It’s been about 5 years since the housing bubble burst. The ensuing foreclosures uprooted millions of Americans from their homes. In the years since, Oregon has seen has seen a slow, yet steady decline in its foreclosure rates. That is until last July, when non-judicial foreclosures in the state all but disappeared. Some loan servicers have begun taking debtors to court. But others seem to be taking a “wait-and-see” approach.
For Clair Klock of Corbett, the timing couldn’t have been much worse. He and his wife agreed to take out a loan on behalf of a family member. The plan was that the family member would eventually refinance. That was in 2006. When the recession hit, Klock and his wife, who are in their 60’s and 70’s, found themselves with a second mortgage on a house that was worth less than the amount of the loan. He’s stopped making the payments. Now he just wants the servicer to foreclose, take the house and be done with it. But so far, that hasn’t happened.
Klock explained, “I just want to get that off my desk and not have to think about it. And that’s my frustration that we just can’t have closure on it and move on.”
As Klock waits to see what happens with his property, so too are thousands of other Oregonians at risk of foreclosure. John Helmick is the president of Eugene-based Gorilla Capital, a company that invests in foreclosed properties and also tracks foreclosure data. His data show since this summer non-judicial foreclosures — that’s foreclosures processed outside the courts — are down about 90 percent though much of the state.
Helmick said, “This isn’t a small shift. This is a paradigm shift.”
At the same time, judicial foreclosures where a loan servicer takes a delinquent lender directly to court— are up, though not by nearly as much. So what’s happened to cause that paradigm shift that Helmick is describing?
Linda Navarro is the President and CEO of the Oregon Bankers Association. She said, “Well two things happened in July and they happened so close together that it’s really hard to determine which of these events caused the dropoff in non-judicial foreclosure filing.”
Navarro’s group represents large and small banks doing business in the state of Oregon.
The first event Navarro describes — and we’re going to take them one at a time here - was a ruling by the Oregon Court of Appeals regarding the mortgage industry’s Mortgage Electronic Registration System, or MERS.
MERS was created by Fannie Mae, Freddie Mac and a handful of large banks as a way to keep track of paperwork. At the time, Wall Street was developing a growing appetite for mortgage-backed securities.
And MERS was seen a way to efficiently keep track of who owned those promissory notes as they were bundled, bought and sold off to investors.
And in that respect MERS sought to replace a function that counties across Oregon had been performing for well over a hundred years.
Here at the Deschutes County Clerk’s office, recording supervisor Jeff Sageser powers up a bulky microfilm viewer — and loads up up reel of shiny black film.
And with the press of a button zips all the way back to the first mortgage document on record here — dated 1879.
Sageser explains, “So here we are. It was a person with the name of Wes Claypoole. They had an obligation of $625 to Breane Summerfield.”
Sageser says in the days before MERS, if a bank wanted to sell a note backed by a mortgage, it would have to file the paperwork with clerk’s office and pay a filing fee.
But with MERS serving as a proxy, banks have been able to sidestep that requirement, saving both time and money in the process.
Now, 15 years after its creation, financial experts estimate MERS is listed on more than half of all mortgages in America. And when loans go into default, it’s often MERS that initiates foreclosure proceedings.
Sagaser shows me some modern paperwork.
“Well, this Deed of Trust shows that the borrower is borrowing money from US Bank and they identify MERS as a beneficiary under the security instrument,” he said.
But the Oregon Court of Appeals ruled that method in which MERS sidesteps the public recording process isn’t compatible with the state’s non-judicial foreclosure laws.
Nancie Koerber is co-founder of Oregon-based Project REconomy. It’s a non-profit homeowner advocacy group that helps people fight the foreclosure process.
She says the law in Oregon requires the party that records transfers of ownership also be one receiving the payments. MERS is just a proxy for the real owner, she says, and can’t therefore be a beneficiary.
Koerber said, “Our statutes are very mature and well written in Oregon and the way our statutes read, that just can’t be.”
Linda Navarro with Oregon Bankers Association says MERS is a legitimate participant in the mortgage process. The Oregon Supreme Court is scheduled to take up the matter next month.
Navarro says the Legislature could help clarify the registry’s role with some changes to Oregon law.
“MERS itself hasn’t caused any foreclosures. It’s been a process for years that has functioned, but I think it’s been picked up to draw attention to challenges that people are facing that have led to foreclosure,” Navarro said.
Koerber and other consumer advocates are against such a change to the law.
One week before the Appeals Court ruling something else happened that many attribute to the decline in non-judicials filings. That was the implementation of the Oregon homeowner mediation program also known as Senate Bill 1552.
The bill required the big banks to sit down and mediate with homeowners before moving ahead with a foreclosure. But the bill was written in such a way that mediation is only required in the case of non-judicial foreclosures. Remember — that’s the type that banks aren’t filing anymore.
Consumer advocate Koerber said, “One of the things we said early on, and it’s not that we’re so smart, this was just simple, if 1552 does not require mediation for both non-judicial and judicial, it was going to backfire.”
Oregon Bankers Association’s Linda Navarro her group never had the opportunity to provide input on the bill, which she believes was deeply flawed from a technical standpoint. OBA has a list of about a dozen changes it wants to see lawmakers take up. That includes a provision requiring banks to enter mediation with home owners who aren’t yet in foreclosure, but who identify themselves as “at risk”.
Linda Navarro said “While that might sound good on the surface, there’s no real definition on what it means for a borrower to say they’re at risk.”
According to Oregon Department of Justice, which administers the program, more than 200 of these so called “at risk” homeowners have applied to take part in the program. But DOJ Communications Director Jeff Manning says loan servicers aren’t playing ball.
Manning says, “And the law says that the industry “shall” respond and in many of those cases the loan servicers have not responded or they’ve just said flat out ‘Go fly a kite. We’re not doing it.’ “
Manning declined to say what the state would do about that. But the consumer group Economic Fairness Oregon wants legislators to amend the law to give it a proper enforcement mechanism.
Meanwhile, observers both in and outside the mortgage industry are waiting to see how the Oregon Supreme Court rules on MERS. But that decision isn’t expected until mid to late 2013.
And in the short term, that could make for fewer property auctions on the courthouse steps — which is the usual conclusion for a non-judicial foreclosure. Instead, more and more of those cases could move inside the court to be heard by a judge.