What is a Deficiency Judgment?
A "Deficiency Judgment" is a judgment a creditor with a security interest on real property may obtain if and when that creditor is "under secured" on that property. The amount is usually the difference between the market value and/or auction price on the property and the amount declared to be due on the promissory note adding attorney fees and costs of sale, etc. Many people don't remember this, but when they bought their property, among the many documents they signed was a promissory note, usually a "Deed of Trust", and various other documents giving various rights to the lender to foreclose in various ways. The promissory note usually gives the lender the right to pursue a deficiency judgment to the extent allowed under the laws of the state--which means that it has "limited recourse".
What is a Trust Deed--and How is it Foreclosed?
A Deed of Trust is a security agreement between you and the lender authorizing the lender to have give a "trustee" power of sale of the property in the event the note goes into default. This is different under Oregon law than a "Mortgage". Under Oregon law, A deed of trust may be foreclosed "non judicially"--which means that the trustee may commence a foreclosure by recording a notice of sale and complying with Oregon's non-judicial foreclosure process (which will not be discussed at length here). Under Oregon law, a Deficiency Judgment may NOT be pursued if the Lender decides to pursue a non-judicial foreclosure. The Lender is not required to pursue a non-judicial foreclosure with a deed of trust. However, in the very rare case the lender has a Mortgage, a lender must proceed judicially
What is a Mortgage? Is a Deficiency Judgment Allowed?
A "Mortgage" in Oregon is an instrument conveying actual title in real property soley for the purpose of securing a debt. It must be foreclosed judicially. Much confusion has been spread in Oregon because people use the term "Mortgage" and "Deed of Trust" interchangeably. One can obtain a Deficiency judgment on a Mortgage in the manner described in step one BUT these are very rare because almost no conforming bank loans are Mortgages.
Can A Deed of Trust be Forclosed Judically and is a Deficiency allowed Here?--Not on Residential Property!
Yes--A deed of Trust may be foreclosed judicially. However, a deficiency judgment is ONLY allowed in very limited circumstances. Oregon law prohibits a deficiency on residential property in a judicial foreclosure. The caveat here is that if the property is abandoned or if you change the property into a rental unit after your purchased it, a deficiency can be pursued. A lender, by pursuing a judicial foreclosure, can also require you to pay the entire balance of the loan in order to avoid losing the property. However, with a judge involved in the process, rights of redemption and other equitable remedies can be asked for. In Oregon, Lenders almost NEVER pursue judicial foreclosures of Real Property
A suit on the Note
A lender can always decide to take the rare step to "Sue on the Note". By doing so, the lender waives the right to any foreclosure on the collateral. The only reason a creditor would do this is if there were a great deal of non-exempt assets owned by the creditor and the lender were upside-down on the collateral. This may be a more common remedy for banks who lent to speculators who are otherwise wealthy but lost money on speculative commercial real estate (although, under Oregon law, deficiency judgments would be allowed in these scenarios). It is very rare but an option. It is extremely unlikely in a residential loan scenario.
The Bottom Line
Deficiency Judgments are allowed but very rare in Oregon. Many people are confused because of predatory "distressed home" buyers warning of financial ruin if people do not "short sale" their homes to them. People of all states need to know their rights in this area of law.