The Oregon Court of Appeals struck a blow to the mortgage industry in Oregon Wednesday, ruling that its controversial document-registry system could not be used to skirt state recording law in out-of-court foreclosures.
In a decision with implications beyond the Mortgage Electronic Registration Systems Inc., the state's second-highest court also held Wednesday that a lender must ensure a complete ownership history of the mortgage is filed in county records before it can foreclose outside a courtroom.
MERS was created by the mortgage industry to bundle and sell loans to investors without having to record every assignment with county clerks. It is involved in most mortgages across the country.
But the court found that the Oregon Trust Deed Act requires the party that receives loan payments to publicly record all changes in mortgage ownership before starting a so-called nonjudicial foreclosure.
MERS does not take loan payments and does not qualify as a “beneficiary” of a trust deed, so the digital registry cannot be used to avoid the recording requirement, the court ruled.
“A beneficiary that uses MERS to avoid publicly recording assignments of a trust deed cannot avail itself of a nonjudicial foreclosure process that requires that very thing--publicly recorded assignments," the court ruled. Judge Lynn Nakamoto wrote the decision.
The ruling won't be the final say on the matter.
In a statement, MERS said it disagreed with the ruling and would appeal it to the Oregon Supreme Court.
"MERS validity as beneficiary has been affirmed in 48 prior Oregon rulings, including 30 since this case was filed," MERS spokeswoman Janis Smith said in the statement.
But other judges have ruled against MERS. The state Supreme Court was asked earlier this year by Chief U.S. District Court Judge Ann Aiken in Portland to resolve the differing opinions. Stephen Armitage, a spokesman for the court, said he did not know when the justices would address the matter.
A third Oregon case is on appeal before the 9th U.S. Circuit Court of Appeals.
The Oregon Legislature could also change the law, though the financial industry's attempt to do during the 2010 session prompted homeowner outrage.
Some banks already have decided to file some foreclosures in court, a process known as judicial foreclosure that lenders say will take longer and cost more.
In Hawaii last year, when a new law requiring judicial foreclosures went into effect, foreclosure activity dropped by more than half, said Darren Blomquist, a vice president with RealtyTrac, a real estate research firm. The average time to complete a foreclosure grew from 278 days in the second quarter of 2011 to 505 days a year later.
But foreclosure starts have jumped significantly this year, he said.
"The pattern in Hawaii shows us that although the switch to the judicial process will forestall foreclosure activity in the short term, it by and large will not eliminate foreclosure activity for the long term," Blomquist said. "The lenders will eventually adapt to the new process and start catching up on delayed foreclosures."
For the time being, lower state courts will likely have to follow Wednesday's ruling, said Kelly Harpster, a Lake Oswego attorney who represents homeowners.
"Right now, it is the first and last word in Oregon," said Phil Querin, a real estate attorney in Portland. "The Supreme Court will have to make the final decision."
Smith of MERS noted that the ruling does not affect judicial foreclosures filed in court and does not overturn any completed foreclosures.
But attorneys representing homeowners speculated that it might compel some homeowners to try to overturn previous foreclosures where assignments aren't completely recorded.
In Wednesday's decision, the court reversed a Clackamas County Circuit Court judge's ruling against homeowner Rebecca Niday, a Realtor in Rhododendron. Niday bought a home in August 2006, borrowing $236,000 from GreenPoint Mortgage Funding Inc., a MERS member that was shut down a year later by owner Capital One Financial Corp.
Executive Trustee Services Inc. sent Niday a default notice in April 2009 and scheduled a foreclosure sale on behalf of MERS and GreenPoint, the decision says. She sued to block the foreclosure sale, saying that MERS and GMAC, the loan servicer, had failed to provide evidence that they had interest in the property.
The court found that while GreenPoint might have sold the loan, or note, it never recorded that sale, or assignment, at the Clackamas County Recorders Office.
The court said that since MERS can't take loan payments, it has no interest in the loan and could not be considered as a "beneficiary," as stated on the trust deed securing the loan.
"Because there is evidence that GreenPoint assigned its beneficial interest in the trust deed but did not record that assignment, the trial court erred," the court wrote.