Ruling Challenges|Ore. Foreclosure System

PORTLAND, Ore. (CN) - Bank of America and Mortgage Electronic Registration Systems broke the law when they failed to record every time the trust deed for a couple's home mortgage changed hands, a federal judge found in a ruling that questions Oregon's system of allowing banks to foreclose without going to court.

Although home owners Ivan and Katherine Hooker have been in default on their loan since 2009, Judge Owen Panner found that the bank and Mortgage Electronic foreclosed on the couple's loan after too many unrecorded transfers left the couple in the dark about who to contact for a loan modification.

"While I recognize that the plaintiffs have failed to make any payments on the note since September 2009, that failure does not permit defendants to violate Oregon law," Panner wrote.

Oregon is one of the few states that allow banks to foreclose on mortgages outside of the courtroom. The only caveat to this is a state statute which requires that all records of sales and transfers be listed in the county land records office where the property is located. Banks are required to record these transactions before initiating a non-judicial foreclosure according to the Oregon Trust Deed Act.

Mortgage Electronic (MERS) argued that the Act allowed it to be lax on recording each individual transfer with the county, as long as it kept track of the transfers in its own internal system and recorded the "final assignment" with the county before initiating foreclosure.

But Panner said the law requires every transfer to be recorded with the county.

"Considering what is commonly known about the MERS system and the secondary market in mortgage loans, plaintiffs allege sufficient facts to make clear that defendants violated the Oregon Trust Deed Act."

In the case of the Hookers, the paper trail to find the holder of their deed was convoluted and, completely missing in some places, making it impossible to figure out which bank to approach about a loan modification.

According to Panner, this information could have helped avoid the pain of foreclosure.

"When a borrower on the verge of default cannot find out who has the authority to modify the loan, a modification or a short sale, even if beneficial to both the borrower and the beneficiary, cannot occur," the judge wrote.

This confusion, Panner wrote, is primarily a result of the system instituted by Mortgage Electronic, which was created in the 1990s by the mortgage industry to facilitate the process of bundling and reselling mortgages as securities.

The situation was so bad that on one day in May 2010 the company made three changes to the plaintiff's deed of trust on behalf of three different people, all certified by the same notary.

To find the paper trail, Panner ordered Mortgage Electronic to provide the court with a chain of title for the note and trust deed. The company uses a system it calls "summary and milestones" to track transfers of servicing and ownership rights of loans.

But the judge found numerous holes in the data. There is no record in the summary of how Guaranty Bank obtained its interest in the trust deed before transferring it to Wells Fargo, the ruling states. And neither Mortgage Electronic nor any of the banks recorded the transfers with the Jackson County land records office, where the property was situated, Panner wrote.

In fact, it took the homeowners' complaint to call attention to the fact that the documents filed last spring were "out of order" and appeared to be "rushed," thereby briefly stopping the foreclosure, according to the opinion.

"A lender that knows it will immediately sell a loan on the secondary market has no incentive to ensure the appraisal of the security is accurate," Panner wrote. "Similarly, the lender need not concern itself with the veracity of any representations made to the borrower. In short, the MERS system allows the lender to shirk its traditional due diligence duties."

Panner said the fact that an agency which can not accurately police itself has the authority to foreclose on people's homes was cause for concern.

"Foreclosure by advertisement and sale, which is designed to take place outside of any judicial review, necessarily relies on the foreclosing party to accurately review and assess its own authority to foreclose," the judge wrote. "Considering that non-judicial foreclosure of one's home is a particularly harsh event, and given the numerous problems I see in nearly every non-judicial foreclosure case I preside over, a procedure relying on a bank or trustee to self-assess its own authority to foreclose is deeply troubling to me."

This is one of six separate cases in which Oregon courts have halted foreclosures involving Mortgage Electronic.

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