[This is Part Two of my post regarding the recent ruling by Magistrate Judge Stewart in the case of James v. ReconTrust, Bank of America, et. al. here. Part One can be found here. – PCQ]
Do All Assignments of the Deed of Trust Need to be Recorded? Mr. and Mrs. James argued that their Trust Deed had been assigned multiple times, i.e. from NWMG [the original lender that funded the loan] to Countrywide [which became BAC Home Loan Servicing, and through merger, became Bank of America] and then, through securitization acquired by Fannie Mae. Thus, due to the failure to record the successive assignments as required by ORS 86.735(1), the James contended that their foreclosure was invalid. [It was the failure to comply with this mandatory recording statute that resulted in Judge Alley, in McCoy, and Judge Panner in Hooker, ruling the foreclosures invalid. – PCQ]
In rejecting this argument, Judge Stewart explained her rationale below [which includes my “dissenting opinion” in bold italics – PCQ].
- The James’ argued that based upon the concept that “the note follows the trust deed” each time the note was transferred, so was the Trust Deed – automatically. Therefore, under ORS 86.735(1), an Assignment of Trust Deed document should have been recorded.
- Judge Stewart disagreed. Citing case law for the proposition that “A transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise….” she concluded: “That concept (of the note following the trust deed) is embodied in Oregon law. ORS 86.110(1) (‘A promissory note secured by a mortgage on real property (can be) transferred by indorsement without a formal assignment of the mortgage’). Since the trust deed follows the note, whoever holds the note by transfer also has the power to foreclose the trust deed, even without recording an assignment of the mortgage. Barringer v. Loder, 47 Or 223, 227-29, 81 P 778, 780 (1905).
- There is a fatal flaw in this reasoning, which, I suspect, the banks’ attorneys recognized immediately: Judge Stewart is citing a statute [86.110(1)] dealing with the satisfaction of the mortgage, not the foreclosure of a mortgage. Clearly, the legislature is much more lenient in “proving” ownership of the mortgage – or trust deed, for that matter – when a loan is paid off. But it is when valuable property rights are being stripped away, Due Process rights are at stake. It is at this time that the law puts the lender under the microscope; (a) With a judicial foreclosure of a mortgage, the bank must prove to the satisfaction of the court, that it has “standing” to foreclose, i.e. that it is the “real party in interest.” (b) Similarly, with a non-judicial foreclosure, although the Oregon Legislature permitted banks to foreclose without judicial scrutiny, it required in the 1959 law, that lenders must record all trust deed transfers, from first to last – thus providing recorded evidence that the foreclosing lender IS the real party in interest.
- Secondly, with all respect, how convincing is a 1905 Oregon mortgage case? The Oregon Trust Deed Act (“OTDA”) did not exist for another 54 years. The mandatory recording of assignments law [ORS 86.735(1)] was nonexistent in 1905. While it is true that mortgages are similar to trust deeds, they are not the same. That is why 86.715 provides that “A trust deed is deemed to be a mortgage on real property and is subject to all laws relating to mortgages on real property except to the extent that such laws are inconsistent with the provisions of ORS 86.705 to 86.795, in which event the provisions of ORS 86.705 to 86.795 shall control. *** [1959 c.625 §21] [Underscore mine. – PCQ] So whatever a 1905 common law case says about mortgage foreclosure, is trumped by what the 1959 OTDA requires then trust deeds are foreclose.
- According to Magistrate Judge Stewart, violations of ORS 86.735(1) which requires recording of assignments, are permitted, since it’s OK for MERS to act as “placeholder” for all member banks. They can assign their trust deeds “off record” with impunity and never be accountable to anyone. Thus, when it comes time to foreclose, MERS simply executes an assignment of the trust deed to another member bank [who is likely different than the original bank making the loan]. How the foreclosing bank acquired the right to foreclose, however, is a mystery, since there are no recorded chain assignments leading up that that lender. We just have to take MERS’ word for it that the foreclosing lender actually has the standing to foreclose.
- But do we really believe that before signing a Trust Deed Assignment teeing up the nonjudicial foreclosure, the MERS’ “officer” actually reviewed the chain of title and concluded: “Yes, By Golly, this is the true holder of the note and beneficial owner of the trust deed!”?
[Note: This is not to say that I support the James’ argument that simply because “the trust deed follows the note”, every time the note passes hands, an assignment of the trust deed and recording are necessary. The better argument – in my opinion – is the more direct one: Whenever the beneficial interest [as opposed to the purely legal interest] in the trust deed is transferred, the assignment of that trust deed must be properly executed, acknowledged, and recorded, since this is what the law says. – PCQ]
- Judge Stewart observed at footnote 4 of her opinion, that “Plaintiffs allege that after acquiring the loan from NWNG (sic) [the original lender – properly identified as “NWMG” – PCQ], BACHLS [who bought the NWMG note] **** securitized it by transferring it to Fannie Mae. However, any such assignment of the Deed of Trust by BACHLS, if it occurred, was not by either the Beneficiary (MERS) or the Trustee (Fidelity National) and did not need to be recorded prior to a non-judicial foreclosure under ORS 86.735(1).”
- Huh? This is a very peculiar statement. If the securitization process occurred – which is undisputed – it is hard to conceive why Judge Stewart would state that any assignments of the trust deed during that process would not have to be recorded. Understanding securitization, and the need for true sale and bankruptcy remoteness in that process, and reading almost any Pooling and Servicing Agreement, should be enough for one to conclude that multiple assignments by the Beneficiary of the trust deed must occur. If so, they need to be recorded under ORS 86.735(1).
- Without more information, it cannot be known for certain, what the James’ REMIC’s Pooling and Service Agreement (“PSA”) said. But most of the Countrywide PSAs were virtually the same. They very clearly provide that the promissory note must be indorsed “in blank” and without recourse, and together with the assigned trust deed, are to be physically delivered to the REMIC’s Trustee [not to be confused with the Trustee identified in the Trust Deed – PCQ] or its Custodian. And this had to occur before the Cut-Off Date of the REMIC, which was years before the filing of the Notice of Default that initiated the James’ foreclosure. There is only one way to assign the beneficial interest in a trust deed in order to convey it to the REMIC Trustee or Custodian: Through an Assignment of Trust Deed. And if that wasn’t done by the Beneficiary or Trustee – as Judge Stewart surmised – who could have done it? The only other parties to that Trust Deed were the James, themselves, and they had no ability to assign the beneficiary’s interest to anyone.
- Riddle Me This: If MERS was acting as the nominal Beneficiary for the original lender, NWMG, then as a part of the securitization process, MERS would have signed a beneficial assignment document to the REMIC’s Trustee or Custodian, – presumably via one of its ubiquitous “Assistant Secretaries.” But once inside a REMIC, trust deeds normally do not leave. Foreclosure is left to the REMIC Servicer or a Sub-Servicer. How MERS would be able to get the James trust deed out of its REMIC and re-assign it to BAC Home Loan Servicing, remains a mystery that I suspect was never examined. Ergo, Judge Stewart’s conclusion that somehow, the transfers of the James’ Trust Deed did not need to be recorded as required by ORS 86.735(1) is simply wrong.
- Judge Stewart stated that “By recording the assignment of the Deed of Trust from MERS to BACHLS, BACHLS then acquired the power to act as the Beneficiary, rendering valid its subsequent appointment of RTC [ReconTrust – PCQ] as the successor trustee in charge of commencing the foreclosure. She then acknowledged Judge Panner’s opposite conclusion in the Hooker case, and set out her reasons for disagreeing with him.
- She noted that Judge Panner “…expressed concern about MERS making it much more difficult for all parties to discover who ‘owns the loan’ for the purpose of modifying it.” She resolved the issue by concluding that the James “… agreed in paragraph 20 the Deed of Trust that the note could be sold one or more times without prior notice to them and that ‘[t]here also might be one or more changes of the Loan Servicer unrelated to a sale of the Note. This is not a case where plaintiffs do not know the point of contact for addressing concerns about their loan. As plaintiffs admit, BACHLS is the loan servicer and the party responsible for addressing all concerns about their loan.”
- I guess this was a polite way of telling the James that ownership of their loan ‘was not any of their business.’ Knowing the name of the servicer was enough. I respectfully disagree. There is no question that the Trust Deed was drafted to benefit the lender, not the borrower. Borrowers have no choice in negotiating the terms that go into the trust deed form. It is presented on a “take it or leave it” basis. Not one party to the lending transaction – nor any law – requires that lenders explain in plain English, what the document means. As a result, 99% of all such borrowers have little understanding of the significance of the boilerplate legalese in their trust deed. For these reasons alone, it is unconscionable to bind consumers to a provision in their loan document they neither negotiated nor understood.
- Lastly, Regulation Z [the Truth in Lending Act, or “TILA” – PCQ], was amended, effective January 1, 2011 to require that a purchaser or assignee acquiring ownership of a loan [not simply servicing rights – PCQ] must inform the borrower in writing no later than 30 days after the date on which the loan was sold, transferred or assigned. So apparently the Federal Reserve Board thought such ownership information important enough that it should be shared with those borrowers whose loans were transferred. [For an explanation of why it is important, read the Federal Register here. – PCQ]
Must the Note be Presented in a Non-Judicial Foreclosure?
- The James argued that the foreclosing bank did not have possession of a properly endorsed [“indorsed” in UCC-speak. PCQ] promissory note at the time foreclosure was commenced. Judge Stewart dismissed this the argument as “…nothing more than a “show-me-the-note” claim masquerading as a viable claim for relief.” She summarily concluded that “There is no requirement under Oregon law that a foreclosing entity must produce the note prior to a non-judicial foreclosure. Whether the UCC requires presentment of the note is irrelevant since this case is not an action on a promissory note or a judicial foreclosure.”
- While it is true that the OTDA does not explicitly “require” a lender to present the note as a part of a non-judicial foreclosure, to my knowledge, it is commonly accepted law [subject to limited exceptions] that a trust deed separated from the note has no debt upon which to base a foreclosure. Absent some evidence that the foreclosing lender has been delegated authority to foreclose by the owner of the note, I believe this is a valid objection to a non-judicial foreclosure. Again, I do not believe the absence of such a requirement in the OTDA is sufficient reason to conclude that it is not an implicit part of the OTDA. It is certainly not an irrelevant issue. Indeed, the trust deed foreclosure statute, ORS 86.770 [entitled “Effect of Sale”], assumes the existence of a promissory note as the basis of the foreclosure, since that is the indebtedness that is extinguished upon completion of the non-judicial sale.
- Judge Stewart correctly noted that the James’ proceeding was not an action on the note or a suit to judicially foreclose the trust deed. Perhaps she knew that sooner or later, when the lender filed for judicial foreclosure against the James, the “show me the note” argument would no longer be a “masquerade.” Rather than the “show me the note” defense being a ruse, as the banks in Florida seeking foreclosure know all too well, proof of the right to enforce the promissory note is essential in all judicial foreclosures.
Do Robo-Signers Have Authority to Sign Multiple Foreclosure Documents?
- Plaintiffs argued, apparently in a “conclusory allegation,” that the signer of their pre-foreclosure documents was a ‘robo-signer’” who had no authority to do so. Citing the MERS Rules giving members authority to sign in an official capacity on behalf of MERS, Judge Stewart ruled that the signer’s “…dual role” was “…not sufficient to state a facially plausible claim…. That the signer “wore two hats” *** is insufficient to prove that she lacked authority to sign either or both documents.”
- One’s reaction to the MERS practice of giving sham corporate resolutions to persons having no familiarity with the underlying defaults, or even with the documents they are signing, is purely subjective – in the eyes of the beholder. Many judges and other commentators have nothing but disgust for a business model that depends upon the use of entry-level employees with false”official” authority to foreclose people out of their homes. A cursory review of a dozen of robo-signed foreclosure documents will dispel any belief in the signers’ competence. They routinely place the wrong lender’s stamp next to their names, sign critical documents out of order, and in some cases – such as the notorious “surrogate signers” scandal – apparently have no qualms about falsifying the signatures of others.
- However, admittedly, there is a grey line between unethical conduct and illegal conduct. From my perspective, I am less concerned whether the bank lackeys are “robo-signers”, with whether they actually signed the recorded documents correctly and in order. Without reading the transcript and exhibits, it’s hard to know what actually happened in the James case.
Conclusion. Judge Stewart concluded “…that MERS is both a named and legitimate beneficiary in the Deed of Trust and that all necessary assignments were recorded as required for a non -judicial foreclosure under the OTDA.” However, expressing, perhaps frustration at having to render a judicial opinion on Oregon law, when there really is none, Judge Stewart observed: “Although this court longs for the guidance of the Oregon appellate courts as to the proper interpretation of the OTDA, the parties are aware of only one state court case that is currently on appeal to the Oregon Court of Appeals, Niday v. GMAC Mortg., LLC, Clackamas County Circuit Court Case No. CV-10-02-0001 (Smith Decl., Ex. 5). Since that appeal likely will not be decided for many months, this court must do its best to interpret Oregon law.”
Do I detect “MERS fatigue” on Oregon’s federal bench? I, for one, am tiring of the uncertainty of the issue. Perhaps the 2012 Oregon Legislative Session will give us some answers. Or perhaps not….
