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]