Shhh … Quiet Title
Suits to “quiet title” to real property have had a statutory basis in Oregon since 1862. Suits to quiet title are sometimes referred to as suits to remove a cloud on title. Although Oregon is famous for overcast skies, the cloud referred to here is any doubt or uncertainty as to the validity of the plaintiff’s title. Cases describe a cloud on title as a lien, claim, or other encumbrance that is apparently valid on its face, but that can be established to be without foundation or merit.
When you take out a mortgage loan to buy a home, you sign a promissory note held by the lender. The promissory note gives the holder the right to collect payments. A deed of trust is recorded at the county recorder’s office to secure payment of the loan, and gives the lender the right to foreclose on the property if you default on the loan. (Oregon is a “title theory” state, meaning that the trustee appointed by the lender holds legal title to your property, subject to the conditions of the trust deed.)
As discussed in my last post, foreclosures involving MERS (the Mortgage Electronic Registry System) are suspect, and title companies in Oregon are now excluding any failures to record assignments from title insurance coverage for such foreclosures. MERS cannot be the “beneficiary” or holder of the promissory note because it has no financial interest in any mortgage loans.
In Utah, also a title theory state, there have been several recent cases granting homeowners title free of liens in quiet title cases. If the lender listed on your deed of trust subsequently sold the loan (or if they no longer exist due to bankruptcy or merger), they may not bother to contest a quiet title action. The title company listed as trustee might also disavow any interest in the loan or the property. In the Utah cases, the homeowners won default judgments because neither the original lender nor the title company listed as trustee appeared in the case. The attorneys argued that MERS did not have to be served because MERS is not the beneficiary of the trust deed. That might work in Oregon, given recent federal court decisions to that effect.
The award of a title free of liens means that whoever owns the promissory note no longer has the right to foreclose. That means the promissory note, perhaps now owned by investors, may be worth far less than they paid for it because it is no longer backed by an asset. While a quiet title judgment may prevent the note owners from foreclosing, it does not preclude them from suing on the note.
A promissory note is a “negotiable instrument.” Like a check, you have to be in physical possession of the document to enforce it. For example, you couldn’t cash a photocopy of a check instead of the actual check. In many cases, there may be no one in a position to try to collect because the actual notes are either lost or destroyed.
Individuals in several circumstances might consider quiet title actions. First, those who bought MERS foreclosed properties may need to clear title to be able to sell. Second, those with MERS on their existing deed of trust may want to test the validity of the mortgage. Third, those who have lost their homes to foreclosures in which MERS was involved may be able to argue that their interest in the property is superior due to a defective foreclosure process in which assignments were not properly recorded.
For these reasons, quiet title actions might not be so quiet in the near future. Instead, they might sound like the approach of a not too far off tsunami.