"What Does the Washington Supreme Court's Ruling on Nonjudicial Foreclosures Mean for Me?"
Posted Monday, August 27, 2012 by Christopher L. Thayer
The Washington Supreme Court recently issued a ruling relating to the Mortgage Electronic Registration System (commonly referred to as “MERS”). MERS was established in the 1990s by a group of various public and private entities in the home loan industry, including lenders such as the Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the American Bankers Association. MERS was set up to create a centralized electronic registry for keeping track of mortgage rights and to make it easier to pool groups of mortgages for sale to investors. Instead of having to record formal assignments and other documentation that might otherwise be required with the local county recorders offices. This makes it easier for the mortgage industry to buy, sell and transfer mortgage rights, also known as “securitizing”. The advantages created for the mortgage industry, however, have come with some risks and concerns by borrowers who have found it almost impossible to determine what bank “owns” their loan, when it has been processed by MERS. This has resulted in frustration by borrowers who are facing foreclosure and are unable to track down an authorized lender representative to try to negotiate loan modifications or forbearance agreements.
In Bain v. MERS, the Washington Supreme Court was asked to answer three questions as certified by Judge Coughenour of the Federal District Court for the Western District of Washington: (1) Is MERS a lawful “beneficiary” as that term is defined under Washington’s Deed of Trust Act (RCW 61.24); (2) If MERS is not a “beneficiary” under the Act, what is the legal effect; and (3) does a homeowner have a claim under Washington’s Consumer Protection Act (CPA) against MERS? The case arose out of two consolidated cases wherein borrowers were contesting nonjudicial foreclosures involving MERS mortgages.
In a unanimous opinion that could have wide ranging impact, the Court held that: (1) MERS does not qualify as a “beneficiary” under Washington’s Deed of Trust Act, and therefore does not have the power to appoint a trustee to initiate a nonjudicial foreclosure; and (2) the legal consequences of not being the lawful beneficiary will vary depending on the circumstances, but the Court noted that, “if MERS is not the beneficiary … it is unclear what rights, if any, it has to convey”; and (3) addressing the possibility of a Consumer Protection Act claim that, although the facts of the underlying cases were unclear, the Court opined that “we agree that characterizing MERS as the beneficiary has the capacity to deceive … [and] there is considerable evidence that MERS is involved with an enormous number of mortgages in the country . . . perhaps as many as half nationwide … [and] [d]epending on the facts of a particular case, a borrower may or may not be injured by the disposition of the [promissory] note, the servicing contract, or many other things ….
The fallout from this decision, published on August 16, 2012, remain to be seen. It appears that any borrowers who are facing foreclosure of a loan involving MERS, may have an additional basis to contest or defend a nonjudicial foreclosure. As the ruling was somewhat narrowly limited to an interpretation of the law with respect to the Deed of Trust Act and in the context of nonjudicial foreclosures, we expect that many MERS’ loans will now be foreclosed judicially (in the court system – which is more time consuming, cumbersome, and expensive for lenders). Any attorney or professional trustee who is being asked to conduct a nonjudicial foreclosure on behalf of MERS is going to have to require additional documentation, including documentation clearly establishing MERS’ right to initiate the foreclosure and also the “chain of title” showing the “true” owner of the promissory note. There will also likely be a flurry of Consumer Protection Act cases filed by borrowers – alleging that they were unable to negotiate a loan modification as they were unable to determine, through MERS, what bank(s) was the current owner of their loan. Just how this will all play out is unclear, but what is clear is that the Washington Supreme Court just made foreclosures in Washington more complicated.
For more information on this ruling, contact Christopher Thayer at (206) 805-1494.