The Conundrum. In Oregon we have a foreclosure conundrum: ORS 86.735(1) requires lenders to record all successive trust deed assignments when non-judicially foreclosing a trust deed. However, lenders have routinely either lost, never created, or destroyed, their trust deed assignment documents during the securitization frenzy of 2005 – 2007. This means that starting with the subprime loans, and working their way up the food chain, lenders have been non-judicially foreclosing trust deeds without recording the necessary assignment documents. This has resulted in two significant court rulings [McCoy in Oregon’s federal bankruptcy court, and Hooker, in Oregon’s federal district court – PCQ] holding that these defective non-judicial foreclosures are invalid.The upshot has been that title companies have become skittish about insuring marketable title when banks attempt to sell their REO properties following a non-judicial foreclosure. In order to avoid the problem, many banks have decided to take a “poison pill” – that is, even though it benefits no one, they are beginning to judicially file foreclosure lawsuits in court, in order to avoid the McCoy and Hooker problem that was limited to non-judicial foreclosures.
However, the judicial foreclosure alternative carries with it a host of unpleasant side effects for everyone.
- It entails costly court filing fees;
- It taxes already limited judicial resources;
- It requires that borrowers be given a six-month right of redemption following the foreclosure sale, which hampers the lender’s ability to quickly re-sell the property;
- It creates a potential public record and credit stigma on borrowers, who now have a court judgment taken against them;
- It continues the oppressive psychological impact on borrowers who are served, sued, and then must retain an attorney to figure out their legal options;
- It continues the reputational damage of Big Banks, by drawing further attention to the never-ending foreclosure crisis.
The Solution. Is there a better alternative? Yes, and it is in plain sight. I have discussed it in a prior post, here. The answer is to secure a pre-foreclosure result. This is not rocket science. “Is anyone home, McFly?” Here’s a pre-foreclosure solution that banks should embrace, rather than continuing to pile on beleaguered homeowners, just because lenders and servicers can’t seem to comply with Oregon’s non-judicial foreclosure law:
- Prior to commencing any foreclosure, judicial or non-judicial, lenders should contact the borrower to see if they would execute a Deed-in-Lieu-of-Foreclosure (“DIL”). It would be “without merger”, which would permit the lender to foreclose a subordinate lienholder, if necessary;
- The DIL would contain certain borrower title warranties to the effect that they have not placed or permitted undisclosed liens on the property [this would be confirmed with a lender’s title policy, of course. – PCQ];
- The lender and borrower would execute a global settlement of all claims – including any borrower rights of redemption and any lender rights to a deficiency judgment;
- The borrower would agree to turn over the subject property to the lender in broom clean condition;
- If a foreclosure lawsuit was already filed, the lender would execute a Judgment of Dismissal against the borrower, “with prejudice and without costs or fees”.
Win-Win. It would seem that this DIL solution would result in a win-win for all parties and the Oregon judicial system. Assuming that there are no lienholders on the property that may have priority claims, that puts an end to all the unpleasantness; the borrower gets on with their life.
If a foreclosure suit was already filed, the other co-defendants (e.g. junior lienholders) would likely permit default judgments to be taken without costs and fees. If a priority battle was necessary, and no judicial foreclosure had been filed, the lender could pursue them non-judicially, without having to name the borrower, who has already deeded his/her property back to the lender.
Going forward, title would be marketable to any REO buyer. The McCoy and Hooker problems are entirely avoided. The banks get back the property without the cost and delay of a lawsuit, and everyone’s happy….sort of.
How Do We Make This Work? My suggestion is to encourage those in the judicial system to embrace this approach. Require that at the time of filing a judicial foreclosure, bank attorneys sign an affidavit under oath, swearing to the fact that they [not their lender-clients who gave us the robo-signers, DocX, and other shenanigans – PCQ] had formally offered the above protocol and the borrower either rejected it or could not be reached.
If anyone can tell me what’s wrong with this approach, I’m willing to listen. But until I’m convinced otherwise, this proposal would seem to give the lender what they want – marketable title, and the borrower what they need – finality.
