February 27th, 2013

Author:  Joseph L. Dunne

 

I.  Introduction

 

            In the real estate world, the years leading up to the 2008 financial crisis were characterized by massive financial irresponsibility exacerbated by a regulation vacuum. The nation’s biggest financial institutions securitized millions of loosely underwritten home loans into mortgaged-backed securities and sold them to unknowing investors. The result—now widely recognized—was the overnight collapse of AAA-rated portfolios collateralized with toxic subprime loans. As of March 2012, nearly 20% of all Oregon homeowners were under water on their mortgages.[1] 

For most of the last five decades, real estate lenders have diligently complied with Oregon’s statutory requirements for nonjudicial foreclosure. Traditionally, every time a home loan was sold on the secondary mortgage market, lenders recorded a deed of trust assignment in the local county records.[2]  This practice guaranteed a complete legal chain of title at the time of foreclosure—making nonjudicial foreclosure a quick, reliable enforcement method without the need for judicial oversight. Oregon’s nonjudicial foreclosure regime theoretically encourages lending to less-qualified credit applicants by ensuring a more cost-effective remedy upon default.[3]  Since their creation in 1959, nonjudicial foreclosures have been the predominant method for foreclosing real property in Oregon.

Widespread changes in mortgage banking practices during the housing boom undercut this once-reliable foreclosure method. Once mortgage bankers and Wall Street financiers realized the enormous profit potential in the secondary market for home loans, mortgage securitization by private investment banks intensified.[4] As the market for home loans burgeoned and Americans increasingly signed up for home ownership, the mortgage banking industry collectively decided the decades-old practice of recording assignments each time a loan was sold was too expensive and paperwork intensive.[5]  They developed an electronic database named “Mortgage Electronic Registration Systems, Inc.” (MERS) to save time and money in the securitization process.[6] An estimated 60% of all current U.S. home mortgages were sold on the secondary market using MERS,[7] but as housing prices continued to skyrocket the legal issues surrounding MERS and mortgage securitization remained unnoticed. The eventual collapse of the housing bubble exposed the legal problems with MERS and mortgage securitization. Mortgage lenders soon found themselves in the middle of a foreclosure crisis.

The Oregon Trust Deed Act (OTDA) requires lenders to record all deed of trust assignments before initiating nonjudicial foreclosures.[8] Lenders have difficulty complying with this requirement because of their dependence on the MERS private recording system.[9] Over the last several years, an increasing number of Oregon homeowners have challenged the legality of their pending nonjudicial foreclosures. Their claims for wrongful foreclosure stem from two basic arguments: (1) MERS cannot be a beneficiary under a deed of trust in Oregon because MERS does not meet the statutory definition of a beneficiary found at section 86.705(2)[10] of the Oregon Revised Statutes, and (2) unrecorded assignments of their deed of trust prohibit the nonjudicial foreclosure remedy under section 86.735(1).

These issues have divided circuit and district court judges in Oregon, resulting in a number of conflicting opinions.[11] On April 6, 2012, Federal District Court Chief Judge Ann Aiken certified four questions to the Oregon Supreme Court stemming from four wrongful foreclosure cases pending before her Court.[12] On July 18, 2012, the Oregon Court of Appeals ruled against MERS in Niday v. GMAC Mortgage, LLC, finding that MERS does not meet the statutory definition of a beneficiary, and cannot be used to circumvent the OTDA recording requirement.[13] The following day, the Oregon Supreme Court accepted the four certified questions from the District Court.[14]  Oral arguments are currently scheduled for January 8, 2013, [15] although a final decision may not be rendered until the following summer.  Until then, in the wake of Niday and recent legislation requiring pre-foreclosure mediation, lenders appear reluctant to pursue any nonjudicial foreclosures in Oregon.[16]  For the time being, the entire foreclosure industry in Oregon has has been forced to switch to judicial foreclosures as the state’s High Court is now poised to weigh in on Oregon’s nonjudicial process and the legislature scrambles to come up with a solution.

This article explains how the use of MERS as a named beneficiary violates the procedural requirements for foreclosure under the Oregon Trust Deed Act.  This article further examines the implications of MERS’s inability to serve as the beneficiary, concluding that, although MERS cannot be a beneficiary, MERS may likely serve as an agent of the initial and successive beneficiaries. In its agency capacity, MERS and its principals may comply with Oregon’s procedures for nonjudicial foreclosure by recording all assignments of the deed of trust prior to initiating nonjudicial foreclosures.

II.  Background

A.         Mortgage Securitization and MERS

Financed real estate transactions involve two distinct legal documents: (1) a promissory note,[17] which documents the obligation to repay the loan; and (2) a security agreement, which secures repayment of the loan to the real property.[18] Mortgage securitization is the process of collateralizing marketable securities (“mortgage backed securities” or “MBS”) with pools of real estate promissory notes.[19]  When promissory notes are bundled together to collateralize securities, the pools of notes are legally organized as trusts.[20] Promissory notes pledged to collateralize MBS trusts are sold multiple times before they become assets of the trusts.[21] Each one of these transfers is an outright sale of the note.[22]  Every time the note is sold, the beneficial interest in the underlying security agreement is automatically assigned to the new noteholder by operation of law.[23] The importance of the relationship between the note and security interest cannot be overstated in the context of securitization. The deed of trust assignments were traditionally recorded in the local land records to give public notice of a noteholder’s secured interest in the property.

According to the American Securitization Forum, securitization of mortgages increases the availability of credit to home purchasers by decreasing the cost of credit and spreading risk.[24] Government sponsored entities began securitizing loans on a small scale in the early 1970s.[25]  Soon thereafter, private financial institutions realized the profit potential from selling these securities, and modern securitization began.[26] Between 1990 and 2006, issuance of mortgage-backed securities increased by 678%.[27]  As the housing bubble took form in the early 2000s, mortgage securitization increased dramatically.[28] By the end of 2007, the market held over $7 trillion in outstanding mortgage backed securities.[29] As millions of new loans were securitized, mortgage bankers found themselves buried in paperwork, because each transfer of the note required a recording of the underlying assignment of the security interest. The mortgage bankers quickly realized they needed a process for streamlining the transfers of mortgages to save time and money.[30]  Their solution was MERS.

MERS tracks the beneficial interest in security instruments and changes in loan servicers.[31]  It was conceived in 1995 by Fannie Mae, Freddie Mac, Bank of America, JP Morgan Chase, Citibank, Wells Fargo, and other large lending institutions.[32] MERS was intended to make securitization both faster and cheaper by avoiding the need to record assignments of security interests.[33] MERS saved its members hundreds of millions of dollars by establishing a parallel recording system to track the transfers of the mortgages.[34] MERS revolutionized the secondary market for mortgages by allowing for the rapid securitization of nearly two thirds of all U.S. home mortgages.[35]

B.         Oregon Real Estate Finance and Foreclosure

In Oregon, the two common forms of real estate security agreements are mortgages and trust deeds.[36] Until 1959, mortgages were the most common form.[37] Oregon mortgages are governed primarily by common law, with some statutory requirements in Oregon Revised Statutes chapters 86 and 88.[38]  In a mortgage, the mortgagee holds the deed until the loan is fully paid by the borrower.[39]  Upon full payment of the obligation, the deed is reconveyed to the mortgagor.[40] 

Upon a default by the mortgagor, the mortgagee accelerates the amount due and files a lawsuit to foreclose. In this process, commonly known as a judicial foreclosure, the mortgagee files a lawsuit against the mortgagor and asks the court to determine the priority of rights between the mortgagor and all junior lienholders.[41] The court instructs the sheriff to sell the property at public auction, and distribute the proceeds according to the priority of the liens.[42] However, before the sale the homeowner and all junior lienholders enjoy a redemption period during which they can exercise their equitable right of redemption.[43]  The property remains unmarketable during this period.[44] If the disbursed proceeds are insufficient to fully satisfy a lien, the lienholder can sue the borrower for the deficiency. However under Oregon’s anti–deficiency statute, a mortgagee cannot obtain a deficiency judgment after foreclosing a residential trust deed.[45]

In 1959, the Oregon legislature passed the Oregon Trust Deed Act (OTDA) to simplify and speed up the foreclosure process.[46] Unlike a mortgage, which involves a mortgagor (borrower) and a mortgagee (lender), a trust deed involves three parties: a grantor (borrower), a “beneficiary,” and a trustee.[47]  The trustee holds legal title for the benefit of the beneficiary until either the loan is fully paid or the home is purchased at a foreclosure sale.[48]  The OTDA simplified the foreclosure process for lenders by creating a private right of sale and a statutory framework for foreclosure outside the purview of the court. The beneficiary of a trust deed can choose to foreclose a trust deed by a common law judicial foreclosure, or a nonjudicial foreclosure under the OTDA.[49] Although nonjudicial foreclosures are faster and less expensive, there are statutory prerequisites to nonjudicial foreclosures that are not required for judicial foreclosures, including the requirement to record all assignments of the deed of trust before foreclosing.[50] Including Oregon, 28 states have currently implemented statutory procedures allowing nonjudicial foreclosures, while the remaining states still require judicial foreclosures.[51]

C.         MERS’s Dilemma in Oregon

Mortgage bankers sought to legally implement the private MERS recording system by designating MERS as both (1) the beneficiary of the deed of trust, and (2) the nominee of the lender (noteholder).[52] The cumbersome boilerplate language in all MERS deeds of trust evidences this two-faced assertion of MERS’s legal status:

“MERS” is Mortgage Electronic Registration Systems, Inc.  MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is the beneficiary under this Security Instrument.[53]

 

MERS therefore claims to be both the beneficiary and the nominee of the lender.

            In the wake of the sub–prime mortgage meltdown, our nation found itself in the midst of a foreclosure crisis.[54] The problems with MERS’ legal assertions became more apparent as an increasing number of Oregonians lost their homes via the nonjudicial foreclosure process. The main problem with MERS is it claims to be the beneficiary to Oregon deeds of trust and acts as the beneficiary throughout nonjudicial foreclosure proceedings, but MERS does not fit the statutory definition of a beneficiary found in section 86.705(2) of the Oregon Revised Statutes.[55]  The result of this monumental oversight during the formation of MERS has profound implications on real estate lending and foreclosures today.  The remainder of this article examines in detail why MERS cannot be a beneficiary to Oregon deeds of trust and whether MERS may nevertheless comply with the Oregon Trust Deed Act’s foreclosure prerequisites.

III.  MERS Cannot Be a Beneficiary

            The language identifying MERS in deeds of trust reflects two very different legal identities.  MERS claims to be both the beneficiary to the deed of trust and the lender’s agent at the same time.[56] MERS relies on its beneficiary status to claim the beneficial interest in the deed of trust throughout the securitization process.  Therefore, there are no assignments to record.  A relatively simple statutory analysis shows that MERS cannot be the deed of trust beneficiary in Oregon.

            The term “beneficiary” is statutorily defined in the OTDA in Oregon Revised Statutes section 86.705(2). Defining the term invokes Oregon’s well-established three-step methodology for statutory interpretation, set forth by the Oregon Supreme Court in Portland General Electric, Company v. Bureau of Labor & Industries and modified in State v. Gains.[57] The first step is to analyze the text and context of the statute as a whole.[58] The second step is to consider the legislative history.[59] If the first two steps are not conclusive and ambiguity remains, “the court may resort to general maxims of statutory construction to aid in resolving the remaining uncertainty.”[60]

            The text and context should first be considered.[61]  Section 86.705(2) of the Oregon Revised Statutes provides:

 

“Beneficiary” means a person named or otherwise designated in a trust deed as the person for whose benefit a trust deed is given, or the person’s successor in interest, and who is not the trustee unless the beneficiary is qualified to be a trustee under O[regon] R[evised] S[tatutes section] 86.790(1)(d).[62]

 

As District Court Judge Simon noted in a recent opinion, this statutory definition can be segmented into 3 separate requirements: (1) a person named or otherwise designated in a trust deed; (2) as the person for whose benefit a trust deed is given, or the person’s successor in interest; and (3) not the trustee unless qualified.[63] If MERS fails one of these three requirements, it does not meet the statutory definition of a beneficiary.  The meaning of requirements one and three are plain and unambiguous.[64]  MERS surely satisfies requirements one and three; MERS is always named or otherwise designated in trust deeds and is not the trustee. The issue then, is whether MERS meets the second requirement. Precisely stated, who “benefits” from a trust deed?  Does MERS enjoy that benefit?  The answer is not expressly found in section 86.705(2) of the Oregon Revised Statutes, because the statute does not declare what the benefit of a trust deed is and who enjoys that benefit. Furthermore, “benefit” is #ff0000 altogether in the OTDA.

            An examination of section 86.705(2) in the context of the entire OTDA leaves no room for ambiguity.  It is obvious that “the ‘benefit’ of a trust deed is that it secures the repayment of the note.”[65] A “trust deed” is defined as:

[A] deed . . . that conveys an interest in real property to a trustee in trust to secure the performance of an obligation the grantor or other person named in the deed owes to a beneficiary.[66]

 

When a trust deed is issued to secure the obligation of a promissory note, the beneficiary of the trust deed is the person to whom repayment of the note is owed, or that person’s successor in interest. This conclusion is supported by the fact that the legislature did not define the terms “lender,” or “noteholder” in the OTDA.[67] Had the legislature intended the beneficiary to be a separate and distinct entity from the noteholder, they would have defined noteholder in the statute.[68]

The legislature clearly intended the beneficiary be the original noteholder or that person’s successor(s) in interest. As Judge Simon correctly pointed out, other sections of the OTDA confirm that the legislature intended the “beneficiary” to be the noteholder.[69]  Oregon Revised Statutes section 86.710 provides:

“[t]ransfers in trust of an interest in real property may be made to secure the performance of an obligation of a grantor, or any other person named in the deed, to a beneficiary.”[70]

 

Section 86.720(1) provides:

“Within 30 days after performance of the obligation secured by the trust deed, the beneficiary shall . . . request . . . the trustee to reconvey the estate of real property described in the trust deed to the grantor.”[71]

 

This assumes “the grantor owes the obligation to the beneficiary.”[72] Also, in describing telephone numbers to be included in foreclosure notices, the legislature again indicates that the beneficiary is the person who loaned the money:

 “[t]elephone numbers . . . must be toll-free numbers unless the beneficiary: (a) Made the loan with the beneficiary’s own money; [and] (b) Made the loan for the beneficiary’s own investment[.]”[73]

 

            The recent passage of Senate Bill 1552 on March 5, 2012 reaffirms the Oregon legislature’s intended definition of beneficiary.[74] Senate Bill 1552 establishes mandatory pre-foreclosure mediation with the goal of seeking a “Foreclosure Avoidance Measure.”[75]  “Foreclosure Avoidance Measure” is “an agreement between a beneficiary and a grantor to modify an obligation secured by a trust deed[.]”[76] The bill requires the beneficiary or its agent to appear at the mediation in person and bring the following documentation:

(A) grantor’s complete payment history; (B) evidence that the beneficiary is the real party in interest on the obligation, including but not limited to (i) a true copy of the original note and (ii) documents showing the chain of title from the date of the original loan, including conveyances, endorsements and assignments of the deed of trust, a servicing agreement the beneficiary has with another person, or an agreement by which the beneficiary pledges as collateral all or a portion of its ownership interest in the note for a security the beneficiary issued or sold[.][77]