Sharpe vs. Wells Fargo Home Mortgage – A Critical Analysis

Hypocrisy: [c.1200, ipocrisie, from O.Fr. ypocrisie, from L.L. hypocrisis, from Gk. hypokrisis “acting on the stage, pretense,” from hypokrinesthai “play a part, pretend….” Online Etymology Dictionary]

Example: When banks lend money today, they demand absolute transparency of their borrowers. Every “T” must be crossed and “I” dotted.  Signatures, income, credit, employment, all must be verified and re-verified to the nth degree. But when banks foreclose their borrowers today, they throw transparency to the wind. Everything becomes opaque. The banks move into the shadows, transferring obligations behind the scenes, employing lackeys to sign their most important foreclosure documents, and using servicers to do their dirty work, all the while whispering “We Care” to beleaguered homeowners, when that is the farthest thing from their mind. – PCQ

Background. On July 23, 2004, Mr. and Mrs. Sharpe borrowed $194,750.00 from their lender, Washington Mutual Bank (“WaMu”).  They signed a Promissory Note and Trust Deed.  Here’s what these documents said:

  • The Note informed them that their lender could transfer it to a third party, which would entitle the new entity to receive the Sharpes’ payments;
  • The Trust Deed stated that the Note could be sold without prior notice to them;
  • The Trust Deed stated that the “Loan Servicer” [i.e. the entity to whom they were to make all Note payments – PCQ] could change;
  • The Servicing Disclosure Statement [a separate lender-created document – PCQ] informed them that WaMu was to initially act as servicer of their loan – but that could change in the future;

On September 16, 2004, WaMu sold the loan to Fannie Mae, although it [WaMu] retained all servicing rights.  This means that while Fannie Mae owned the Trust Deed and was the holder of the Note, WaMu acted as the collection agent and was thus earning servicing fees on the Sharpes’ loan even after they had sold it to Fannie Mae.

On February 1, 2007, Washington Mutual transferred the servicing of the Sharpes’ loan to Wells Fargo.  The Sharpes were appropriately notified of the change in servicers.

On February 21, 2007, Washington Mutual assigned the Sharpes’ Trust Deed to Wells Fargo. Wells Fargo recorded the assignment in the Jackson County public records, ostensibly in accordance with ORS 86.735(1), which requires that as a condition to conducting a non-judicial foreclosure in Oregon, a foreclosing lender must record all assignments of the Trust Deed being foreclosed.

[At this point in the story, one might reasonably ask:  “How can WaMu assign the Sharpes’  Trust Deed to anyone, since it had already sold the loan, including the Note and Trust Deed, to Fannie Mae in 2004?”  Doesn’t one have to actually “own” the Trust Deed as the Beneficiary, in order to assign it to a third person?

But wait! Isn’t this was MERS has been doing for years?  When a loan went into default and was being teed up for foreclosure, an “Assistant Vice-President” – actually, nothing more than a low-level robo-signer ostensibly acting for the original lender that funded, and then promptly sold, the loan years earlier – would assign the Trust Deed to a new Beneficiary.  The robo-signer, now acting as the Assistant Vice-President for the new Beneficiary, would appoint a Successor Trustee to commence the foreclosure. In some instances, the robo-signer was actually an employee for the foreclosure trustee company, although acting as an authorized officer for the originating bank and the assignee bank.  This ruse, compliments of a MERS corporate resolution, allowed its members to pretend they had legal authority for one another’s banks – even though there was never any business relationship to support the titles they used.  It is this very same MERS business model that foreclosure mill attorneys are able to actually explain in open court without snickering, that allows a single person to simultaneously take on more personalities than Sybil. – PCQ]

Ahh, but I digress. In the Sharpe case, MERS is nowhere to be found.  So how is it that WaMu, who had sold the Note and Trust Deed to Fannie Mae three years earlier, now has the ability as the loan servicer, to again assign the Trust Deed to another lender?  Surprise answer appears below:

By August 2010, the Sharpes were officially in default on their loan – a fact that Fannie Mae could apparently see coming, since that appears to have been the sole reason for the WaMu assignment of their Trust Deed.  [Why do I say this?  Well, what other reason would Fannie have for transferring a non-performing loan to Wells, besides default servicing and foreclosure? – PCQ]

What follows is a summary of the default process that occurred in the Sharpe case:

  • On October 28, 2010, Wells Fargo [the new Beneficiary appointed by WaMu, the servicer] recorded the Appointment of Successor Trustee by Northwest Trustee Services, Inc. (“NWTS”) as successor trustee;
  • Also, on October 28, 2010, NWTS recorded a Notice of Default and Election to Sell the Sharpes’ home [The reason these documents were recorded on the same day is likely because the same robo-signer signed both document in two different legal capacities. – PCQ];
  • On March 1, 2011, the Sharpes sued Wells Fargo.

Judge Panner’s Written Opinion. Judge Panner, who heard the case, dismissed all of the Sharpes’ legal claims, leaving the following single issue for discussion: Whether Wells Fargo’s foreclosure was invalid, since the transfer of the Sharpe Trust Deed to Fannie Mae was never recorded pursuant to ORS 86.735(1).

That statute permits non-judicial foreclosures only if any assignments of the trust deed have been recorded in the mortgage records of the county in which the property is situated.  Judge Panner noted that this statutory requirement “…is consistent with the longstanding rule that the trust deed or mortgage generally follows the note.”

[I interpret this statement to mean that he believes the legislative purpose of Oregon’s statutory requirement for recording the assignment was to inform buyers the identity of the lender that currently holds their note, since the note and trust deed typically travel together.  Ergo, recording the owner of the trust deed should also identify the holder of the note. In other words, had the WaMu Assignment of Trust Deed to Fannie Mae been properly recorded, the Sharpes would have known that Fannie held their Note – or, in the cryptic lexicon of loan modification processors, the mysterious “Investor.” – PCQ]

In his written decision, Judge Panner reiterated his holding in Hooker that “…I agree with Judge Alley [in the McCoy case – PCQ] that ‘Oregon law permits foreclosure without the benefit of a judicial proceeding only when the interest of the beneficiary is clearly documented in a public record.”  He concluded that WaMu’s 2004 sale of the Sharpes’ loan to Fannie Mae was an assignment of the beneficial interest in their trust deed subject to ORS 86.735(1).  So far, so good.

However, at this point, Judge Panner made an abrupt turn without signaling.  He concluded that the servicer, i.e. Wells Fargo, could proceed in its own name, acting on behalf of the note holder, Fannie Mae.  Judge Panner based his decision on ORS 86A.175(3).  This statute became effective on July 31, 2010, and was based upon a predecessor statute, ORS 59.962.  Both statutes appear to say substantially the same thing:

  • With the permission of the lender, note owner, note holder or other holder of an interest in a note, a bank may service or collect any mortgage loan in its own name or the name of the lender, note owner, note holder or other holder of an interest in the note.
  • To “service or collect any mortgage loan” includes but is not limited to:
    • Holding documents or written instruments and receiving and disbursing payments according to the instructions of the parties to the documents or written instruments;
    • Collecting or remitting, or having the right or obligation to collect or remit, for any lender, note owner, note holder or other holder of an interest in a note or for the lender’s own account, payments, interest, principal and trust items, etc.
    • Bringing and maintaining any suit or action to collect any amounts owed on a mortgage loan, including but not limited to the exercise of any contractual, statutory or common law remedies such as injunction, specific performance, judicial or non-judicial foreclosure or receivership.

So the rationale for Judge Panner’s ruling went something like this:

  • Fannie Mae authorizes its servicers to “appear in the land records as the mortgagee”;
  • The Fannie Mae servicing contract allows the servicer [in this case, WaMu] to execute assignments of the trust deed;
  • “…the Fannie Mae Servicing Guide grants servicers, acting in their own names, the authority to represent Fannie Mae’s interests in foreclosure proceedings as holder of the mortgage note.”
  • Therefore, pursuant to ORS 86A.175(3) together with Fannie Mae’s Servicing Guide, everything that was done with the Sharpes’ loan documents – including the assignment and subsequent foreclosure – was legal.

My Dissenting Opinion. My first problem with Judge Panner’s ruling is that even if we agree ORS 86A.175(3) permits servicers masquerade as beneficiaries, WaMu transferred its servicing rights to Wells Fargo on February 1, 2007 and then subsequently assigned the Sharpes’ Trust Deed to Wells Fargo on February 21, 2007.  But ORS 86A.175(3) only gives a servicer the right to assign a trust deed in its own name while acting in that capacity on behalf of Fannie Mae. Once the servicing was transferred to Wells Fargo on February 1, WaMu had no further power to assign the Sharpes’ Trust Deed to Wells Fargo on February 21st – it was no longer Fannie Mae’s servicer.  WaMu should have recorded the Trust Deed Assignment to Wells Fargo first (on behalf of Fannie), and then transferred the servicing rights.  As it was, the Sharpes had an unseized opportunity to argue that Wells Fargo had no authority to foreclose them because the WaMu Trust Deed Assignment was executed after WaMu had transferred the servicing rights.  [Do you suppose the bank attorneys for Wells knew this but said nothing to the Court? – PCQ]

My second problem with the Sharpe ruling is that it ignores the strawman problem that has plagued many of the earlier MERS cases; i.e. it permits servicers to engage in the very same ruse – they may now masquerade as the foreclosing beneficiary, while the real beneficiary remains hidden.

In Sharpe, Judge Panner concluded that:

  • “…Washington Mutual’s 2004 sale of plaintiffs’ loan to Fannie Mae was an assignment of the beneficial interest in the trust deed.  The Oregon Trust Deed Act requires that assignment be reflected in the county land records prior to the initiation of a nonjudicial foreclosure.  ORS 86.735(1).”
  • Quoting, with approval, Judge Alley in the McCoy case, he said: “Oregon law permits [a non-judicial] foreclosure only when the interest of the beneficiary is clearly documented in the public record.”
  • Nevertheless, referring to ORS 86A.175(3), Judge Panner concluded that “Because under Oregon law, a servicer can proceed in its own name on behalf of the note holder, Wells Fargo’s appearance in the county land records, which defendant [Wells Fargo] recorded prior to initiating non-judicial foreclosure procedure, satisfies ORS 86.735(1).”  He concluded that “To require Washington Mutual to record the assignment in Fannie Mae’s own name would render ORS 86A.175 meaningless.”

Riddle me this:  Does not this ruling in Sharpe render ORS 86.735(1) meaningless?  Is it not inconsistent with the spirit and intent of ORS 86.735(1)?  Judge Panner had previously stated in Hooker:  “Should the beneficiary choose to initiate non-judicial foreclosure proceedings, the [Trust Deed] Act’s recording requirements mandate the recording of any assignments of the beneficial interest in the trust deed.”  Or to put a fine point on the issue: If only beneficiaries or trustees can make and record assignments of trust deeds under ORS 86.735(1), and servicers are neither, why should they be permitted to “pretend” they are?

We know from Hooker that Judge Panner believed that MERS was simply a “strawman” and not the party “for whose benefit a trust deed is given” as required by  ORS 86.705(1). So how is it that a servicer, who is no more of a “beneficiary” under ORS 86.705(1) than MERS, can perform acts in Sharpe, that MERS could not perform in Hooker?  At least MERS identifies itself in the Trust Deed as the “legal” – though not “beneficial” – owner of the trust deed.  The servicers’ pretense under Fannie Mae’s rules and ORS 86A.175(3) is more insidious – it allows outright deception.  The only difference between  Sharpe and Hooker is that MERS cannot call itself a “mortgage lender” under ORS 86A.175(3).  But at least when we saw MERS in the chain of title, we knew the devil we were dealing with.  Under the Fannie Mae “servicer” ruse, combined with ORS 86A.175(3), we can’t know the devil we’re dealing with.  [It is becoming clear that the genesis of ORS 86A.175, was the banking industry’s attempt to make an end run around the MERS problem, by letting servicers become the new “stawman”. – PCQ]

The Sharpe holding is a pretty thin reed to rely upon in avoiding Oregon’s mandatory recording law.  Especially since both the Fannie Mae rules and the MERS rules seek to do the same thing – conceal the true identity of the beneficiary. Hopefully, some will see the judicial inconsistency in attacking the MERS model for failing to comply with ORS 86.735(1), but then permitting Big Bank Servicers to legally accomplish the same subterfuge via ORS 86A.175(3).

Reconciling ORS 86.735(1) and ORS 86A.175(3). However, requiring WaMu to record the assignment to Fannie Mae would not render ORS 86A.175 “meaningless.”  Both ORS 86.735(1) and 86A.175(3) can be read and construed together.  They are not mutually exclusive. Here is a Solomon-esque approach that gives equal credence to both statutes, but destroys neither:

  • Require Washington Mutual to record the assignment of the Sharpes’ Trust Deed to Fannie Mae pursuant to ORS 86.735(1).  As long as Fannie Mae holds the loan, there is no question that it is the “Investor” and thus, the decision-maker for such things as loan modifications, or other distressed housing decisions.  After all, it is American taxpayers who are being foreclosed, and it is the American taxpayers that own Fannie Mae.  Why should Fannie be able to conceal its foreclosure activities from its owners?
  • If the loan goes into default, Fannie can then assign the Trust Deed to the servicer of its choice, who could then commence and complete the foreclosure in its own name.  Granted, this requires that Fannie perform an extra step in recording the assignment, as required by ORS 86.735(1). But is a recording fee too heavy a price to pay for transparency?
  • The spirit and intent of the two statutes are both honored.  But without ever recording the assignment to Fannie, the homeowner never knows who is the decision-maker should they go into default. [I do not agree that all one has to do is go onto the Fannie or Freddie lookup website to learn if a GSE owns their loan.  This is not identified in any of the loan documentation and is a largely unknown resource to consumers being foreclosed.  Moreover, it is a company-made protocol that exists outside of any legal authority.  I doubt that if asked, Wells Fargo would have revealed to the Sharpes the current owner of their loan.  I’d  prefer the GSEs follow state law, just like everyone else is expected to do. – PCQ]

I suspect that Judge Panner may have sensed that his ruling in Sharpe could completely emasculate ORS 86.735(1) when he wrote:

“Although I am troubled with a situation, apparently present here, where the note holder’s interest is never revealed to the borrower prior to a non-judicial foreclosure, the Oregon legislature has clearly spoken on this issue. In certain situations, including those present here, the legislature allows a servicer to proceed in its own name on behalf of the note holder. I do not determine the wisdom of the statute, but only whether defendant violated the statute.”

Conclusion. The Sharpe case underscores a problematic trend: Pro se’ litigation, such as occurred here, will continue to result in bad law for distressed homeowners.  The Big Bank lawyers know the legal arguments that will resonate.  They will not admit the inconsistency of their own position – especially the rules of statutory construction requiring that both ORS 86.735(1) and ORS 86A.175(3)  should be read together in an effort to give meaning to both. That could have been one of the borrowers’ arguments in Sharpe, but it was not.  And the Big Bank lawyers were not going to help them out.  [It must be a bittersweet victory for a foreclosure mill attorney to win a case against a pro se’ borrower – perhaps something akin to a gunfighter whose knows his opponent was shooting blanks, but still puts a notch on his handle. – PCQ]

I cannot help but wonder if the result in Sharpe might have been different had a good foreclosure defense attorney argued this case.  I suspect Judge Panner would have listened very closely.  As it was, he felt his hands were tied, and the Sharpes had no advocate but themselves.