In August, a Washington state high court ruled against the mortgage industry’s use of an electronic database to file foreclosures—a decision some legal analysts say is a turning point in the ongoing discord between lenders and homeowners.
The database is called Mortgage Electronic Registration Systems, or MERS. Lenders regularly use MERS to track loans, and the system serves as the representative of mortgage lenders across the county.
Using that authority, MERS has initiated foreclosure proceedings on thousands of homeowners, including many in Washington state. While the practice has gone unchecked for years, the fact the MERS lists itself as a loan beneficiary in its filings is where things get complicated.
In a case titled Bain v. MERS, the state supreme court ruled that the system can no longer file foreclosures in Washington, because MERS is not the true owner of mortgage loans.
Making matters more complex, the widespread use of MERS enabled the lending industry to combine and trade bundles of loans for profit. That practice has made it difficult, and in some cases impossible, for many homeowners in foreclosure to find who they can negotiate with to modify their loans and try to stay in their homes.
Bellingham attorney James R. Doran, who has represented clients in foreclosure cases, explained why some observers think Bain v. MERS could be a game-changer in the foreclosure world.
BBJ: What do you think homeowners in foreclosure, particular ones involving MERS, should be aware of as they move forward in the next few months?
DORAN: They should take advantage of a mediation program (the Whatcom Dispute Resolution Center handles foreclosure mediations in the Bellingham area).
The Washington Foreclosure Fairness Act sets out a very borrower-and-homeowner friendly mediation process. Take advantage of it.
There’s parts of the law that say the lenders have to participate in good faith. That means the experience someone in foreclosure may have had over the last few years of never being able to talk to the same person, or lenders making commitments on the phone and then not following through and having modifications turned down—finally the good-faith provision of the statute says that someone has to show up at a mediation with the authority to make a decision on behalf of the lender.
And it’s not, “Oh, well thank you very much, we’ll talk to you later.” They have to be able to make a decision then and there.
That good-faith requirement has brought lenders to the table.
There’s another provision—and I’ll try not to be overly detailed here, but this is important—called the net present value equation. That determines whether or not the bank is going to get more by foreclosing all the way through and ending up with the property back again, and then having to sell it, or if they would be better off to modify the loan with the homeowner.
And if it comes out that the bank won’t do any better by going through with the foreclosure, especially with the deflated real estate values in the market today, then they should modify.
BBJ: Do you think courts will begin halting foreclosures that involve MERS?
DORAN: Immediately after the Bain v. MERS case, lenders have agreed to postpone trustee sales.
Usually an attorney has to go to court and get a restraining order to stop a trustee sale. But at the courthouse steps after Bain v. MERS, the lenders are saying, “Hold on a second, we’ll agree to postpone.”
Everybody’s still scratching their heads trying to figure out exactly what this means for foreclosure cases. The language from the court’s decision is pretty plain. If a lender has proof of ownership to all of the chain of title in the assignments, then fine. But if they can’t, they’re just not going to get paid. It’s not a very satisfactory answer for anybody, society or lenders—and it shouldn’t be a free ride for homeowners, but that’s kind of where we are.
People in foreclosure are typically in financial straits. They can’t hire lawyers to go to war with Wells Fargo. So, we’re hoping this kind of evens the playing field where lenders will postpone the trustee sales and come to the table to negotiate.
BBJ: Has the court deterred lenders from going after homeowners who default on mortgages?
DORAN: Again, the decision just recently came out. But in my practice, I wouldn’t be hesitant to use Bain v. MERS to argue a case in any one of the Superior Courts in the state of Washington.
BBJ: Do you think we’ll see lenders who used MERS held liable for penalties under the state’s Consumer Protection Act, possibly even held liable retroactively?
DORAN: With the Consumer Protection Act there are about eight elements, and all of them would have to be proved, as the Bain v. MERS case said. So, it isn’t just a carte blanche.
That’s a fairly severe remedy—with an award of attorneys fees and damages. But the court opened the door to it. It’s in black and white in the court’s decision, so that would be part and parcel of someone’s claim. But retroactively—I think that would have to depend on the tone of the case before the court—what exactly happened in that retroactive case, and maybe even the sympathies of the court.
BBJ: So on a case-to-case basis?
DORAN: I would say, if you didn’t try anything strange—because there are people out there who are trying to work the system—but if you were honest and you tried everything you can and MERS was involved, you might actually find that the court will put you back into your home.
It would be kind of difficult to go through the whole unwinding of each case. But the home is still sitting there somewhere. It depends on whether someone else is occupying it now, which brings up the whole question of who knows who has which titles to which properties anymore. It’s not an easy situation.
BBJ: You have mentioned a plan by San Bernardino County in California that piqued your interest, which would use eminent domain to help underwater homeowners keep their homes. Can you explain this development?
DORAN: The idea is that the county uses its eminent domain authority to take a piece of property from someone—we’ve heard of that in the past—and of course the property owner under due process has the right to be compensated for their property.
So, what that means is whoever’s entitled to be paid for the property being taken by eminent domain has to step forward and show that they’re entitled to be paid. That’s the point here.
And the lenders can’t do that. They screwed up the paperwork, and they can’t produce the documents that show they’re entitled to be paid. Therefore, they should either come to court and try to prove it or if they know they can’t prove it, then stay away. Then the county ends up with the property and makes a loan to the homeowner. That’s kind of the scheme.
The reason this sort of plan is attractive is because it starts to address, for the first time that I’ve heard, the actual bigger picture. We have borrowers who—if they had taken advantage of the decision in Bain v. MERS—could have just stiffed their banks and lived in their places for free. But that’s not equitable. That’s not fair and just, and it’s not the way the world works. So, homeowners should pay something to somebody to stay in their home.
The plan in San Bernardino is the first approach that would renegotiate, modify and write up a whole new set of documents that would keep these people in their homes. That’s the real answer.
Contact Evan Marczynski at firstname.lastname@example.org or call 360-647-8805.