days before the sale (auction date) of the house.
At least 20 days prior to the sale of the property, the trustee should publicize for the last time the sale/auction in a local newspaper in the county or counties where the property is located. The publication will also include the date, time and place where the sale of the property will take place.
The buyers of the property will be entitled to take possession of the property ten (10) days after the auction date. Anyone interested, including yourself, may present a bid to buy the house.
Effective June 9, 2008, a new state law - the Mortgage Rescue Protection Act - requires trustees to provide homeowners a "notice of home loss danger." The trustees are required to provide this notification to the homeowner at the same time or before the required notification that the house is in foreclosure.
The purpose of the notice is to promptly and clearly notify homeowners who occupy the property as their primary residence, about the risk of losing their homes and, if possible, what homeowners could do to try to save their homes. The notification also should include a toll-free number where homeowners can call to get information about approved non-profit organizations that provide foreclosure prevention counseling programs in different areas of the state. Also, the law and the notice provide homeowners with the opportunity to seek legal assistance if they meet the definition of low income under federal guidelines. For more information on foreclosure prevention counseling and legal assistance, please see the resources section of this publication or call the telephone numbers provided in the required notifications. If you receive such notification, we strongly recommend calling the toll-free number provided and seek help from an approved counselor or legal assistance in your area. Also, you can find the contact information in the resources section.
Also, if you do not pay your annual property taxes to the county or counties where your house is located, after three years of unpaid property taxes, the county will start the foreclosure process.
Proper procedures of notification must be followed. You will receive in your annual property tax statements the notification about when your house is subject to foreclosure.
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| What if my house sells for less than I owe? |
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If your house is sold at auction or is transferred to the lender and the amount for which it was sold or transferred is not enough to cover the balance of your loan, the financial institution, with certain exceptions, may have to cancel or forgive the balance between the fair market value of the house and the amount you owe. This balance or deficit is also known as "cancellation of debt." The institution will file the applicable IRS forms with the amount(s) owed and other relevant information. You will receive a copy of the applicable 1099 form(s) in reference to the amount "forgiven." With certain exceptions, you may have to include this amount as part of your income when you file your income taxes. Talk to a tax adviser about the potential impact on your tax filings.
A recent law, the "Mortgage Forgiveness Debt Relief Act" amending the Internal Revenue Code, provides with additional exclusions for some homeowners who lost their homes, if occupied as their primary residence, to foreclosure and the lender canceled or "forgave" a debt secured by the house. This new law can be applied for residential discharged debts of up to $2 million ($1 million if married filing separately) made on or after January 1, 2007, but before January 1, 2010.
For additional information please see our resources section for the IRS Web site or contact your tax advisor.
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