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What is foreclosure?
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 loan agreement. Foreclosures can also be initiated by others having a lien on a property such as the county if property taxes are not paid.

How does the foreclosure process work?
There are two types of foreclosure processes in Oregon that lenders can use when a mortgage loan is in default — judicial and nonjudicial.

In a judicial foreclosure, the lender or a representative acting on its behalf takes you to court to recover the money you owe by selling the house used to guarantee the repayment of the loan. In a real estate judicial foreclosure, there are some restrictions about the amount of money you can be sued for. If you receive a Notice of Hearing or a notice to appear in court regarding the sale of your property, immediately contact an attorney. There is contact information for the Lawyer Referral Services from the Oregon State Bar Association in this brochure’s resources section. Before you receive this Notice of Hearing, your lender may send you a notification informing you of its intention to start the foreclosure process. Remember, once you are in default on your loan agreement, the lender can start the foreclosure process at any time.

The judicial process starts when the lender or its representative requests the circuit court authorize the sheriff to conduct the sale of the house. To allow the sale, the court must first give the homeowner the opportunity to be present at the hearing. After the request to the court, the homeowner will be served with a new notification at least 10 days before the hearing with a “NOTICE OF HEARING ON SHERIFF’S SALE OF YOUR PROPERTY.” The notice, or summons, will also be sent by first class mail to the property address. The notice will include the name of the lender asking for the property’s sale, the property address, the reason for the request, and the time and location of the hearing. The homeowner does not have to attend the hearing. The judge will decide if the lender is entitled to have the house sold. If the judge rules for the lender, the judge will issue an order called writ of execution. One important difference in a judicial foreclosure, after the sale of the property, is the right of the former homeowner to recover the house within 180 days, known as the redemption period. To redeem the house within this period, the former homeowner, following a formal notification process, must notify the new owner of that intention. The former homeowner must pay the new owner, whether a person or the financial institution, the amount paid at the sheriff’s sale to purchase the house, including applicable interest. The total amount to redeem the property may also include payments made by the purchaser for property taxes, insurance, and other expenses to maintain the house in good condition.

In the nonjudicial process, where the document securing the loan is a Deed of Trust, with a power of sale given to the trustee, the parties involved in this model are the “beneficiary,” which is the financial institution or investor you owe the money to; the “trustee,” which is the neutral third 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 “grantor.” This process applies to owner occupied, one-to-four unit, single-family dwellings.

A nonjudicial process of foreclosure by “advertisement and sale” commonly starts if you, the homeowner, are in default by not making your mortgage payments as agreed and they have been continuously late. After trying to contact you to bring your mortgage payments current, the financial institution collecting your payments will give instructions to the trustee to start the foreclosure process or, in lending jargon, “accelerate” the loan. First, the trustee will file a Notice of Default in the county records where the house is located. When the notice of default is recorded, the foreclosure process becomes public information and will take approximately 120 to 180 days until the house is sold or transferred. Immediately after the filing of the notice of default, the trustee will send to you and all parties with an interest in the property, a Notice of Trustee’s Sale or Trustee’s Notice of Sale. You will also receive a notification about your right to request a face-to-face mediation meeting with the lender or its representative. The purpose of the mediation meeting is so the parties involved - the lender, you, and a mediator - can attempt to come to agreement to avoid foreclosure. The foreclosure can be avoided by applying various options available from the financial institution, such as a forbearance, loan modification, pre-foreclosure sale or “short sale,” or voluntarily giving up the title of the house commonly known as deed-in-lieu of foreclosure. 

A word about the mediation process

If a mediation service provider sends you a notification about your right to have a meeting with your lender’s representative, act immediately. The first step: Meet with a certified Housing and Urban Development (HUD) nonprofit counselor within 30 days after receiving the mediation notification form. The notification of your right to a mediation meeting will include information for the Lawyer Referral Services of the Oregon State Bar and providers of low-cost legal services. The form will include a list of options to avoid foreclosure. Even if you are not currently in the foreclosure process, you can also request a mediation meeting with your lender, if you were 30 days late on your loan payment at least one-time and your financial situation will likely not improve. You can request a mediation meeting by using a form available from a mediation service provider approved by the Oregon Attorney General. 

You will also be notified about the documents you need to bring with you to the meeting. Consult an approved housing counselor because the counselor will be able to better prepare you for the mediation meeting, including the paperwork you need to bring with you and other conditions you will have to meet. One condition is to pay a fee (not to exceed $200) to the mediator at least 10 days before the meeting. If you are not able to meet with an approved housing counselor within 30 days, you can still request a mediation meeting, but you must submit an affidavit to the mediator stating the reason why you could not consult an approved housing counselor.

You do not have to agree to attend the mediation meeting if you choose not to. You can notify the mediator at the address or contact information provided in the mediator’s notice about your decision. Visit the Attorney General’s office website.

You have the right to reinstate your loan by bringing your loan current, in addition to paying the late fees and the expenses to foreclose, but you should do this no later than five days before the sale (auction date) of the house. If, after exhausting all your options, you were not able to reach an agreement with the lender to save your house and unless the lender decides to postpone the sale, the trustee will conduct a trustee’s sale at the place and time noted on the Trustee’s Notice of Sale. Oregon law allows a postponement of the sale for up to 180 days. The postponement will be announced at the time and place of the scheduled sale date and a written notification will be also be sent to the homeowner at least 15 days before the new sale date, unless the first postponement is for less than two days from the sale date. Oregon law requires trustees to provide homeowners additional notifications. One is the “NOTICE: YOU ARE IN DANGER OF LOSING YOUR PROPERTY IF YOU DO NOT TAKE ACTION IMMEDIATELY.” Trustees must provide this notification to the homeowner at the same time or before the required notification that the house is in pre-foreclosure 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 the homeowners could do to try to save their homes. The notification also must include a toll-free number where homeowners can call to get information about approved nonprofit providers of foreclosure prevention counseling programs in different areas of the state. The notice also includes contact information for the Oregon State Bar’s Lawyer Referral Service if you decide to hire a lawyer. Low-income homeowners can also ask for legal assistance. 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. Approved nonprofit counselors are trained to facilitate the interaction with lenders and, in many cases, increase the possibility in obtaining the best possible solution. Their services are often free of charge or have a small nominal fee for credit reports.

What if my house sells for less than I owe?
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 amounts owed and other relevant information. You will receive a copy of the applicable 1099 forms 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.
The "Mortgage Forgiveness Debt Relief Act," which amemded 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 portion or the total 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 Jan. 1, 2007, but before Jan. 1, 2012.
For additional information please see our resources section for the IRS website or contact your tax adviser.