Sales of hundreds of foreclosed homes in Oregon have been halted or withdrawn in recent weeks after federal judges repeatedly questioned their legality, according to a number of real estate attorneys in the state.
Lenders have withdrawn more than 300 foreclosure sales since February in Deschutes County alone, one of the Oregon area’s hardest hit by the housing collapse. About 130 of those notices were filed in the past week, attorneys say.
Dozens of foreclosure listings by ReconTrust Co., the foreclosure arm of Bank of America Corp., have disappeared from its website, attorneys say. A BofA spokeswoman said the bank was canceling certain sales to ensure that those homeowners had fully explored options to avoid foreclosure.
Since October, federal judges in five separate Oregon cases have halted foreclosures involving MERS, saying its participation caused lenders to violate the state’s recording law. Three of those decisions came last month, the key one in U.S. Bankruptcy Court in Eugene.
Attorneys say it’s not clear whether lenders in Oregon will simply start over or head to court to foreclose, steps that could prolong the crisis for months and drive up costs, attorneys say. Some suggest lenders might not have access to the documents they need to comply with state law.
“A lot of us are questioning whether there is a solution,” said David Ambrose, a Portland attorney who represents lenders in mortgage transactions. “It’s pretty amazing. There are a lot of unanswered questions.”
MERS is listed as an agent for lenders on more than 60 million U.S. home loans, about half of all such loans.
Homeowners nationwide have challenged its standing. In New York last month, a federal bankruptcy judge ruled that MERS lacked authority to foreclose on homes it didn’t own.
In Oregon, lenders can foreclose without going to court. But state law also requires that the loan’s ownership history, or assignments, be recorded with local county governments before proceeding with a nonjudicial foreclosure.
In the Eugene court case, Donald E. McCoy III filed for bankruptcy protection in part to block U.S. Bank from foreclosing on his Central Point home. He then sued the bank and MERS, along with his original lender BNC Mortgage Inc., claiming they had not properly recorded BNC’s subsequent sale of the loan to investors.
Chief Bankruptcy Judge Frank R. Alley III found McCoy’s allegation persuasive and refused to grant the bank’s request for a dismissal.
“Oregon law permits foreclosure without the benefit of judicial proceeding only when the interest of the beneficiary (lender) is clearly documented in a public record,” Alley wrote. “When the public record is lacking, the foreclosing beneficiary must prove its interest in a judicial proceeding.”
In response to that ruling, First American Financial Corp., one of the nation’s largest title insurers, began warning lenders and buyers in title documents that it wouldn’t insure titles with a cloudy public record in Oregon, company attorney Alan Brickley said.
“It’s simply saying we have a concern, and you should have a concern,” said Brickley, who’s based in Portland.
But attorneys representing lenders and consumers say that warning will have a chilling effect on the sales of foreclosed homes in which MERS is involved.
“If you can’t get title insurance, that almost stops the process,” Ambrose explained.
And, in a potential deal breaker for other foreclosure cases, one of the nation’s largest title-insurance companies is warning lenders that it might not guarantee title in some cases.
The developments underscore that the challenges disrupting foreclosures in other states have finally hit home in Oregon. Foreclosure sales in the state totaled 10,500 last year, or 28 percent of all home sales, according to RealtyTrac Inc. Federal agencies and state attorneys general are investigating the foreclosure and loan-modification practices of the nation’s largest banks.
The legal concerns revolve around Mortgage Electronic Registration Systems Inc., a Reston, Va., corporation set up in the mid-1990s by the mortgage banking industry to rapidly record the ownership of mortgages so they could be packaged and sold as securities.
MERS essentially allowed lenders to sell loans without recording each transaction with county recorder offices, experts say. That rapid and sometimes reckless securitization of such loans contributed to the 2008 financial crisis and housing slump. The problems clouding the foreclosure process — including last year’s robo-signing scandal that forced several big banks to suspend foreclosures in about two dozen states — continue to drag down the housing market today.
U.S. District Judge Anna J. Brown last month blocked two foreclosure sales by CitiMortgage Inc. and BAC Home Loan Servicing, saying the lenders had failed to properly record documents.
Also last month, MERS told its member lenders in a memo distributed nationally to stop foreclosing in its name while it works to address the legal challenges.
“It’s a fundamental change that they have to deal with and the question is whether they can,” said Margaret E. Dailey, a real estate attorney in Newport.
The full impact of these developments is only now beginning to play out in Oregon. Not all foreclosures involve MERS.
Dailey on Friday counted more than 70 foreclosures rescinded at the Lincoln County recorder’s office since the start of the year, including 45 in February.
A review by The Oregonian of Deschutes County clerk’s office records shows that BofA’s ReconTrust withdrew more than 60 foreclosure sale notices Friday and 35 on Thursday.
BofA spokeswoman Jumana Bauwens said the cancellations resulted from a review late last year of its foreclosure process. The bank wants to ensure that homeowners nearing a foreclosure sale have exhausted other opportunities, including loan modifications and short sales, she said.
“We are not going through and saying rescind everything,” Bauwens said late Saturday.
Experts caution that the rulings eventually could be overturned. But buyers and lenders probably will look to the Oregon Legislature for a potential fix, attorneys say. Already, one bill has been introduced, Senate Bill 484, that would make it harder for banks to sell or foreclose on properties using MERS.