The McCoy Case Analyzed – MERS Smackdown!

Posted on by Phil Querin

“…the powers accorded to MERS by the Lender [whose name appears in the Trust Deed] – with the Borrower’s consent – cannot exceed the powers of the beneficiary.  The beneficiary’s right to require a non-judicial sale is limited by ORS 86.735.  A non-judicial sale may take place only if any assignment by [the Lender whose name appears in the Trust Deed] has been recorded.”

[Frank R. Alley III, Chief Bankruptcy Judge, published opinion, Donald McCoy III v. BNC Mortgage, et al., Adversary  No. 10-6224 -fra, Case No. 10-63814-fra-13, February 7, 2011]

Slapdown!  In a relatively uncomplicated adversary proceeding in Oregon’s bankruptcy court, Judge Alley hit the nail squarely on the head:  If lenders in Oregon want to foreclose people out of their homes, they must follow ORS 86.735(1). Or in the words of one Oregon title counsel, Judge Alley’s decision means that “…all assignments behind a MERS trust deed must be recorded for a non-judicial foreclosure.  In McCoy, it appeared there were unrecorded assignments by the original lender identified in the promissory note.  A “beneficiary” in Oregon is defined as the entity or person identified in the trust deed as the one for whose benefit the trust deed is given (or their successor in interest) – that was not MERS, but rather the original lender making the actual loan to the borrower.

For some reason, this relatively simple requirement has been routinely and flagrantly ignored in virtually every non-judicial foreclosure I have reviewed last year and this year.  I suspect if I went back to 2008 and 2009, I would see the same thing.  And this holding isn’t confined to situations in which MERS is the (nominal) beneficiary.

As this site has repeatedly pointed out, the Oregon statute is pretty clear:  Oregon Revised Statute 86.735(1) provides that a successor trustee [i.e the bank’s “enforcers” who actually process the foreclosure from beginning to end – PCQ] may foreclose a trust deed by advertisement and sale if “(t)he 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 public records of the county in which the property is located.  [Underscore mine.  PCQ]

Without going into details, suffice it to say, that from the initial funding of most loans, the note and trust deed, travel far and wide.  In many, many residential loans from the Big Banks during 2005 – 2008, loans were securitized, that is, sold into the secondary market to be sliced and diced into billion dollar REMICs and then gobbled up by investors.  Of necessity, this meant that the trust deed would be transferred into and out of the hands of multiple banks.  In theory, each time the trust deed was transferred, there needed to be an official “Assignment” document transferring ownership.  Compliance with this law was of little consequence if loans were always paid off.  But when they went into default, as millions did commencing in 2008, the handling of the trust deeds came under scrutiny.  People began to notice that lenders who were foreclosing through their successor trustees, simply materialized out of thin air.  There was really no way to trace the “genealogy” from the first bank to the last.

This blatant disregard for Oregon law was due to the need for speed in the foreclosure process.  It was also due to years of sloppy lender practices. In truth, it appears that most Big Banks never bothered recording the assignments every time they transferred their trust deeds.  In fact, it appears that they may have never even prepared the assignments at all.  The effect of the McCoy holding is a direct consequence of the MERS model, which sought to “electronically record” trust deed transfers, rather than following laws such as Oregon’s, that require recording in the public record.  This meant that the public record no longer disclosed multiple assignments of the trust deed.  The only way for successor trustees – the persons or companies foreclosing on behalf of a lender – to deal with this problem, was to ignore the law.  So they took it upon themselves to prepare and record assignment documents either from the originating lender whose name appeared on the trust deed – or MERS – to another lending institution.  No question was ever asked or inquiry made about the many other assignments – yet we know from the securitization process, that multiple banks, of necessity, received and delivered each trust deed multiple times, in order to obtain what is known as “true sales” and “bankruptcy remoteness.

In many Oregon foreclosure cases, the successor trustee signs and recorded all of the necessary documents that tee up the foreclosure – the Assignment of Trust Deed, the Appointment of Successor Trustee, and the Notice of Default and Election to Sell.  For the answer to this and other cosmic (and comic) mysteries, see my posts here and here.  The process is patently wrong.  Now, Judge Alley, has said “Stop.”  In effect, he ruled that if you want to non-judicially foreclose someone out of their home in Oregon, the trust deed assignments must be recorded.  The next move is up to the folks who’ve been ignoring the law to date.  That includes those companies acting as successor trustees, who should think twice before recording a Notice of Default without first recording the other trust deed assignments.

Of course, the recording  problem now raises several moral conundrums for the major players in the booming foreclosure industry (from MERS and the Big Banks to their processor services, successor trustees, title insurance carriers, and attorneys: “Do I comply?” Do I pretend I didn’t know better?” “Do I rely upon the ‘I was just following orders’ excuse?”  Do I rely upon the time-honored lawyer practice of “distinguishing” the McCoy case from everything else?”  And then there is the ultimate ruse, which raises the civil and criminal consequences exponentially: “Do I participate in the fabrication of assignment documents, suitable for recording?”  How long will they be able to cloak themselves in “Don’t Ask, Don’t Tell” hoping that the issue will never find it’s way into the court system?  And ultimately, the lawyers advising their foreclosure industry clients will have to face the reality that their licenses may be on the line if they give bad or illegal advise. Time will tell – but the problem is not going away.

Posted in Foreclosure, Legislation - Oregon, Lenders, Miscellany, Real Estate General | Tagged , , , , , , , , , ,
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