Hucke: MERS, Foreclosure and Evolving Oregon Foreclosure Law

Buying a house may seem like a personal matter, but when a borrower takes out a home loan many parties are involved in the transaction: the borrower, the lender, a trustee and other beneficiaries. Further complicating matters is modern financing permits changes to these parties over the life of the borrower’s loan. The changing of parties can create legal issues when the borrower defaults and foreclosure becomes necessary. To help simplify change, the Mortgage Electronic Registration System (MERS) was developed as a centralized means of tracking certain parties to real estate transactions. A problem can exist, however, when MERS is designated as a beneficiary to a trust deed if its role does not meet the Oregon statutory definition of “beneficiary.”

A beneficiary to a deed of trust has the right to appoint a trustee, and the power to direct foreclosure of the property. In Oregon, the beneficiary is the person entitled to repayment, typically the lender. If a party such as MERS is named a beneficiary when it does not meet the Oregon statutory definition of “beneficiary,” and then tries to foreclose, a borrower may challenge the legal validity of a foreclosure action. This was the series of events that lead to a recent Oregon Court of Appeals case Hucke v. BAC Home Loans Servicing, L.P. In Hucke, a borrower defaulted on his mortgage and due to a series of unrecorded transfers and assignments the validity of a nonjudicial foreclosure and sale of the property was in dispute.

In Hucke, the initial parties to the home mortgage transaction included borrower Hucke, lender GreenPoint Mortgage Funding, Inc. (GreenPoint) and trustee Fidelity National Title Company (Fidelity), as well as Mortgage Electronic Registration Systems, Inc. (MERS) as “the beneficiary” under the trust deed. GreenPoint eventually sold the loan to Fannie Mae. MERS assigned the trust deed to Fannie Mae, who then appointed as successor trustee ReconTrust. After Hucke defaulted on his mortgage, ReconTrust recorded notices of default and sale, and subsequently sold the property through a nonjudicial foreclosure sale. A trustee’s deed was then properly recorded with the County. The notices named MERS the beneficiary of the trust deed, and Hucke filed an action seeking a declaratory judgment that the foreclosure sale was invalid for two reasons: (1) MERS was not a beneficiary of the deed of trust as defined by ORS 86.705 and therefore lacked the power to make any assignment to Fannie Mae (who afterward appointed ReconTrust, who then foreclosed and sold the property), and (2) all assignments of interest had not been recorded with the county prior to foreclosure as required by Oregon law. Fannie Mae recorded a correction of errors deed to correct an erroneous recording of the trustee’s deed, and subsequently moved to dismiss Hucke’s lawsuit because, it argued, the correction deed voided the foreclosure sale and reinstated the trust deed, restoring Hucke to his position prior to the foreclosure of the property. After a trial, the court determined that because no assignment from GreenPoint, the original lender, to Fannie Mae, the successor lender, was ever recorded, the foreclosure and sale were invalid.

Between the trial court’s decision and this appeal, two opinions were issued by the Oregon Supreme Court that determined whether assignments that occur by transfer of the secured obligation, such as what occurred in this case, must be recorded prior to a nonjudicial foreclosure. In Brandrup v. ReconTrust Company, N.A. and Niday v. GMAC Mortgage, LLC, the Supreme Court held that Oregon law does not require recording of an assignment of a loan resulting from a sale of the loan in order to comply with ORS 86.735 and prior to initiating a nonjudicial foreclosure. The Court in Hucke held on appeal the trial court’s decision on this issue was erroneous because of the Supreme Court’s decision, and then turned to the issue of whether the correction deed could operate to void the foreclosure and sale of the property.

When a person takes out a loan on property in Oregon, they can execute a trust deed that creates a lien on the property securing repayment to the lender. This trust deed is held by a trustee, a third party appointed by the lender to ensure both borrower and lender fulfill their contractual duties until such time as the borrower pays off the loan. In the usual course, full repayment of the home loan results in reconveyance of the trust deed to the borrower. However, in the case of borrower default, the trustee is authorized to initiate a nonjudicial foreclosure, sell the property, and execute and deliver a trustee’s deed to the purchaser of the property.

A trust deed must be recorded in the appropriate county records, but recording of a trustee’s deed following a nonjudicial foreclosure sale is optional. When either type of deed is recorded but contains an error, a correction deed may be recorded, which can accomplish two distinct objectives: to correct an erroneous reconveyance of a trust deed, or to correct an erroneous recording of a trustee’s deed. The Court in Hucke clarified the results of these distinct actions. When correcting an erroneous reconveyance of a trust deed, the original trust deed is reinstated, restoring parties’ interests. A correction deed recorded to correct an erroneous recording of a trustee’s deed will set aside the trustee’s deed as though it had never been recorded; however, the correction deed does not function to void the foreclosure sale, nor does it reinstate the trust deed. The Court explained that because the interest in property sold at a foreclosure sale is transferred upon execution and delivery of a trustee’s deed to the purchaser, and recording of the trustee’s deed is not required, the purchaser’s interest is not extinguished simply because a trustee’s deed is cancelled by recording a correction deed. The correction deed does, however, allow those parties to take steps to try to unwind the foreclosure sale and reinstate the trust deed through subsequent proceedings.

Hucke is an important decision. Parties involved in foreclosure will not regain rights to property merely by voiding a trustee’s deed. Additional steps are required regain the legal interest conveyed to the purchaser of property through a foreclosure sale. Lenders and trustees should proceed cautiously to ensure the steps they take in a nonjudicial foreclosure are proper because unwinding the transaction could result in burdensome negotiations and expensive further proceedings. If you have questions related to nonjudicial foreclosure actions, please contact one of our Bankruptcy and Creditor’s Rights experts for information on how to proceed in this rapidly evolving area of the law.