posted on 3.19 @ 10:18 pm
MERS? What’s MERS? It’s what’s behind the headline that made the very top of the front page of the Oregonian a couple of Sundays ago: “Hundreds of foreclosed sales halted.”
MERS is a company set up about 15 years ago by a bunch of the biggest players in the mortgage finance business to reduce their expenses and increase their profits. MERS did so by making it cheaper and easier to sell the rights to mortgages from one lender to another. It allowed the mortgage lenders to get very fancy, packaging and “slicing and dicing” pools of mortgages into “mortgage-backed securities,” “collateralized debt obligations,” and other exotic financial instruments that could be very profitably sold to investors. When billions and billions of dollars worth of these instruments turned nearly worthless virtually overnight, they became the infamous “toxic assets” that threw the economy into its tailspin of the last few years.
So how does MERS fit in here? And how could this all help today’s distressed homeowner?
It’s an abbreviation for Mortgage Electronic Registration Systems, Inc. It operates a computer database designed to track mortgage loans in the United States. MERS lowered the costs of processing loans for mortgage lenders, in part by reducing what the lenders pay for recording fees, by avoiding recording fees for the assignments of trust deeds. When one lender sells a loan and its trust deed to another lender—often in big batches of loans—it assigns the trust deed, and the rights contained in it, including the right to foreclose, to that new lender.
MERS saved these mortgage lenders these recording fees through some fancy footwork which is now the source of the lenders multi-billion dollar—maybe multi-trillion dollar—problem: the homeowner’s original lender prepares the loan documents with itself as the lender to be paid on the loan, as expected, but instead of putting its name on the trust deed (giving itself the right to foreclose if the homeowner doesn’t make the payments), it writes in MERS as the original trust deed holder. MERS then records the documents at the county recorder’s office, but then all subsequent assignments are kept track of through MERS but are NOT recorded in the official county records. According to MERS these assignments don’t need to be recorded. This more “efficient” system became essential starting in the early 2000s when mortgage lenders figured out that they could make much greater profits by repackaging loans in a particularly creative way called securitization and selling shares of these packages to investors.
But MERS created a whole bunch of problems. One is that many state’s laws—including Oregon’s—plainly require a lender to have received its assignment of the trust deed through an officially recorded assignment. Unbelievably, for years this requirement was overlooked mostly because homeowners very seldom challenge foreclosures. But just last month an Oregon bankruptcy judge ruled that a mortgage lender could not foreclose on a home because that lender had received its right to foreclose from the homeowner’s original lender through an “assignment” that had NOT been recorded in the county real estate records. Other judges have made similar rulings. As a result, one of the nation’s largest title insurers has announced that it would not insure real estate titles in these circumstances. In the last few weeks, hundreds of foreclosures have been cancelled all over Oregon. Where this is all leading is very unclear because we’re in uncharted territory. We’ll update you in our next blog.
posted on 3.05 @ 12:48 am
The Problem: As the number of foreclosures has skyrocketed in the last two or three years, more and more renters living in the houses or apartment buildings being foreclosed have become victims of the legal dispute between their landlord and the landlord’s bank. Renters have become the collateral damage of the foreclosure epidemic.
Foreclosure law carefully lays out the rights and responsibilities of the mortgage lender and the home or apartment building owner, but pays virtually no attention to the renters who occupy many of those homes or apartments. So:
- Renters often have no idea that their landlord had fallen behind on mortgage payments and that their home is being foreclosed. Many times they find out after the foreclosure sale has occurred and the bank or the new owner serves them with eviction papers.
- Not knowing about the foreclosure, renters pay rent to the landlord after the foreclosure when the landlord no longer has any right to the rent. Getting the money back from the former landlord is usually difficult if not impossible, and the it is often difficult to recover pre-paid security deposits.
- Landlords sign leases with new renters when the landlords know about an upcoming foreclosure, but do not disclose it to the renter. The term of the lease can extend beyond the anticipated foreclosure date, when the landlord knows he or she cannot perform under the lease after that time.
Some Solutions:
Both Congress and the Oregon legislature reacted to this problem relatively quickly, with both passing legislation in 2009 to provide the following protections for tenants:
The Federal Response: The Protecting Tenants at Foreclosure Act of 2009
- Gives a minimum of 90 days notice before most tenants would be required to move out, that 90 days starting no sooner than the date of the foreclosure sale.
- Tenants who have leases of a specific length of term are permitted to finish out the term; the exception is if the person who purchased the home at the foreclosure sale intends to live in the home as that person’s primary residence, in which case the tenant is entitled to the same 90 day notice above, instead of to the end of the term.
- To receive these rights the tenant cannot be the same person who has lost the property to foreclosure, or a member of that person’s family.
- Unless extended, this law will expire after Dec. 31, 2012; a bill introduced in the last session of Congress to remove this “sunset clause” did not pass.
The Oregon Response: 2009 Senate Bill 952 and House Bill 3004:
- Written notice of a pending foreclosure now needs to be sent to anyone living in a rental, that is, the notice must be “addressed clearly to any person who occupies the property and who is or might be a tenant.”
- If the tenant has a “fixed-term lease,” he or she must contact the foreclosing “trustee” and provide “written evidence of your rental agreement,” at least 30 days before the proposed foreclosure sale to get the remaining benefits of the new law. If the tenant has no “fixed-term lease,” and can’t come up with a written rental agreement, the tenant can give other indirect written evidence of a rental agreement, such as rent receipts or cancelled checks.
- Assuming this evidence of a tenant relationship has been established, if the tenant has a “fixed-term lease,” the new owner has to give the tenant 60-days notice to vacate the property. If the tenant does NOT have a “fixed-term lease,” the new owner has to give the tenant only 30-days notice to vacate.
- Once the tenant has learned about the upcoming foreclosure, the tenant can apply any pre-paid security deposits or “last month’s rent’ to the present rent as it becomes due to the landlord. But the tenant must notify the landlord in writing of this intention at or before the time the next rent payment is due.
- Landlords of all one-to-four unit properties being foreclosed upon must notify any NEW tenants of the pending foreclosure when they sign the rental agreement. Or else the tenant can sue the landlord for twice the amount of any actual damages or the monthly rent, whichever is larger, plus recovery of any prepaid rent.
Note that these federal and Oregon laws overlap in some respects. In many other areas of law where there is a conflict, federal law controls. But here the federal law specifically provides that any state statutes which give tenants more protection in foreclosure are controlling over the parallel parts of the federal statute. Also, since the federal law expires at the end of 2012 (unless it is extended), only the Oregon law will be in force after that.