Freddie’s Destruction Instruction Rule – The Epilogue

“The great thing about working at  ________________ Bank is that no one has to take personal responsibility for the institutionalized immorality of our industry.  We get up in the morning, go to work, and check our soul at the door. When we come home at night to our families, we can become human again, without feeling any regret for the havoc our foreclosures have wreaked on so many lives.  We’re the zombies in zombie banks.  It’s no wonder our industry has no code of ethics….” [Overheard at a local Portland watering hole from an obviously intoxicated bank employee in the foreclosure department, responding to the frequently asked question: “How do you live with yourself?”][1]

In my recent post here, I was critical of what appeared to be intentional document destruction by Freddie Mac.  This information was based upon an April 11, 2011 announcement that it sent to its sellers and servicers.  However, at the time, I was unclear of the reason for – and timing of – the document destruction.  Was there some explanation that would dispel the appearance of chicanery?  As Paul Harvey used to say, “Here’s the rest of the story. Back in January, 2002, whenever a trust deed was sold to Freddie, the seller was required to execute but not record an assignment of that trust deed to Freddie. This appears to have been required across the board for all sellers and servicers who sold their paper to the GSE.  This practice would result in hiding the transfer from the public record, thus creating the appearance that the original lender still owned the loan, when it did not.  Why the ruse? Since 1959 Oregon law has required that if a non-judicial trust deed foreclosure became necessary, all assignments of the trust deed must first be recorded. [See, ORS 86.735(1) – PCQ]

Thus, it would appear that Freddie’s unrecorded pre-signed assignments should be recorded prior to foreclosure.  But Freddie didn’t want to foreclose in its own name.  Nor did it want their unrecorded assignments floating around in servicer’s files.  So it simply said “destroy them.” That way, when an Oregon foreclosure was commenced, there would be no “unrecorded assignment” in need of recording.

Putting a finer point on this, it appears that Freddie, long before going into government receivership, had concluded that the easiest and cheapest way to avoid compliance with Oregon’s recording law was to simply destroy the evidence.  The rule remains in effect to this day.

Here’s how Freddie’s Manual explained its destruction rationale to sellers and servicers of the loans it bought in 2002:

“This [destruction] will ensure that, at the time the trustee begins the foreclosure process in Oregon, the chain of assignments to the deed of trust identifies you as the beneficiary of the deed of trust and there is no assignment in existence from you to Freddie Mac.” [Underscore mine. – PCQ]

Of course, what the explanation fails to say, is that Freddie is the real beneficiary.  ORS 86.705(1) defines a beneficiary as “…the person for whose benefit a trust deed is given, or the person’s successor in interest….” [Italics mine. PCQ] If the sale of loans to Freddie is real, then the buyer must be the new beneficiary.  One cannot sell all right, title and interest in its loans, and still be the one benefited by the loans.

So, it appears that even though Freddie is the real beneficiary under the trust deed as of the date of the foreclosure, it wants the public record to show that another entity is the beneficiary. Back in 2002, if I were asked to write the rule for Freddie, here’s how I’d have explained it to the lenders/servicers whose loans were being purchased:

We know that for some time now, we’ve been telling you that when we purchase your conforming loans, you must also prepare an assignment of the trust deed to us.  And, we know that we’ve asked that you not record these documents in the public record.  We like to operate “sub rosa”, so as not to draw too much attention to ourselves. Attention can morph into scrutiny, and we don’t like scrutiny!  And you know we don’t want to foreclose in our own name, since we want everyone to think of us like that kindly rich old uncle whose money is being used to provide liquidity to the residential housing market.  Well, we just learned that that some hick state out West – we can’t remember the name, but it’s the one right above California on the AAA TripTik® map – has an old 1959 law that requires lenders to record its assignments at the time of their foreclosures.  Well, we just can’t do that, since it could result in that dreaded attention/scrutiny thing.  So please go back into your files, and destroy (read:  “shred!”) all unrecorded assignments, so that you can foreclose those hapless homeowners as if you were the “real” owner of the loan.  That makes you the bad guy, not us.  By destroying the assignments, you will thereafter be in compliance with the law, since one can’t record what they no longer have.”

In 2002, Freddie’s Manual went on to explain that if a delinquent borrower reinstated their loan while in foreclosure, the seller/servicer conducting the foreclosure would just pre-sign a new assignment of the trust deed to replace the one that had been destroyed. It too, was to remain unrecorded.

Now fast forward to October 2009. Freddie changed its Manual to provide at Section 22.14 [“Assignment of Security Instrument”] that sellers/servicers of loans were no longer required to prepare unrecorded assignments of the trust deeds sold to Freddie, unless Freddie required it.

Then skip to April 2011, when Freddie distributed the new rule that was the subject of my prior post above, on the subject of document destruction.  At that time, Freddie amended Section 66.17 of its Manual [“Foreclosing in the Servicer’s Name”] to provide the following:

“If the Servicer is foreclosing on a property in the State of Oregon, the Servicer must destroy any unrecorded assignment to Freddie no later than 10 days after the date the Servicer refers the foreclosure to its trustee.” [If the Borrower subsequently reinstated the trust deed during foreclose, Freddie said the Servicer did not need to prepare a new assignment. – PCQ]

So, it actually appears that Freddie’s Oregon Destruction Instruction Rule has actually existed since January 2002. The last nine years!  But when the October 2009 rule did away with the requirement of pre-signing unrecorded assignments, Freddie must have realized by April 2011 that there still might be unrecorded assignments floating around in lender and servicer files under the old 2002 rule.  So just to cover their bases, they said that within 10 days following notice that the loan was going into foreclosure, they were to destroy these errant assignments. [Silly me!  I thought the April 2011 rule was an effort to get around the effect of the recently decided McCoy holding.  In fact, digging deeper, we find that Freddie didn’t just get into the destruction of document business this year – it was aware of Oregon’s recording law in 2002, and had been instructing its sellers and servicers to destroy their unrecorded assignments back then. – PCQ]

Conclusion. Is this a big deal?  Apparently not to Freddie.  When faced with having an unrecorded assignment of a trust deed in foreclosure, it was easier to destroy the evidence than comply with Oregon’s law.  What would have happened if the unrecorded assignment was recorded instead of destroyed, prior to foreclosure?  Since Freddie didn’t want to foreclose in its own name, would it mean that it would have had to re-assign the trust deed back to the lender servicing the loan, so it could foreclose?  Not necessarily.  If permitted by the servicing contract, there should be no problem in the servicer retaining the power of foreclosure in its own name.

So why the need to destroy the unrecorded assignment? What’s wrong with it being recorded as a part of the foreclosure? [Note: Had this been done in the Flynn case, the result may have been different.  PCQ] Certainly, if the servicer was contractually permitted to initiate a foreclosure for Freddie, it could do so.  But wait!  That would mean the Freddie or the servicer/seller of the loan would have to pay a recording fee!  Remember, this Destruction Instruction Rule only applies to non-MERS loans.  If it was a MERS loan, all a lender needed to do to transfer the beneficial interest in a trust deed was make a change in the MERS Registry, using one of its own robo-signing officers.  But if the loan wasn’t owned or serviced by a MERS member, physical recording was necessary. This meant a recording fee.

So, unless someone can come up with a better explanation, it appears that the sole reason for destroying the unrecorded pre-signed assignments was to avoid having to pay a single recording fee.  If true, this is symptomatic of a larger problem that exists in the entire banking/servicing/securitization industries – a complete absence of any business ethics.  When the issue is compliance versus noncompliance, and noncompliance saves money, they choose to ignore the law.  We’ve seen this at every level of these industries – so why should we be surprised now?


[1] This is gallows humor. The drunk is real, the quote is not.  PCQ