HOUSE BILL REPORT

ESB 6143

BYSenators Pullen, Talmadge and Nelson

Revising provisions on real estate contract forfeitures.

House Committe on Judiciary

Majority Report:  Do pass.  (13)

      Signed by Representatives Armstrong, Chair; Crane, Vice Chair; Appelwick, Brough, Hargrove, Lewis, Meyers, Moyer, Padden, Patrick, Schmidt, Scott and Wineberry.

House Staff:Charlie Gavigan (786-7110)

AS PASSED HOUSE MARCH 1, 1988

BACKGROUND:

The purchase of real property, when not paid for in cash, is done utilizing a mortgage, deed of trust, or real estate contract.  A contract is executed for the purchase of the property.  Where a lender is involved, in either a purchase or a refinance, a contract is entered into regarding the repayment of the loan, and a mortgage or deed of trust is executed and recorded as security for the loan.  A real estate contract combines all three of these, acting as the contract for the purchase, the contract for the repayment of the loan, and the security for the loan.

The purchaser obtains title to the property immediately when a mortgage or a deed of trust is used.  The seller maintains title when a real estate contract is used until the last payment is made on the loan by the purchaser. Traditionally, since title remains with the seller in a real estate contract, judicial foreclosure or deficiency judgments are not available.

The real estate contract forfeiture act was passed in 1985.  Essentially this legislation attempted to provide a more certain and more uniform method for non- judicial forfeiture of real estate contracts when the purchaser defaults. Under this act, the seller must record in the county real property records and send to specified parties a notice of intent to forfeit the contract.  The seller may issue a declaration of default after 90 days from the date the notice of intent to forfeit is recorded, which terminates the purchaser's interest in the contract/property.  The seller may take possession of the property ten days after the recording of the declaration of forfeiture.

The purchaser may stop the forfeiture of the real estate contract by curing the default in a timely manner.  The purchaser or lienholders can force a public sale of the property after the notice of intent to forfeit has been recorded, although the purchaser cannot bid at the sale.

The only way to forfeit a real estate contract is under the real estate contract forfeiture act.

A mortgage is foreclosed judicially (through a court).  After determining that the purchaser or borrower is in default, a court generally orders the property sold at a public (or sheriff's) sale.  A deficiency judgment may be obtained by the lender if the proceeds from the sheriff's sale do not cover the loan amount due and the cost of foreclosure.

When a mortgage is foreclosed, the borrower has a right to redeem the property after the sheriff's sale.  Here the borrower can regain title to the property by paying the amount the property sold for at the sheriff's sale plus sheriff's costs. The redemption period is 8 months where there is no deficiency judgment sought or where the property is not agricultural, and 12 months in all other cases.

A deed of trust may be foreclosed either judicially as a mortgage or non-judicially.  A deficiency judgment is not available if the deed of trust is foreclosed non-judicially.  A deed of trust may not be used when the real property is agricultural. A non-judicial sale of the property cannot occur until 6 months after the default.

Attorney fees may be awarded if the mortgage, deed of trust, or real estate contract provides for them.  Some real estate contracts only allow attorney fees when judicial action occurs; if the purchaser cures the default, or because a real estate contract forfeiture is non-judicial, attorney fees may not be available under these circumstances.

SUMMARY:

One significant policy change and several technical or procedural changes are made to the real estate contract forfeiture act.

The substantive change allows a seller to choose, when the purchaser defaults, between foreclosing on the real estate contract as a mortgage or using the real estate contract forfeiture act.  A seller may initiate forfeiture and change to foreclosure, or visa versa.

The more technical or procedural changes include: (1) the personal representative is included in the definition of purchaser or seller where a party's interest is in probate; (2) the seller may execute the declaration of forfeiture through an agent rather than personally; (3) an interest in timber is included in the rights effected by forfeiture; (4) any person to whom notice of the intent to forfeit has been given may request a public sale of the property; (5) the seller does not have to give any notice after the notice of intent to forfeit before the declaration of forfeiture is recorded; (6) compliance with the real estate forfeiture act must be in all "material" respects; (7) damages for waste to the property by the purchaser are available to the seller after the declaration of forfeiture has been recorded, (8) when the address or identity of persons required to be notified are unknown, the notice must be posted on the premises and published; (9) procedures for handling liens and pending actions are addressed; and (10) the purchaser may bid at the public sale.

The act applies to all forfeitures initiated after the effective date of the act.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    A. Eugene Hammermaster; David Rockwell, Washington State Bar Association, Real Property Section.

House Committee - Testified Against:      David Leen; Steve Fredrickson, Evergreen Legal Services.

House Committee - Testimony For:    Technical changes are needed to the real property forfeiture act that was enacted in 1985.  An additional remedy should be added to allow attorneys fees to be collected where the contract only provides for attorney fees when judicial action occurs.  This is accomplished by allowing real estate contracts to be foreclosed as mortgages.

House Committee - Testimony Against:      The bill changes the balance of the 1985 act in favor of the seller.  Allowing real estate contracts to be foreclosed as a mortgage is a significant departure from present law.  For instance, a deficiency judgment would be available if the real estate contract is foreclosed as a mortgage.  The law on real property will be more confusing because a real estate contract is not a mortgage.