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If the Servicer is foreclosing on a property in the State of Oregon, the Servicer must destroy any unrecorded assignment to Freddie Mac no later than 10 days after the date the Servicer refers the foreclosure to its foreclosure attorney or trustee. If the Borrower subsequently reinstates his or her Mortgage, the Servicer does not need to prepare a new assignment to Freddie Mac. Refer to Section 22.14 for additional information on Freddie Mac’s requirements for assignments of the Security Instrument.”  [Sec. 66.17 Freddie Mac Seller/Servicer Guide. Underscore added. – PCQ]

Recent History. On February 7, 2011, the Honorable Frank R. Alley III rendered his decision in In Re: McCoy, discussed in my post here. McCoy stands for the following principles:

  • A non-judicial foreclosure in Oregon is invalid if there were one or more assignments of the lender’s trust deed that were not recorded in the country records;
  • ORS 86.705(1) defines a trust deed “beneficiary”  as “the person named or otherwise designated in the trust deed as the person for whose benefit a trust deed is given, or the person’s successor in interest. . . .” [Italics added by Judge Alley – PCQ]  The person “benefited” is the lender to whom the note is payable, not MERS; and,
  • While a deed of trust may authorize delegation of the beneficiary’s powers to a separate nominee [as occurred in McCoy], “…the powers accorded to MERS by the Lender – with the borrowers’ consent – cannot exceed the powers of the beneficiary.”  The beneficiary’s right to complete a non- judicial sale is subject to the successive recording requirement of ORS 86.735.  A non-judicial sale may take place only if any assignment by the lender was recorded.

The McCoy case sent shock waves through the lending and title industries.

  • Lenders began rescinding their non-judicial foreclosures, fearing that they would be deemed ineffective;
  • Title companies began inserting special exceptions in their preliminary title reports, warning that they may exclude insurance coverage to buyers of REO property if the lender had not complied with the recording requirement of ORS 86.735(1) when completing a non-judicial foreclosure.
  • Both industries sought relief in the Oregon 2011 Legislative Session, but to no avail.

On May 25, 2011, Hooker v. Northwest Trustee Services and Bank of America N. A. was decided by Senior Judge Owen M. Panner.  He came to the same conclusion as Judge Alley, i.e. that the failure to record one or more assignments as required by ORS 86.735(1), was the fatal flaw in a non-judicial foreclosure.  Today, two other federal judges have weighed in on the need to record assignments, and have come to the opposite conclusion. Those decisions are reviewed in my posts here, here and here.  Until the Oregon legislature or Oregon judiciary decide the issue, we are destined to have divergent opinions on the federal bench and continued confusion by the public.

Freddie Mac’s Response to McCoy. One reaction that has received little apparent attention was that of Freddie Mac, the government owned GSE that, together with Fannie Mae, could still cost the American taxpayer as much as Four Billion Dollars.  By way of background, Freddie [and Fannie] generally do not foreclose in their own name.  They normally leave that up to the lender or servicer of the delinquent loan.

Following the McCoy case in February 2011, Freddie implemented Section 66.17 of its Seller/Servicer Guide (‘the Guide”), entitled “Foreclosing in the Servicer’s Name”, which directs that the following steps be taken upon commencing a foreclosure of one of its purchased loans:

  • The Servicer must instruct the foreclosure counsel or trustee to process the foreclosure in the Servicer’s name.
  • If an assignment of the Security Instrument to Freddie Mac has been recorded, then the Security Instrument must be assigned back to the Servicer before the foreclosure counsel or trustee files the first legal action.
  • To have the Security Instrument assigned back to the Servicer, the Servicer must submit a completed assignment to Freddie Mac, who will then execute the assignment and return it to the Servicer within seven business days of receiving the documents.
  • If the Servicer is foreclosing on a mortgage registered with MERS, the Servicer must prepare an assignment of the Security Instrument from MERS to the Servicer and instruct the foreclosure counsel or trustee to foreclose in the Servicer’s name and take title in Freddie Mac’s name.  The Servicer must record the prepared assignment where required by state law.
  • If the Mortgage is an FHA, Section 502 GRH or VA Mortgage, then the Servicer must follow FHA, Rural Housing Service (RHS) or VA guidelines to determine in whose name the foreclosure action should be brought.
  • “If the Servicer is foreclosing on a property in the State of Oregon, the Servicer must destroy any unrecorded assignment to Freddie Mac no later than 10 days after the date the Servicer refers the foreclosure to its foreclosure attorney or trustee. If the Borrower subsequently reinstates his or her Mortgage, the Servicer does not need to prepare a new assignment to Freddie Mac.” [Italics and underscore mine. – PCQ]

The Flynn Eviction Case. On June 23, 2011, the Honorable Jenefer Stenzel Grant, Columbia County Circuit Court, relying upon Hooker, declined to evict a borrower/homeowner following foreclosure of her home, ruling as follows:

“The [borrower-homeowner’s evidence was] that by December 4, 2009 and apparently through December 11, 2010, Freddie Mac was the owner of the mortgage and therefore the holder of the beneficial interest in the property.  No evidence that this transfer of the beneficial interest was ever recorded was presented by the plaintiff, so I am concluding that the recording never occurred.”

Now we know why the bank in the Flynn eviction did not record its beneficial interest in the trust deed; either it never had any evidence of the assignment – or the evidence was destroyed, as per Freddie Mac’s new rule.

The Conundrum. We know from Section 22.14 of the Guide, that sellers and servicers transferring loans to Freddie do not have to sign a formal recordable assignment. In fact, if the assignments exist, they are to remain unrecorded.  And we know from Section 66.17 of the Guide, that upon initiation of the foreclosure process all evidence of any assignments to them are to be destroyed.

But why would that be?  In light of McCoy and Hooker, why would Freddie Mac require that in Oregon, unrecorded assignments be destroyed?  Why would they not require that all unrecorded assignments in the chain of transfers be recorded to comply with ORS 86.735(1)?

We know that borrowers can go online to find out if Freddie owns their loan.  Thus, any borrower facing an imminent non-judicial foreclosure should be able to deduce that if Freddie owns their loan there will be no recorded assignment since it was likely destroyed, and therefore, under McCoy, Hooker, and Flynn, the foreclosure could be ruled invalid and unenforceable. So, isn’t Section 66.17 of Freddie’s Manual just a self-inflicted wound?

Why Do Freddie M. and Freddy K. Like To Shred Things? Freddy K’s motive is easy – he’s just acting.  He puts on his clawed glove and scares people at Halloween.  Freddie M’s motivation is a little harder to figure out.  But, in light of Oregon’s case law pointing to the potential invalidity of conducting foreclosures without recorded assignments, one has to wonder about the legal, ethical, and reputational wisdom of Section 66.17.

[Apologies – some  of the Freddie Mac hyperlinks are timing out. – PCQ]

Shill – “…a person who helps a person or organization without disclosing that he or she has a close relationship with that person or organization. “Shill” typically refers to someone who purposely gives onlookers the impression that he or she is an enthusiastic independent customer of a seller (or marketer of ideas) that he or she is secretly working for.” Wikipedia

Introduction. The Fall of 2007 seems like a long time ago.  While most people do not mark the season with anything other than falling leaves and back-to-school activities, the third quarter of 2007 was a watershed moment.  It represented a period of massive investment downgrades by the credit rating agencies, and marks the tipping point for the financial crisis that was to follow.

Until Q3, 2007, the credit ratings companies had been issuing high grade ratings to investments that, we now know, did not deserve them. Without these ratings, investment banks could not have bought and packaged millions of home loans to sell as securities to large investors.  Without investment banks buying their loans, lending banks would not have tossed their underwriting standards out the window.  Without banks originating millions of bad loans to purchase homes, real estate values would not have ballooned to stratospheric levels.  In short, the rating agencies were enablers of the entire securitization process that set in motion the rise and fall of the American real estate industry.

What are the “rating agencies” anyway, and how did they get so much power?  How is it that they had the ability to make and break markets, when their entire business model was based upon a huge conflict of interest?  And why is anyone giving them any credence today, when they were, together with the big investment banks, the shills in the crowd, giving inflated ratings to junk, so investors would buy them?  Lastly, how have they escaped liability for their misdeeds? Or have they? Continue reading “Credit Rating Agencies – The Shills in the Crowd”

The sad reality is that negative equity, short sales, and foreclosures, will likely be around for quite a while.  “Negative equity”, which is the excess by which total debt encumbering the home exceeds its present fair market value, is almost becoming a fact of life. We know from the RMLS™ Market Action report that average and median prices this summer have continued to fall over the same time last year.  The main reason is due to the volume of  “shadow inventory”. This term refers to the amorphous number of homes – some of which we can count, such as listings and pendings–and much of which we can only estimate, such as families on the cusp of default, but current for the moment.  Add to this “shadow” number, homes already 60 – 90 days delinquent, those already in some stage of foreclosure, and those post-foreclosure properties held as bank REOs, but not yet on the market, and it starts to look like a pretty big number.  By some estimates, it may take nearly four years to burn through all of the shadow inventory. Digging deeper into the unknowable, we cannot forget the mobility factor, i.e. people needing or wanting to sell due to potential job relocation, changes in lifestyle, family size or retirement – many of these people, with and without equity, are still on the sidelines and difficult to estimate.

As long as we have shadow inventory, prices will remain depressed.[1] Why? Because many of the homes coming onto the market will be ones that have either been short sold due to negative equity, or those that have been recently foreclosed.  In both cases, when these homes close they become a new “comp”, i.e. the reference point for pricing the next home that goes up for sale.  [A good example of this was the first batch of South Waterfront condos that went to auction in 2009.  The day after the auction, those sale prices became the new comps, not only for the unsold units in the building holding the auction, but also for many of the neighboring buildings. – PCQ]

All of these factors combine to destroy market equilibrium.  That is, short sellers’ motivation is distorted.  Homeowners with negative equity have little or no bargaining power.  Pricing is driven by the “need” to sell, coupled with the lender’s decision to “bite the bullet” and let it sell.  Similarly, for REO property, pricing is motivated by the banks’ need to deplete inventory to make room for more foreclosures.  A primary factor limiting sales of bank REO property is the desire not to flood the market and further depress pricing. Only when market equilibrium is restored, i.e. a balance is achieved where both sellers and buyers have roughly comparable bargaining power, will we see prices start to rise. Today, that is not the case – even for sellers with equity in their homes.  While equity sales are faster than short sales, pricing is dictated by buyers’ perception of value, and value is based upon the most recent short sale or REO sale.

So, the vicious circle persists.  In today’s world of residential real estate, it is a fact of life.  The silver lining, however, is that most Realtors® are becoming much more adept – and less intimidated – by the process.  They understand these new market dynamics and are learning to deal with the nuances of short sales and REOs.  This is a very good thing, since it does, indeed, appear as if this will be the “new normal” for quite a while.

[1] This discussion ignores two other additional factors, employment and confidence.  We see the effect of this every day; notwithstanding record low interest rates, and record high affordability, there are many, many potential buyers still sitting on the sidelines.

In a recent post on mortgage insurance (“MI”), I addressed what I saw as a problem, but didn’t yet fully understand the depth of it, so just issued a cautionary warning to Realtors® and sellers that they should find out, in advance, if MI was obtained on the underlying loan.  The reason for this warning was due to reports I was receiving that MI companies were requiring the payment of money or a promissory note from sellers, in order to give consent to a short sale.  Why consent was even necessary from the MI company has mystified me.

After reading some MI master policies for these carriers, and doing a little research on the Web, together with a well-placed threat to one MI carrier, I think I’m getting closer to understanding what’s going on.  Here’s a summary of what I know so far: Continue reading “Short Sale Trap: Mortgage Insurance [Part Two]”

The Oregon Legislature has recently passed, and the Governor has signed, House Bill 2916.  Here’s a quick summary:

  • It applies to lenders who hold mortgage or trust deed on property consisting of one to four family dwellings, one of which the borrower occupies as their primary residence;
  • It applies to “Residual Debt” which is the remaining amount due to the lender after closing of the short sale;
  • It provides that if a lender files a 1099-C form with the IRS reporting that it has canceled all or a portion of the borrower’s remaining debt due under the loan, the lender (or its assignee) may not thereafter bring legal action for repayment of that deficiency.

Is this a good thing?  Will it, as recently reported by the Oregon Association of Realtors©, “…protect sellers by eliminating the current uncertainty that is inherent in the short sale process, reducing the amount of time it takes to sell property and the number of foreclosures in communities throughout the state“?  I certainly hope so.  It is clearly a positive move forward, and anything that helps distressed home sellers (and by extension, their buyers) is a good thing.

But I have a couple of questions:

  • If I close a short sale in 2011, a 1099-C normally isn’t issued by the lender, if at all, until the start of 2012. The form goes to the IRS and a copy goes to the borrower.  But how do I know, at the time of the short sale closing in 2011, whether the lender will file the form?  Unless the lender expressly agrees to release me from all deficiency liability at the time of closing, I really have no assurance about what will happen the following year.  Am I supposed to just trust that the bank will file a 1099-C? Remember, these are the same banks that repeatedly lost borrowers’ modification documents, promissory notes, and other paperwork.
  • According to the IRS instructions about the 1099-C form, certain pass-through entities are not required to file it. One such pass-through entity is a Real Estate Mortgage Investment Conduit, or “REMIC“. Many – if not most – loans were securitized into REMICs during the 2005 – 2007 credit bubble. If this is correct – although I hope I’m wrong – many distressed sellers who close short sales this year in reliance upon the belief/hope their lender will file a 1099-C may be disappointed to learn that the true owner of their loan – the REMIC – didn’t need to do so in the first place.  Where does that leave short sale sellers?

Although perhaps we’ll know more after others weigh in, my initial reaction is that this new law may not be a silver bullet.  In short, it appears that the most prudent course of action is to always insist upon a written release of deficiency liability at the time of closing the short sale. Then, regardless of whether a 1099-C is issued or not, the door has been forever closed to any future claims. – Q

“Foreclosure processing delays continue to mask the true face of the foreclosure situation, although there were some clues in the May numbers of what lies behind that mask,” said James J. Saccacio, chief executive officer of RealtyTrac. “First, activity spiked in May for various stages of the foreclosure process in some states, a pattern that has occurred in several states over the past few months. This pattern provides evidence that lenders are somewhat unevenly pushing batches of bad loans through foreclosure as they overhaul their paperwork and documentation procedures and as they determine that some local markets are able to absorb more foreclosure inventory.” [Emphasis mine. – PCQ] Mortgage News Daily, June 15, 2011

Considering its source, the above quote caught my attention.  Here, a reliable mortgage industry news release seems to believe that the Big Banks are actually “overhauling” their paperwork and documentation procedures.  The inference being, I suppose, that the next round of home foreclosures will finally comply with those pesky state laws governing the recording of mortgage and trust deed assignments. If this is so, ReconTrust apparently never got the memo.

As discussed in an earlier post here, ReconTrust, the wholly owned subsidiary of Bank of America, had previously suspended their foreclosures toward the end of last year. Although no explanation was ever given, most observers believed it was to “re-examine” their procedures and bring them into compliance with local laws.  Since the suspension of foreclosures followed Judge Alley’s decision in the McCoy case, the hope was that lenders were going to review processes, locate old trust deed assignments, and record them, before foreclosure.

A more cynical view was that the banking industry was waiting to see what would happen at the Oregon Legislature, where there was a stealth campaign going on by the lender lobby, to persuade politicians to remove the “successive recording” requirement of ORS 86.735(1), which is the foundation of Oregon’s non-judicial trust deed foreclosure law.  [Without requiring the recording of successive trust deed assignments, non-judicial foreclosures in Oregon could be conducted by virtually any lender asserting the right to do so.  In fact, this has been the case for the past few years; lenders have routinely ignored Oregon’s recording law, before commencing a trust deed foreclosure.  As a result, lenders who had never before appeared in the chain of title, could simply assert that they now have the right of foreclosure, based upon an assignment from a bogus MERS “officer.”  Judge Alley’s decision was an effort to stop that practice. – PCQ] However, as noted in my earlier post, the lenders’ efforts to avoid Oregon’s foreclosure law and Judge Alley’s ruling, were, in the immortal words of Arch Villain, Snidely Whiplash, “foiled again.” Continue reading “Recon Redux”

 

Greed: “An excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth.”

The term “negative equity” has found its way into common parlance today.  And it is sure to hang around for a while.  That’s because many people have it – that unpleasant experience of owning a home worth less than the mortgage – or mortgages – encumbering it.  The more graphic expression for having “negative equity” is being “underwater.”

Based upon my many conversations with clients about the negative equity in their homes, most are forthright and honest how it came about.  While there are a variety of reasons for their particular circumstance, it is rarely what some cynics have unfairly characterized as “greed.”

Here’s what I’ve learned from my clients: Continue reading “Whose Greed Fueled The Credit And Housing Crisis?”

 

Snidely Whiplash, Arch Villain, Rocky & Bullwinkle Cartoon

This post follows on the heels of my discussion of Oregon’s Foreclosure problems, here. At this time, we know two things: (a) The lenders and servicers cannot change our trust deed foreclosure law to accommodate their foreclosure practice; and (b) In fact, they likely don’t have the necessary paperwork to record even if they wanted to comply.

Here are their choices:

  • Continue to ignore ORS 86.735(1), the successive recording law they sought to repeal, and record only one assignment [which usually issues from a sham corporate officer on behalf of MERS or the originating lender – PCQ]. But even if you’re a Big Bank, it’s pretty hard to ignore two federal judges who have already said that the resulting foreclosure would be invalid. Moreover, as pointed out in my earlier post on the marketability issue, the title companies are now balking at insuring title for the banks’ REO sales if the underlying foreclosure failed to comply with Oregon’s law.
  • But let’s look at what would happen today if lenders actually continued doing their foreclosures illegally in Oregon?  Probably what is going on right now, i.e. a fear that the deeds out from the lenders to good faith buyers who pay fair consideration without knowledge of the problem. [These people are known as “Bona Fide Purchasers” or ”BFPs.”  Normally the law gives them great protection. However, it questionable whether BFP protection can trump a void sale. – PCQ] So how will the banks deal with the risk that a couple of years down the road, a former foreclosed borrower might come back and assert ownership to the property due to an invalid foreclosure?  Here are some suggestions for the Big Banks to consider: Continue reading “Solutions to the Foreclosure Mess in Oregon”

 

“Curses! Foiled Again!” – Snidely Whiplash, Arch Villain, Rocky & Bullwinkle Cartoon

Background. The lending industry’s response to the foreclosure problems in this country, and Oregon in particular, can best be summarized with the cliché “Like a deer in the headlights….”  Frozen by the glare, the banks’ reaction has been to do nothing to correct the problem – as if the impending impact can be avoided by some miracle.

Oregon seems to be a particularly interesting example of the foreclosure problems facing lenders today.  Here’s why:

Oregon’s trust deed law requires that to foreclose a homeowner, all successive assignments of the trust deed must be recorded in the courthouse – from the originating lender who actually made the loan, to the foreclosing lender.

  • The banking industry has routinely ignored this requirement.  [Note:  Other states have mandatory recording laws similar to Oregon’s. – PCQ]
  • In February of this year, Judge Frank R. Alley, III issued his ruling in the McCoy bankruptcy case, holding that a foreclosure that failed to follow Oregon’s recording requirements was invalid – i.e., a nullity.
  • Shortly thereafter, many, if not most, Oregon foreclosure sales were either cancelled or rescinded.
  • Title companies began to balk at insuring title on bank REO sales – that is, the banks’ sales of those homes taken back following a foreclosure.  Banks have not routinely warranted title when selling their own REOs.  Following the McCoy case, title companies began carving out exceptions in their policies saying that they would not insure against title defects arising because the foreclosing bank didn’t comply with Oregon’s foreclosure laws. This has placed the status of all REOs into question; how can the bank convey marketable title to a buyer if the quality of that title is in question?  It appears that until this problem is resolved, many REOs may remain under bank ownership unless the bank warrants title to the buyer or gets the title company to insure it for the buyer.
  • Rather than start conducting foreclosures legally, the lending industry has chosen a different path.  It has tried to convince the Oregon Legislature to change the trust deed foreclosure law by deleting the provision requiring the recording of all successive trust deed assignments.  It is important to understand that the lenders’ effort included trying to give retroactive application to their proposed amendment.  It would have had the effect of legislatively overruling Judge Alley’s decision in McCoy, and reversed a foreclosure process that has been on Oregon’s books for over 50 years.
  • The banking industry’s proposed law was not introduced in the conventional way, i.e. as a bill on the floor of the state legislature.  Rather, it was surreptitiously added to a pre-existing affordable housing bill that was well on its way to passage.  The process, known as a “gut and stuff” was a last minute effort to unilaterally alter the law so that banks could legally continue with their current practice of ignoring it.
  • A copy of the proposed amendment can be found here.  As reported in the Oregonian and Wall Street Journal, this amendment failed in the Oregon House Judiciary Committee on June 1, 2011.  “Curses!  Foiled again!”
  • Adding insult to injury, on May 25, just as the banking industry’s amendment was under discussion in the pols’ cloakrooms, Oregon Federal District Judge Owen M. Panner, confirming the McCoy holding, ruled that Bank of America’s foreclosure in the Hooker case was invalid for also failing to follow Oregon’s recording of assignments law. Continue reading “Foreclosure Problems in Oregon: Revenge of the Titans”

“While I recognize that plaintiffs have failed to make any payments on the note since September 2009, that failure does not permit defendants to violate Oregon law regulating non-judicial foreclosure. The Oregon Trust Deed Act “represents a well-coordinated statutory scheme to protect grantors from the unauthorized foreclosure and wrongful sale of property, while at the same time providing creditors with a quick and efficient remedy against a defaulting grantor.”  Staffordshire Investments, Inc. v. Cal-Western Reconveyance Corp., 209 Or.App. 528, 542, 149 P.3d 150, 157 (2006).  In part due to the legislature’s desire ” to protect the grantor against the unauthorized loss of its property,” a party conducting a non-judicial foreclosure must demonstrate strict compliance with the Act.  Id. As demonstrated above, the MIN Summary demonstrates the defendants failed to comply with the Oregon Trust Deed Act.”  – Honorable Owen M. Panner, Memorandum Order, Ivan Hooker and Katherine Hooker, Plaintiffs v. Northwest Trustee Services, Inc., Bank of America, N.A., Mortgage Electronic Registration System, Inc., Defendants.

It seems things have been ominously quiet since U.S. Bankruptcy Judge Alley’s holding in McCoy.  Well, no more.  On May 25, 2011, the Honorable Owen M. Panner, U.S. District Court, came to the same conclusion as Judge Alley:

“I agree  with Judge Alley that “Oregon law permits foreclosure without the benefit of a judicial proceeding only when interest of the beneficiary is clearly documented in a public record.”  In re McCoy, 2011 WL 477820, at *4.”

In the Hooker case, the plaintiff borrowers, sought a judicial declaration – known as a “declaratory judgment” – that Bank of America’s nonjudicial trust deed foreclosure was wrongful, since the bank had failed to record on the Jackson County public records, all successive assignments of the trust deed sought to be foreclosed.

As I have posted on multiple occasions [here, here, here, here, and here], ORS 86.735(1) is pretty clear.  It reads in relevant part as follows:

“The trustee may foreclose a trust deed by advertisement and sale in the manner provided in ORS 86.740 (Notice of sale to be given to certain persons) to 86.755 (Sale of property) if: (1) The 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….”

So what would prompt the banks to think that this statute, written long before MERS existed, didn’t mean what it said?  Why would they think MERS, that great electronic registry in the sky, would be an adequate and legal substitute for recording on the public record?  Since the lenders and their attorneys aren’t confiding in me, I will submit my own theory:  First, I suspect back in the early 90’s, when MERS was just a doodle on the back of a bar napkin, it seemed like a good idea.  It permitted the Big Banks to pass around their trust deeds like a bottle of bourbon at a frat party. There was no public accountability – just a members-only “registry”, where, in theory, participants would “electronically register” the transfer of their mortgages and trust deeds.  In this way, Big Banks could securitize their loans faster, rather than complying with those time consuming and pesky state recording laws.  But wait!  There’s more!  As an added bonus, lenders would save millions of dollars in recording fees!  The opportunity seemed too good to pass up – back then. Continue reading “Another MERS Slapdown! The Hooker Case Analyzed”