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William G. Fig

Court Opinions Could Change Residential Lending

September 2012

William G. Fig

Published in the Daily Journal of Commerce

The landscape for residential lenders in Oregon and Washington is changing quickly. Three recent appellate court opinions have the potential to significantly impact how residential lenders do business in the Pacific Northwest.

Two of the opinions involve whether Mortgage Electronic Registration Systems Inc. may be a beneficiary of a deed of trust – and, if not, what effect, if any, MERS' involvement has on the non-judicial foreclosure of a deed of trust where it is named the beneficiary. The third opinion involves condominium homeowners association liens.

The Washington Supreme Court and the Oregon Court of Appeals both ruled recently that MERS did not meet the statutory definition of a "beneficiary," as set forth in each state's respective trust deed acts. Thus, under the current state of law in Oregon and Washington, MERS can no longer non-judicially foreclose a deed of trust as the beneficiary of the deed of trust.

The Oregon court went a step further by stating that each transfer or sale of the promissory note secured by the deed of trust resulted in an assignment of the deed of trust. The court's opinion appears to say that, prior to non-judicially foreclosing a deed of trust, each transfer or sale of the note must be recorded in the real property records of the county in which the subject property is located.

This raises the question whether it is possible (or practical) in Oregon to non-judicially foreclose a deed of trust that has been securitized or where MERS is in the chain of title. The Court of Appeals' decision has been appealed to the Oregon Supreme Court.

The Washington Supreme Court did not rule on the question regarding the legal effect of MERS being named as the beneficiary of a deed of trust; however, it did comment that "having MERS convey its interest" to the current lender prior to a non-judicial foreclosure would not establish that the lender owns the loan – a requirement for foreclosure. The court's less-than-clear opinion will surely generate more litigation in this area.

With respect to HOA liens, the Washington Court of Appeals recently held that a purchase money lender/mortgagor does not have a statutory right to redeem a judicially-foreclosed HOA condominium lien.

Washington's redemption statute, written in the late 1800s, when first in time meant first in priority, requires the redeeming party's interest to be subsequent in time to the foreclosed party's interest. The condominium statutes, enacted much later, give an HOA lien partial "super priority" over existing encumbrances.

The court strictly construed the statutes and held that "time" did not equate to "priority." Therefore, a lender with a deed of trust recorded prior in time, but partially subordinate in priority to a later-in-time HOA lien, is not a redeemer under the Washington statute.

This means that the lender cannot ignore the lawsuit brought to judicially foreclose the HOA lien. The HOA lien must be paid prior to the entry of a judgment foreclosing the lien, or the lender's security against the condominium will be lost.

Link to the online article: http://djcoregon.com/news/2012/09/13/court-opinions-could-change-residential-lending/

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