Lawyers practicing in Oregon bankruptcy courts have done their best to protect debtors from home foreclosure. Starting in 2007 and continuing into the foreclosure crisis, bankruptcy judges and trustees worked with debtors to facilitate loan modification or reinstatement of defaulted home loans. Despite these efforts, the bankruptcy court has limited tools available to assist a debtor who has defaulted on loan payments to preserve the family home. As a consequence, home foreclosures moved forward at an ever quickening pace as more and more debtors lost their jobs and were unable to keep loan payments current.
Over the last thirty years, the home loan business has become a massive endeavor the size and scope of which has been credited with the 2007 worldwide economic crash. As part of the industrial push to mechanize lending practices, mortgage bankers created a new entity, Mortgage Electronic Registration Systems, Inc., or “MERS.” This enables lenders to bypass the county recording systems used by states like Oregon to keep a record of property transfers. MERS is a nominal party in many loan transactions used to facilitate an electronic central registry of note holders and servicers of home loans to track for its members the multiple transfers common in today home mortgage finance system. A trust deed involving MERS also designates that entity as beneficiary with powers to enforce the terms of the loan instrument on behalf of the lender. This is intended to expedite and centralize the foreclosure process in the event of a default by the borrower.
In the case of Donald E. McCoy, III, v. BNC Mortgage, Inc., et al., decided February 7, 2011, the Oregon Bankruptcy court found that calling MERS the “beneficiary” in a trust deed was not enough to permit that entity to enforce the terms of a trust deed securing a home loan. This decision and the Oregon statutory requirement that all trust deed assignments must be recorded before a nonjudicial foreclosure can proceed have stalled many foreclosures in the state of Oregon.
Two recent Oregon Supreme Court decisions, Brandrup v. Recontrust Company and Niday v. GMAC Mortgage paved the way for reinstatement of the nonjudicial foreclosure process in Oregon. In substance, the court determined that even if MERS is not a trust deed beneficiary it can be an agent delegated with various powers, including the powers to affect ownership transfers and enforce the rights of the lender by foreclosure. This decision prevents the possible invalidation of thousands of previously completed foreclosures involving MERS trust deeds.
The Oregon Supreme Court also reaffirmed its earlier decisions that transfer of a promissory note automatically includes transfer of the trust deed and its security interest in the borrower’s home by operation of law. Since ownership rights to the note were transferred through MERS electronically, the trust deed was automatically transferred without recordable paper documentation. This assignment by operation of law had previously hampered the recording of all assignments required for nonjudicial foreclosure under Oregon law. The Oregon Supreme Court reasonably decided that the Oregon legislature did not intend a requirement that such undocumented automatic transfers be recorded before nonjudicial foreclosure.
It is important to note that despite technical problems with nonjudicial foreclosure of MERS trust deeds, defaulted home loans could still be foreclosed in state court. The controversy over nonjudicial foreclosure of MERS trust deeds left lenders with the alternative of a formal state court judicial foreclosure. Judicial foreclosure increases costs for the lender and under Oregon law comes with a six-month right of redemption that can delay or inhibit resale of the property. Judicial foreclosure also requires that the foreclosure sale be conducted by a public official, the County Sheriff, rather than a third party appointed by the trust deed beneficiary.
Many desperate homeowners have resorted to bankruptcy as a last line of defense against foreclosure of their homes. Bankruptcy still offers the potential ability to reinstate a defaulted home loan with Chapter 13 payments. As the economy improves, Chapter 13 plans that pay accumulated arrearages over time have become more feasible for homeowners who have been denied home loan modification or other out-of-court loan default remediation.