a proposal for banks to take back deeds-in-lieu-of foreclosure

8/3/2019 A Proposal For Banks To Take Back Deeds-In-Lieu-of Foreclosure

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QUERIN LAW, LLCP H I L L I P C . Q U E R I N

121 S.W. Salmon Street Suite 1100 Portland, Oregon 97204(503)471-1334 Fax: (503)961-1862

PHI L@Q-LAW .C OM

PROPOSAL TO IMPLEMENT A DEED-IN-LIEU-OF-FORECLOSURE PROGRAM FOR LENDERS

E XECUTIVE SUMMARY

AS WE KNOW , UNTIL RECENTLY , THE VAST MAJORITY OF FORECLOSURES IN OREGON WERE

CONDUCTED NON- JUDICIALLY , BY ADVERTISEMENT AND SALE. HOWEVER , DUE TO THE

M CCOY AND H OOKER DECISIONS ,1 THE EFFICACY OF THIS METHOD OF FORECLOSURE HAS

BEEN PLACED IN DOUBT.

THE PROPOSAL DESCRIBED BELOW SUGGESTS THAT BEFORE FILING JUDICIAL

FORECLOSURES , HOMEOWNERS BE OFFERED AN OPPORTUNITY TO CONVEY THE PROPERTY

BACK TO THE BANK IN LIEU OF FORECLOSURE. THIS WOULD AVOID ANY M CCOY /H OOKER

TITLE PROBLEMS , SINCE THE DEED WOULD COME DIRECTLY FROM THE HOMEOWNER. IF

THERE WERE SUBORDINATE LIENS ON THE PROPERTY , THE LENDER COULD EITHER

NEGOTIATE A VOLUNTARY REMOVAL OF THAT LIEN , OR COULD DECIDE TO FORECLOSE

JUDICIALLY OR NON- JUDICIALLY WITHOUT THE BORROWER’S INVOLVEMENT.

THIS SOLUTION WOULD PROVIDE SIGNIFICANT BENEFITS: (A) LENDERS COULD AVOID THE

COSTLY FILING FEES , LEGAL FEES , AND PROLONGED FORECLOSURE PROCESS , COMPOUNDED

BY THE SIX MONTH RIGHT OF REDEMPTION ; (B) BORROWERS WOULD BE ABLE TO

TRANSITION OUT OF THEIR DISTRESSED HOUSING SITUATION SOONER , AND WOULD AVOIDHAVING TO HIRE AN ATTORNEY TO EXPLAIN THEIR RIGHTS ; (C) THE OREGON COURT

SYSTEM WOULD AVOID THE TIME AND COST OF RAMPING UP FOR HUNDREDS OR

THOUSANDS OF JUDICIAL FORECLOSURES , SAVING SIGNIFICANT MONEY AND

ADMINISTRATIVE TIME.

Discussion

The impact of McCoy and Hooker continues to place the title to non-judicially foreclosedproperties in doubt. This has now required most title companies to examine title toREOs on a case-by-case basis before insuring title out to purchasers. Although I do notknow what possible legislation the lending/title industries have planned for the 2012Session, it will likely be politically charged, as was the case in 2011.

1 In re McCoy, 446 BR 453 (Bankr. D. Or. Feb. 7, 2011) (MERS could not be beneficiary; all assignments of

beneficial interests required to be recorded); Hooker v. Nw. Tr. Servs., Inc., Civil No. 10-3111-PA, 2011 U.S. Dist.

LEXIS 57005, 2011 WL 2119103 (D. Or. May 25, 2011), appeal docketed sub nom. Hooker v. Bank of America,

N.A., No. 11-35534 (9th Cir. June 24, 2011) (MERS not a valid beneficiary, all assignments of beneficialinterest in trust deed must be recorded).

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Recently, we have seen several major lenders begin filing their foreclosures in court, toavoid the recording difficulties imposed by ORS 86.735(1). This decision has resulted inseveral predictable consequences for the banks, including: (a) Incurring significant courtfiling fees; (b) Requiring the use of lawyers to prepare and file legal pleadings, rather

than using foreclosure trustees to handle the advertisement and sale process; (c)Involving the court system and judiciary in the foreclosure process; and (d) Triggeringthe automatic six month right of redemption to foreclosed borrowers.2

Impact of Judicial Foreclosures on Borrowers

The consequences were tangible and predictable for the banks and court system. Weknew this would occur at the outset. But the consequences to affected homeownerswere not a part of any analysis I am aware of. However, in the course of my practice, Ihave seen the results.

Most borrowers are not used to being sued, and have no idea what to expect. They arescared and fearful when they are served with a complaint seeking a judgment forthousands of dollars. They fear garnishment of wages and bank accounts, and(incorrectly) execution on their retirement funds, IRSs, 529s, or social security.

In most cases, borrowers have absolutely no interest in fighting a foreclosure. If given achoice, they would have preferred not to be publically sued in a court of law, with theattendant stigmatization that goes beyond having one’s name appear in the Daily Journal of Commerce. While homeowners usually know when foreclosure is imminent,

most expect the process to follow the historical non-judicial format, i.e. the mailing of anotice to them that the property will be sold on a date certain a few months away.However, to be personally served by a process server at a time not of their choosing,and to be informed in the paperwork that they have 30 days to respond or a default judgment will be taken against them for thousands of dollars, is a frighteningexperience. In my opinion, there is a viable alternative.

A Lender DIL/F Program

I believe that prior to filing a lawsuit in court, lenders should uniformly make a good faitheffort to contact defaulting borrowers and offer to take the property back using a deed-

in-lieu-of-foreclosure (“DIL/F”).3 The benefits to all affected parties, i.e. lenders,

2 See, ORS 18.964. This right of redemption is, in most cases, a useless form of protection to borrowers,since the home likely had negative equity at the time of foreclosure. Thus, the cost to redeem wouldexceed the value of the property redeemed.3 This is not to suggest that in the early stages of default, borrowers should not first try to short sell thehome. But in the latter stages, when curing is impossible and foreclosure imminent – say, 30 days away -the DIL/F alternative should be pursued before filing in court.



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borrowers, and the judicial system, would be substantial: Lenders would savethousands, if not millions of dollars in attorney and filing fees, and borrowers would beable to transition out of their home in an orderly fashion - and avoid having to employan attorney to inform them of their legal rights.4 The overburdened and under-fundedcourts would be freed of having to deal with a majority of defaulted loans headed into

judicial foreclosure.

The Specifics

I acknowledge that several conditions and exceptions are necessary to ease lenderconcerns. I will address those that have occurred to me, and those that have beenkindly suggested by title counsel.

• It would only apply to the judicial foreclosure of 1 to 4 family dwellings.5

• It would not apply to cases in which the lender needed to file judicially due to

circumstances arising from a failure to probate or other title issues.• It would apply even though the property was encumbered by two or more

subordinate lienholders.o If the subordinate lienholders refused to consent (or were unable to reach

agreement with the borrower on payback of the deficiency), but theborrower was still willing to execute the DIL/F, the borrower couldvoluntarily do so, and the lender could decide whether to proceed judicially or non-judicially against those lienholders.

o Since McCoy and Hooker stem from borrower claims over the validity ofnon-judicial foreclosures, it would seem that once the borrower deeded

the property back in lieu of foreclosure, the non-judicial process could bepursued against most subordinate lienholders, if necessary to remove thecloud of the lien.6

4 Most attorneys are unfamiliar with the judicial foreclosure process, since it has not been a significantpart of our legal landscape since the Oregon Trust Deed act was passed in 1959. The result could be thatborrowers may end up paying their own lawyers to learn (or re-learn) laws they are unfamiliar withthemselves.5 I do not recommend using the “residential trust deed” definition found in ORS 86.705(3), which focuseson the date the foreclosure is “commenced.” Instead, I suggest that the DIL/F approach be followed inall cases in which it reasonably appears from the lenders’ files that the purpose of the loan was to fund

the purchase of a primary residence. In those cases in which the lender: (a) believes it is legally entitled torecover a deficiency; (b) intends to recover a deficiency; and (c) reasonably believes from its files that theborrower is financially capable of responding to a deficiency judgment, it may proceed judicially after theDIL/F process has failed (i.e. the bank cannot reach agreement with the borrower on payback of all or aportion of the deficiency).6 Interestingly, it appears that some lienholders, e.g. HOAs, are now taking the position that under McCoy

and Hooker , their subordinate position cannot be legally extinguished by a non-judicial foreclosure.However, the cost of this gambit to a HOA would seem daunting, given the poor financial condition thatmost are in today.



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• The parties would execute a mutual release of all claims, excepting only thoseresulting from a breach of some representation or warranty in the DIL/Fdocuments.7

• The DIL/F documents would be Oregon-specific (e.g. land use warning8 andstatement of consideration9), and thoroughly vetted in advance by Oregon title

counsel, to assure future insurability. The forms would include an estoppelaffidavit with all standard lender protections (e.g. (a) Making it clear that theDIL/F is a deed of conveyance of title - not a disguised mortgage; (b) Recitingthat the loan is in default and subject to imminent foreclosure; and (c) Recitingthat the borrower is not acting under any coercion or duress, etc.)10

• Borrowers would release their right of redemption in consideration of which thelender seeking to foreclose would waive any claim for deficiency liability,together with all costs, disbursements and attorney fees. Any deficiency owed tosubordinate lienholders would be subject to lender-borrower negotiation for aspecified period of time.

• Similar to the short sale protocols: (a) All lender-held impounds or after-acquiredrefunds, etc., would belong to the lender; (b) Any intentional misrepresentationsin the documents could invalidate the DIL/F and result in judicial action beingfiled; (c) A 1099-C would be issued for the year of transfer of the DIL/F.

• The property would be delivered to the bank in broom clean condition, subject toreasonable wear and tear.

• If a foreclosure suit had already been filed, the above protocol could apply, and ifnecessary, serve as an offer of judgment under ORCP 54E.

Conclusion

This DIL/F solution will result in a win-win solution for all parties and the alreadystrapped Oregon court system. In addition to the advantages discussed above, it willhave two further significant benefits:

7 I anticipate that such a release might include provisions designed to eliminate benefits under any future

class action settlements or the 50 (now 48?) state attorneys general probe, etc.8See, ORS 93.040.

9 See, ORS 93.030. 10 If there would be any way to concisely put this approach into statutory form, I would suggest that: (a)

the recitals in the estoppel deeds and affidavits contain similar protections found in ORS 86.780 (“Recitalsin trustee’s deed and certain affidavits as prima facie or conclusive evidence”); and (b) at the time of filinga judicial foreclosure of a trust deed on a 1-4 family residence, the plaintiff’s attorney would be required tocertify that he/she made a good faith effort to secure a DIL/F from the borrower(s). This certificationshould be based upon the attorney’s actual knowledge, not just belief. Actual knowledge could be basedupon telephonic or personal contact with the borrower prior to filing, or review of a signed receipt fordelivery of a certified letter offering the DIL/F option over 30-days prior to filing, etc.



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• Since the DIL/F will come directly from the borrowers, and not a foreclosuretrustee, it completely avoids the McCoy/Hooker problem, leaving titlemarketable and insurable, and;

• It will substantially accelerate the movement of residential properties from adepressed foreclosure status to a condition of marketability, resale, and eventual

price appreciation. Under the non-judicial foreclosure process, we know there isa minimum period of at least 120 days, i.e. four months, from start to finish. 11 Judicially, the period from filing to entry of default judgment, sale, and a sixmonth right of redemption, is hard to estimate. Much depends on the court’sdocketing ability to set protocols in place. But I believe nine months would be avery fast track, and suspect it would take closer to a year from the filing andservice of a foreclosure complaint, to recovery of marketable title (i.e. includingthe 6-month right of redemption). From REO listing to resale would extend thedelay in getting homes into the marketplace. Due to the right of redemption, Isuspect most investors, etc. would be less inclined to purchase at auction.

Currently, most observers agree that it will take several years before this country burnsthrough its shadow inventory12 of distressed housing. The DIL/F option is one tool wecan use to accelerate lender recovery and resale, free of the risk of the title problems thathave forced some lenders into the high cost alternative of judicial foreclosure.

11 Of course, this does not include the time it takes from the first payment default to the filing of theforeclosure, which can be 9+ months. 12 This shadow inventory consists of: (a) Homes not yet in foreclosure, but in some stage of impending

default; (b) Homes in actual default that are queued up, but the foreclosure has not yet been filed; (c)Homes in formal foreclosure, prior to the actual sale date; (d) Homes in some stage of loan modificationor abatement (which historically has had very high failure rates) that may eventually end up in default;.Of course, HARP 2.0 will do little to eliminate this problem, since it merely refinances negative equity,rather than liquidating it through short sale, DIL/F, or foreclosure. Until this shadow inventory of

distressed housing is significantly reduced or eliminated, the price of homes with equity will continue todrop, in lock-step those without equity. According to the RMLS™, average sale prices for the Portland-Metro area in June, July, August, and September, 2011, dropped 7.8%, 7.4%, 9.2% and 4.2%, respectively,from the same period in 2010. Buyers dictate housing prices because of the availability of lower pricedcomps, and every short sale, foreclosure sale, and REO sale today, becomes tomorrow’s comp for Realtors® andappraisers. This disequilibrium will not abate until the shadow inventory of distressed housing clears out,thus shifting some bargaining power to sellers, as prices begin to rise. Rising prices incentivize buyers tobuy sooner rather than later. But in a market with falling prices, such as Oregon, not even historically lowinterest rates can move buyers off the sidelines.

a proposal for banks to take back deeds-in-lieu-of foreclosure

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