The Home Equity Theft Reporter Cases & Articles: State AG To Federal Appeals Court: 'MERS Has No Business Interfering In Oregon Non-Judicial Foreclosure Process!'

Monday, April 2, 2012

In Portland, Oregon, The Oregonian reports:

Oregon Attorney [General] John Kroger fired a shot across the mortgage industry's bow Tuesday, arguing for the first time that a national electronic loan registry can't trump state records laws.

If courts agree, it could route thousands of Oregon foreclosures through courtrooms, creating a drawn-out and much more costly process. That prospect might make banks more willing to bargain with at-risk homeowners, say homeowners' rights advocates.

Kroger weighed in on a case that won't by itself have the power to bind decisions in state or other federal courts. But it could influence similar cases, and/or the entire case could be transferred to the Oregon Supreme Court to decide on the issue of state law.

The state Department of Justice filed a brief in the 9th U.S. Circuit Court of Appeals, arguing that the Mortgage Electronic Registration Systems, or MERS, can't stand in for lenders when it comes to county records in what's called "a non-judicial foreclosure" -- one that does not go through court.

The electronic registry system was formed by the mortgage industry to track loans as they're bundled, bought and sold by investors. It's designed to avoid the cost and hassle of going through all the documentation normally required by state recording laws. The bundling of loans, known as securitization, wasn't envisioned by lawmakers when Oregon's recording law was written. But the Department of Justice said Tuesday that the industry's digital workaround didn't meet the standard of transparency the state law intended.

"Lenders using the MERS system have to follow Oregon law just like everyone else," Kroger said in a statement. "The Department of Justice will not tolerate lenders cutting corners in their rush to foreclose on Oregon homeowners."

The state's non-judicial foreclosure process requires beneficiary of a loan -- the entity that holds the note -- to be recorded after every transfer. Simply listing MERS as beneficiary on a multitude of deeds doesn't cut it, Kroger argued, if other entities really own the loans.

"Although the trust deed refers to MERS as the 'beneficiary,' courts need not accept that assertion at face value," the brief says. However the case is ultimately decided, it could have a chilling effect on out-of-court foreclosures.

"If the Hooker case is upheld, then it's just going to be another nail in the coffin for MERS, which may result in more banks simply going the judicial route rather than taking their chance in non-judicial foreclosure," said Phil Querin, a Portland real estate attorney.

The case in question revolves around a $260,000 loan taken out by Ivan and Katherine Hooker in 2005 that had traded hands twice before they fell into foreclosure in May 2010. In September of that year, the couple filed suit to block Bank of America from seizing their house. U.S. District Judge Owen Panner halted the foreclosure, saying the MERS system violated state recording law.(1)

On Tuesday, Kroger weighed in on the side of upholding Panner's decision. The Department of Justice is taking a side now because this case is the first to reach the U.S. Circuit Court of Appeals, said Keith Dubanevich, Kroger's chief of staff. "We felt that it's the perfect opportunity for the attorney general to express the legal view of the state of Oregon," he said.

Dubanevich said a decision in this case could have a controlling influence on others in the federal courts, which would normally look to state courts for guidance on issues of Oregon law.

It would take a state Supreme Court decision to definitively validate or invalidate the MERS system. Or the legislature could write a fix into state law. "This is not the final chapter by any means," Dubanevich said.