Enforcement of Loans Secured by Real Property

In simple terms, a loan that is documented by a promissory note and nothing else is an “unsecured” loan, and a loan that gives the lender lien rights in property, by way of a mortgage, assignment, or pledge, is a “secured” loan. Being a secured lender is generally highly preferred to being an unsecured lender because rights in property increase the likelihood of collectability.

Many lenders make loans that are documented by both promissory notes and by security interests in real property. The type of loan document that gives a lender rights in real property as security for re-payment is generically a “mortgage”. In Washington, the most common type of mortgage is called a “deed of trust.” It is the type of security document that is used in virtually all residential lending and in the vast majority of commercial lending.

Deeds of trusts are filed of record against the borrower’s title to property by recording them with the county Auditor’s office where the property is located. The time of recording generally establishes the priority of the mortgage, which means the rights of the holder of a deed of trust recorded first is superior to deeds of trust recorded later.

The deed of trust creates a “lien” on the property in favor of the lender. Upon default in payment on the loan, the lender may enforce its lien right by causing a sale of the property in satisfaction of the debt. The process for causing this sale is called foreclosure. Generally, with a foreclosure, if the lender follows a set of rules the property will eventually be put up for sale (quite literally “on the courthouse steps”). At the sale the lender is entitled to bid on the property using up to its total debt amount (a “credit bid”), as opposed to cash, to purchase title to the property. Any other bidders must pay cash. It is often the case that no one but the lender bids at the foreclosure sale, and in that event the lender will end up with legal title to the property.

However, foreclosure is not necessarily the lender’s only option.  In Washington, a lender may elect to file a suit to collect on the underlying promissory note only, which is more likely to happen when there is little value in the real property that secures the loan. However, in that case the lender will also retain the lien of its deed of trust on the real property security in the meantime. So, if the lender is not paid in full as a result of the suit on the note, the lender may still foreclose its deed of trust lien against the real property for the balance it is owed.

Every collection case will differ and these are general principles. It is always wise to review your specific facts with competent legal counsel.