Monday, April 29, 2013
Joseph L. Dunne (Attorney, Vial Fotheringham, LLP) recently published his article entitled, Enforcing the Oregon Trust Deed Act, 49 Willamette L. Rev. 77 (2012). The introduction to the article is available below:
In the real estate world, the years leading up to the 2008 financial crisis were characterized by massive financial irresponsibility exacerbated by a regulation vacuum. The nation's biggest financial institutions securitized millions of loosely underwritten home loans into mortgaged-backed securities and sold them to unknowing investors. The result, now widely recognized, was the overnight collapse of AAA-rated portfolios collateralized with toxic subprime loans. As of March 2012, nearly 20% of all Oregon homeowners were under water on their mortgages.
For most of the last five decades, real estate lenders have diligently complied with Oregon's statutory requirements for nonjudicial foreclosure. Traditionally, every time a home loan was sold on the secondary mortgage market, lenders recorded a deed of trust assignment in the local county records. This practice guaranteed a complete legal chain of title at the time of foreclosure - making nonjudicial foreclosure a quick, reliable enforcement method without the need for judicial oversight. Oregon's nonjudicial foreclosure regime theoretically encourages lending to less-qualified credit applicants by ensuring a more cost-effective remedy upon default. Since their creation in 1959, nonjudicial foreclosures have been the predominant method for foreclosing real property in Oregon.
Widespread changes in mortgage banking practices during the housing boom undercut this once-reliable foreclosure method. Once mortgage bankers and Wall Street financiers realized the enormous profit potential in the secondary market for home loans, mortgage securitization by private investment banks intensified. As the market for home loans burgeoned and Americans increasingly signed up for home ownership, the mortgage banking industry collectively decided the decades-old practice of recording assignments each time a loan was sold was too expensive and paperwork intensive. They developed an electronic database named "Mortgage Electronic Registration Systems, Inc." (MERS) to save time and money in the securitization process. An estimated 60% of all current U.S. home mortgages were sold on the secondary market using MERS, but as housing prices continued to skyrocket the legal issues surrounding MERS and mortgage securitization remained unnoticed. The eventual collapse of the housing bubble exposed the legal problems with MERS and mortgage securitization. Mortgage lenders soon found themselves in the middle of a foreclosure crisis.
The Oregon Trust Deed Act (OTDA) requires lenders to record all deed of trust assignments before initiating nonjudicial foreclosures. Lenders have difficulty complying with this requirement because of their dependence on the MERS private recording system. Over the last several years, an increasing number of Oregon homeowners have challenged the legality of their pending nonjudicial foreclosures. Their claims for wrongful foreclosure stem from two basic arguments: (1) MERS cannot be a beneficiary under a deed of trust in Oregon because MERS does not meet the statutory definition of a beneficiary found at section 86.705(2) of the Oregon Revised Statutes, and (2) unrecorded assignments of their deed of trust prohibit the nonjudicial foreclosure remedy under section 86.735(1).
These issues have divided circuit and district court judges in Oregon, resulting in a number of conflicting opinions. On April 6, 2012, Federal District Court Chief Judge Ann Aiken certified four questions to the Oregon Supreme Court stemming from four wrongful foreclosure cases pending before her Court. On July 18, 2012, the Oregon Court of Appeals ruled against MERS in Niday v. GMAC Mortgage, LLC, finding that MERS does not meet the statutory definition of a beneficiary, and cannot be used to circumvent the OTDA recording requirement. The following day, the Oregon Supreme Court accepted the four certified questions from the District Court. Oral arguments are currently scheduled for January 8, 2013, although a final decision may not be rendered until the following summer. Until then, in the wake of Niday and recent legislation requiring pre-foreclosure mediation, lenders appear reluctant to pursue any nonjudicial foreclosures in Oregon. For the time being, the entire foreclosure industry in Oregon has been forced to switch to judicial foreclosures as the state's High Court is now poised to weigh in on Oregon's nonjudicial process and the legislature scrambles to come up with a solution.
This article explains how the use of MERS as a named beneficiary violates the procedural requirements for foreclosure under the Oregon Trust Deed Act. This article further examines the implications of MERS's inability to serve as the beneficiary, concluding that, although MERS cannot be a beneficiary, MERS may likely serve as an agent of the initial and successive beneficiaries. In its agency capacity, MERS and its principals may comply with Oregon's procedures for nonjudicial foreclosure by recording all assignments of the deed of trust prior to initiating nonjudicial foreclosures.