We recently wrote a post describing a MERS defeat in Oregon Bankruptcy Court, and MERS (an acronym for Mortgage Electronic Services, Inc., an electronic registry) is in the news once again. This has not only been a hot topic in Oregon, but people around the nation have been attacking MERS as foreclosures mount and banks turn defaulting homeowners out into the streets.
Many home lenders use an entity called Mortgage Electronic Registration Systems, Inc., or “MERS” as a nominal party in loan transactions to facilitate an electronic central registry of note holders and servicers. On its website, MERS claims many benefits to use of their services. According to the website, MERS should be named in security instruments as a “nominee for the lender” in order to “eliminate the need for assignments and realize the greatest savings.” In an Oregon deed of trust instrument, MERS is often named as “Beneficiary” in its nominee capacity.
A recent decision in the Oregon Bankruptcy Court by Chief Judge, Frank R. Alley, III, complicates matters dramatically for institutional trust deed holders using the MERS system when they attempt to foreclose defaulted home loans.
A deficiency judgment is a judgment entered against a borrower after foreclosure of a secured debt when proceeds from sale of the collateral fail to fully satisfy the debt. A deficiency judgment against the borrower is prohibited by ORS 86.770(2) after non-judicial foreclosure of a trust deed on real property that is held as collateral security. This statute was changed in 2013; current statute is ORS 86-797. This non-judicial foreclosure process is referred to as “advertisement and sale” in Oregon. However, the antideficiency statute only applies after a foreclosure and does not apply when the note holder waives the security and sues directly on the note. This is made clear in Beckhuson v. Frank, 97 Or App 347, 775 P2d 923 (1989), see also the case of In Re Daraee 279 B.R. 853, a 2002 Oregon Bankruptcy Court opinion.
Deficiency judgments are uncommon for first priority home loans in Oregon. Lenders normally prefer to foreclose and sell the collateral in a nonjudicial proceeding to quickly recover as much as they can, without the expense and delay of a judicial proceeding.
The 2005 bankruptcy “reform” law was really about abuse of consumers and protection of banks. Its lofty name “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” was no vehicle for consumer protection. I have long felt that this effort to make consumers more “responsible” financially has contributed to the dramatic economic downturn we have experienced. The negative publicity surrounding passage of the bill in April of 2005 caused a rush to the courthouse for many consumers. The abrupt dropoff in filings after the effective date in October 2005, made it clear this legislation had a significant impact on the economy.
If scaring consumers by taking away some of the protection afforded by the bankruptcy laws makes them more responsible, it also seems to have contributed significantly to home loan defaults. It makes sense. Consumers have limited resources. When they must dedicate more to payment of credit card debt, they have less money to pay their home loans. Now, there is a study that documents that result.
A new paper written by three economists, Wenli Li of the Federal Reserve Bank of Philadelphia, Michelle White of the University of California San Diego, and Ning Zhu of the University of California, Davis, takes the position the 2005 bankruptcy legislation is a significant factor in the mortgage crisis and the recession it caused. The abstract of this article is published by the National Bureau of Economic Research under the title Did Bankruptcy Reform Cause Mortgage Default to Rise? It promotes the paper as arguing that “an unintended consequence of the reform was to cause mortgage default rates to rise.”
After looking at a large number of individual mortgages, the authors conclude that default rates increased by 14% in prime mortgages and 16% in subprime mortgages after enactment of the new law. They find that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 caused an increase in home loan defaults of approximately 200,000 per year.
You can thank those corrupt senators and congressmen who took millions in campaign contributions from banks, credit unions and other consumer lenders for bringing on the recession we struggle with today. However, in all honesty, it is the live for today attitude of most first world consumers that is the root of our problems. The voters elect politicians who promise to lower taxes and increase spending. These same voters expect public benefits to increase but are unwilling to pay the price for this largess.
Last week President Obama announced an ambitious and expensive plan to stabilize home prices and help homeowners in trouble with their home loans avoid foreclosure. The plan proposes incentives for investors and servicers alike to encourage loan modification even before homeowners default on their loans. However, one key element of the administration plan costs the taxpayers very little but could provide extensive relief from foreclosure.
What is now being described as “Judicial Modification” is really the well known bankruptcy concept referred to as “Cramdown”. The word does not appear in the language of bankruptcy code but this innovation emerged as a tool for debtors when the 1978 bankruptcy code was enacted by congress. The term is used to describe the modification of creditors’ rights, against their will, when the negative impact on a particular creditor is substantially outweighed by the benefit to the debtor.
The Helping Families Save Their Homes in Bankruptcy Act of 2009 was introduced early in the 111th Congress (2009-2010) in both the House of Representatives as H.R. 200 by Representative John Conyers, a Michigan Democrat, and S 61 in the US Senate by Senator Richard Durbin, an Illinois Democrat. This legislative proposal would lift a longstanding limitation contained in the bankruptcy code with respect to the rights of homeowners and residential lenders in a bankruptcy proceeding.
The bankruptcy code provides for modification of the rights of secured creditors in both Chapter 11 and Chapter 13 cases. Under current law, a Chapter 13 plan is permitted to include, pursuant to 11 USC §1322(b)(2), language that will “modify the rights of holders of secured claims” with the express exception that no “claim secured only by a security interest in real property that is the debtor’s principal residence” may be so modified.
The White House proposes “careful” legislative changes that allow bankruptcy judges to modify mortgages written in the last few years when there are no other reasonable options for families with problem loans. The proposed plan provides that:
“When an individual enters personal bankruptcy proceedings, his mortgage loans in excess of the current value of his property will now be treated as unsecured. This will allow a bankruptcy judge to develop an affordable plan for the homeowner to continue making payments. To receive judicial modifications in bankruptcy, homeowners must first ask their servicers/lenders for a modification and certify that they have complied with reasonable requests from the servicer to provide essential information. This provision will apply only to existing mortgages under Fannie Mae and Freddie Mac conforming loan limits, so that millionaire homes don’t clog the bankruptcy courts.“
While the proposal is more limited than the current legislative initiative, it will cost the taxpayers relatively little by comparison with the many other investments being made by the Obama administration in an attempt to improve the economy. As a bankruptcy lawyer, I have no doubt this portion of the Homeowner Affordability and Stability Plan will do a great deal to keep many families in their homes.
In the bankruptcy practice where I work, I am seeing an increasing number clients caught in financial binds caused by usurious home loans. Oregon has an explicit exception to the statutes limiting interest and fees charged on loans set forth in ORS 82.010(4). On the other hand, there are many state and federal statutes including RESPA and HOEPA which have provisions either restricting loan terms or requiring lenders to be explicit when disclosing the costs of a loan. When examining loan documents I sometimes find clear violations of existing laws, but far more often what surfaces is a contract which is legal, but unconscionable.
Usury, once associated with organized crime, has become institutionalized in credit-card lending, subprime home loans, and, increasingly, private student loans. Home loans and easy credit have driven the economy for the last decade, generating obscene profits for banks and lending institutions. Congress, meanwhile, adopted a laissez-faire attitude. If it wasn’t obviously broken, no-one wanted to expend effort to fix it.