Several recent decisions by federal judges in Oregon have sent the Mortgage Electronic Registration Systems (MERS) to the mat, bringing foreclosures to a halt. MERS was created in 1993 to electronically track assignments of mortgages without publicly recording those assignments in the County real property records. Lenders thereby keep the promissory notes and servicing rights and sell their rights to receive payments under the notes to investors without paying any recording fees. “Penny wise but pound foolish” my Mom would say.
Central to these recent decisions is ORS 86.735, which provides that a nonjudicial foreclosure by advertisement and sale is permitted in Oregon only if “any assignments of the trust deed by the trustee or the beneficiary and any appointment of a successor trustee are recorded in the mortgage records . . ..” A trust deed is a three party arrangement between the lender, borrower, and the trustee, who releases the mortgage lien when the loan is paid or conveys title to the lender after foreclosure if the loan is not paid. Without recording all assignments, a foreclosure cannot go forward.
In the Rinegard-Guirma case, Judge King found that MERS was not really the “beneficiary” (even though labeled as such in the trust deed) because the trust deed was for the benefit of the lender to secure payments under the note, not MERS. Judge King looked to cases from Oregon and elsewhere which indicate that assignments of the trust deed, without the note, are not effective. MERS has no authority to transfer the note. Like Siamese twins joined at birth, the note and trust deed cannot be split – no assignment of trust deed alone is effective.
In Burgett, Judge Hogan stated that unrecorded assignments of trust deeds are permissible, but not if foreclosure by sale is sought. All prior unrecorded assignments must be filed in a nonjudicial foreclosure by sale. In McCoy, Bankruptcy Judge Alley made the same findings, while noting that ORS 86.735 does not restrict judicial foreclosures. There were four separate unrecorded assignments in McCoy as part of a securitized loan pool put together by now defunct Lehman Brothers.
In the Barnett and Eckerson cases, Judge Brown reviewed the prior decisions by Judge Hogan and Judge King and found that foreclosures involving MERS could not proceed. Homeowners 5, MERS zero.
In Barnett, Judge Brown also found that the lender, BAC, may have breached a loan modification agreement with the borrower. In a classic case of “dual track” foreclosure, BAC was negotiating a loan modification with the homeowner and at the same time it was pursuing foreclosure. Apparently the left and right hands did not communicate. Lenders’ computer systems, once programmed for foreclosure, are extremely difficult to override.
All of these decisions — involving restraining orders, injunctions, and motions to dismiss or for summary judgment — are preliminary in nature and do not necessarily mean the lenders will eventually lose. However, in a few short months Oregon has developed an impressive set of precedents indicating foreclosures involving MERS are suspect. The lenders may have a very difficult time getting the assignments they need in these cases because several links in the chain of assignments (Lehman, La Salle Bank, Countrywide) are either bankrupt or no longer exist.
Hundreds of foreclosures already in process in Oregon have been rescinded in the past few weeks, because title companies are now excluding the failure to record assignments from title insurance coverage for nonjudicial foreclosures. Are the lenders likely to regroup and file them as judicial foreclosures? Probably not, since the filing fees in State Court are hefty, and homeowners and lien holders have a six month period of redemption after any judgment.
So where does that leave us? Without any legislative solutions, either state or federal, we’re exactly in the same place we’ve been since the mortgage crisis began three years ago – in limbo.