First American Title Insurance Co. is reportedly adding an exception to its title reports and (presumably) its guarantees, that will exclude certain matters, including the lack of insurable title after a foreclosure sale, that arise out of the failure to have recorded the Trust Deed Assignments, including all intervening assignments between the first and last assignment. Given the size of First American, can other title companies be far behind?
Hooray! It’s about time. In Oregon, ORS 86.735(1) provides that in order to foreclose a trust deed, several conditions or events must occur. One of them is that “(t)he trust deed, 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 in the counties in which the property described in the deed is situated.” This statute was first enacted in 1959, and was amended from time to time, up to 1989. I’m not sure if the above-quoted language first appeared 52 years ago or 22 years ago – but suffice it to say, this requirement should come as no surprise to anyone involved in an Oregon trust deed foreclosure for the last several decades. Unfortunately, it has been uniformly ignored for the past several years by Big Banks in their rush to foreclose.
So what does this mean? It will take more explanation by the title industry to be certain, but some things are clear. Title insurers are becoming increasingly concerned with the drumbeat of federal court and bankruptcy court cases in Oregon and elsewhere tossing out foreclosures due to the blatant lack of compliance with statutes like ORS 86.735(1).
It also means that the title industry is worried about the quality of title that is – or isn’t – being conveyed by banks following foreclosure. Without giving a detailed explanation, it is important to understand that Oregon law already has some pretty strong language that gives substantial protection against title defects following a foreclosure:
86.780 Recitals in trustee’s deed and certain affidavits as prima facie or conclusive evidence. When the trustee’s deed is recorded in the deed records of the county or counties where the property described in the deed is situated, the recitals contained in the deed and in the affidavits required under ORS 86.750 (3) and (4) shall be prima facie evidence in any court of the truth of the matters set forth therein, but the recitals shall be conclusive in favor of a purchaser for value in good faith relying upon them. [Italics mine. – PCQ]
And here is what Oregon law says about the contents of a trustee’s deed to the winning bidder at the foreclosure sale:
86.775 Contents of trustee’s deed to purchaser. The trustee’s deed to the purchaser at the trustee’s sale shall contain, in addition to a description of the property conveyed, a recital of the facts concerning the default, the notice given, the conduct of the sale and the receipt of the purchase money from the purchaser. [Italics mine. – PCQ]
The boilerplate language appearing in the Recitals of a recent Trustee’s Deed includes a description of the parties, the fact of default and the setting of the foreclosure date at a certain place and time. However, also appearing is a statement that the Trust Deed was recorded in the county records, “…and subsequently assigned…” to the foreclosing bank, acting as trustee for a REMIC trust. [Italics mine. – PCQ]
Near the end of the Trustee’s Deed is the following boilerplate language:
This conveyance is made without representations or warranties of any kind. By recording this Trustee’s Deed, Grantee [the foreclosing bank that is now getting the property back as trustee for the REMIC trust – there were no bidders who offered to pay more than the bank’s opening bid. – PCQ] understands acknowledges and agrees that the Property was purchased in the context of a foreclosure, that the trustee made no representations to the Grantee concerning the Property and that the trustee owed no duty to make disclosures to Grantee concerning the Property, Grantee relying solely upon his/hers/theirs/ its own due diligence investigation before electing to bid for the Property. [Italics mine. – PCQ]
What does all of this mean for the quality of the title of a property that has been foreclosed upon? Here are some thoughts:
- While the Recitals in a Trustee’s Deed may be “conclusive” – that is, they must be taken as true – they may not be legally controverted – that protection only applies to ” a purchaser for value in good faith relying upon them.” Thus, a good faith third party bidder who acquired a property at a foreclosure sale would have a nearly absolute right to rely on all of the facts recited. However, if the foreclosing bank got the property back – and the foreclosure sale contained known defects, such as the failure to record all of the intervening assignments as mandated by ORS 86.735(1) that bank would not be entitled to the status of a “good faith purchaser.”
- Under the McCoy case, a foreclosure that fails to follow ORS 86.735(1) is void.
- In almost all Oregon bank foreclosures [with those few exceptions where some title companies insisted upon the recording of all intervening assignments before they would insure title out of a bank’s REO department. – PCQ] intervening assignments are never recorded. Instead, banks simply record a single assignment from MERS or the originating lender to the foreclosing bank, frequently acting as a REMIC trustee. All intervening assignments are routinely ignored in violation of ORS 86.735(1).
- But a REMIC trustee cannot foreclose on behalf of a trust if it did not have legal possession of the loan documents [i.e. the note and its companion mortgage or trust deed. – PCQ] before the Cut-Off Date identified in the PSA. This date is generally six months following creation of the REMIC. In many cases, the REMIC on whose behalf the trustee is acting, closed several years earlier. If the necessary loan documents were not in the REMIC before the Cut-Off Date, transferring them into the trust years later – right before commencement of a foreclosure, cannot work. The welcome mat has been rolled up and the door closed long ago. There are multiple reasons for this result, but the primary ones are found in (a) the PSA, (b) the Uniform Commercial Code, and (c) the applicable tax laws, all of which set strict requirement as to when and how loans may be legally transferred into and out of REMIC trusts. Violation of these rules can jeopardize the REMIC election made by the trust under the Internal Revenue Code. [A longer explanation is discussed in some of my earlier posts, here and here. The Ibanez decision out of Massachusetts, contains an interesting discussion of similar issues where the foreclosing banks attempted to transfer the loan documents into the REMIC trust after the foreclosure was completed. – PCQ]
- Since the Trustee’s Deed carries no warranties or representations as to the quality of the title, it is equivalent to a Bargain and Sale Deed at best – or a Quitclaim Deed at worst. This fact underscores the need for title insurance when the property is re-sold to a buyer out of the bank’s REO department.
Ergo, it is very problematic with REO properties, exactly what kind of title a bank can convey to a purchaser, since it does not have the protection of being a good faith purchaser [or “bona fide purchaser” – PCQ] under ORS 86.775. Up to this point in time, title companies were writing policies for buyers of these REOs, insuring the quality of the banks’ title. This meant that if an REO buyer had their title challenged later, the buyer could rely upon the title insurance carriers to fix the problem on their dime. Even though some of these companies have been able to obtain indemnities from the Big Banks against their shoddy foreclosure practices, it now appears that even these indemnities may not – in the eyes of the title companies – be enough. [For a less serious discussion of the problem, see post here. – PCQ]
Without title insurance – or with title insurance that excludes coverage for the very real possibility that these shoddy bank foreclosures may not have been legal – it appears bank REOs will not be selling very quickly. I doubt many buyers would be satisfied taking a warranty deed from the banks with nothing more….
Rumors abound that some of the Big Banks are quietly instructing their foreclosure trustees to rescind many of their pending foreclosures. So the beat goes on. More about this in a later post. Another Slapdown!
