The Mortgage Mess
By Courtney Sherwood
A law requiring mediation in non-judicial foreclosures was supposed to help stem the tide of homes lost in Oregon. But it has led to unintended consequences.
Everything started falling apart in 2008 for Will and Heather Sirotak. Their grandson, who they’d adopted and were raising, died that year. Heather got cancer. Her insurance wouldn’t cover the treatment. The Sirotaks refinanced their house to pay the bills. Will lost his construction job. They missed a mortgage payment. Then another. They tried to sell, failed, went to court to avoid foreclosure and lost the fight. Last November their house became one of 50,000 in Oregon seized by banks and other lenders since 2007.
“All this talk about the recovery? I don’t feel it,” Heather Sirotak says. “I don’t see it. It’s not real for us or for a lot of other people.”
The same foreclosure crisis that forced the Sirotaks to spend Thanksgiving in a hotel before they settled in a North Portland rental has reshaped Oregon’s financial institutions and political landscape for the past five years, often with equally unsatisfying results.
Now state officials are trying to unravel a situation five decades in the making. Legislators this session want to expand Oregon’s groundbreaking law that requires mediation before lenders begin foreclosing on homes. The Oregon Supreme Court is scheduled to decide later this year whether a mortgage recording company, as opposed to a lender, can initiate foreclosure proceedings. The bankers, consumer advocates, attorneys and disgruntled activists jostling to re-shape Oregon foreclosure law all say they want foreclosures to be handled more humanely and at reasonable cost. But they disagree about the best way to make that happen.
“Making the system work again is what we want to do,” says Kevin Christiansen BA’95, JD’99, government affairs director at the Oregon Bankers Association. “But the choices we make have consequences.”
After the 2007–08 global credit crunch, when bankers cut back on subprime loans and home sales dragged to a crawl, state leaders had few options to help homeowners.
That changed with a U.S. Supreme Court ruling in 2009 that said federal bank regulators couldn’t stop states from enforcing fair-lending laws. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, affirmed that states can write and enforce consumer financial laws that affect how national banks operate within their borders.
Then-Oregon Attorney General John Kroger joined peers from 48 other states in negotiating a $25 billion settlement with the country’s five largest banks. Oregon’s share, which included $199.8 million for homeowner relief, has been used to help 3,100 borrowers reduce their mortgage debt.
Kroger appointed Scott Bellows, trained at Willamette University College of Law’s Center for Dispute Resolution, to work with bankers, consumer advocates and government officials in developing a better way to help borrowers keep their homes. The group devised a proposal for the 2012 legislative session that required almost all lenders and borrowers in the state to sit down with a mediator before foreclosures could proceed.
Based on recent history, legislators expected the law to affect about 95 percent of non-judicial foreclosures — those that start with a letter of default and end with an auction to the highest bidder. These actions proceed without the oversight of a judge unless homeowners sue to fight their banks — a daunting and expensive hurdle for people in financial distress.
Under Senate Bill 1552, homeowners who want to challenge a non-judicial foreclosure now can opt for mediation. They pay a $200 fee and meet a housing counselor, then sit down with a state-sanctioned mediator and a representative of the bank. Consumer advocates expected many homes to still be foreclosed upon but hoped that those still capable of making mortgage payments would be able to renegotiate their loans.
“Depending on who’s doing it, mediation allows for a 65 percent to 95 percent success rate,” Bellows says. “It makes parties sit down and face the issues all at once, instead of playing procedural games.”
Bankers were worried. Today, many large financial institutions hire third parties to manage foreclosures across the country. To participate in mediation, they’d have to send a representative authorized to negotiate mortgage modifications — a costly and time-consuming commitment.
Christiansen says the mediation requirement is a burden. “The banking industry has inherited a lot of regulation over the last few years,” he says. “It creates a burden that ultimately is borne by consumers, who have to pay higher prices.”
Who Owns the Loans?
Around the same time that mediation was being proposed for non-judicial foreclosures, state judges were asked to evaluate the financial sector’s interpretation of Oregon foreclosure law.
In 1959, the Oregon Trust Deed Act for the first time allowed banks to foreclose without going through the courts. Foreclosing became easier, faster and less expensive — a change that lenders said allowed them to write more loans. But a lender had to be on record at the county property records office as the beneficiary of a deed of trust, or mortgage.
In the decades that followed, the U.S. financial sector grew increasingly complex. Formally recording these transactions in each county of every U.S. state was time-consuming and costly. In 1997, an East Coast company called the Mortgage Electronic Registration System began tracking servicing and ownership rights of loans as a service for financial institutions.
In 2005, an Oregon homeowner filed a lawsuit challenging MERS’ role in the mortgage business. Rebecca Niday had borrowed $236,000 to buy a Clackamas County house. The recorded deed of trust named Green Point Mortgage Funding Inc. as the lender. When she defaulted on her loan, however, Green Point didn’t try to collect. Instead, MERS and GMAC Mortgage initiated the foreclosure.
Niday sued, saying that only the beneficiary of a trust deed — the lender — could foreclose under Oregon law. She aimed to halt her foreclosure, arguing that because she did not owe her mortgage payments to MERS or GMAC, they did not have the right to take her home. A Clackamas County judge, noting that the deed of trust specifically described MERS as a beneficiary, ruled against Niday.
But the Oregon Court of Appeals agreed with her, ruling that state law defines a beneficiary as the party collecting on a mortgage loan — in Niday’s case, Green Point Mortgage Funding Inc. Just calling MERS a “beneficiary” in paperwork was not enough to change its legal designation. GMAC could not foreclose, either, because county property records only showed Green Point as the lender, the court’s ruling said.
MERS appealed to the Oregon Supreme Court, which heard arguments in January and is expected to rule later this year.
The Court of Appeals ruling came exactly one week after Oregon’s new mediation requirements went into effect in July 2012. That month, foreclosures in the state underwent a dramatic change. Both SB 1552 and the Niday ruling only applied to non-judicial foreclosures. For years, 95 percent of Oregon foreclosures had been handled outside the court system. But with both mediation and the Niday ruling, large numbers of banks began foreclosing through the courts – a situation that lawmakers hadn’t anticipated and that ended up putting a strain on the legal system.
“Costs and uncertainties are driving our banks to the judicial foreclosure route,” says Christiansen of the Oregon Bankers Association. He said the banking industry is pushing for legislative changes that would clarify the mediation program and allow MERS foreclosures to proceed outside the courts once more.
“It takes close to a thousand days for a foreclosure to run through the court system – almost three years,” he says. “We’ve had approximately 50 years of non-judicial foreclosure in this state. It’s worked effectively. Our banks are very interested in getting back to that point.”
Consumer advocates, who had worried about finding enough mediators to handle demand, say they’re happy to see lenders opt to foreclose through the courts. “Homeowners are better off in the judicial foreclosure process, because you have the oversight of a judge,” says Angela Martin, executive director of Economic Fairness Oregon.
Kelly Harpster, a Lake Oswego foreclosure lawyer, says it’s difficult for struggling homeowners to challenge non-judicial foreclosures. They must sue their banks and bear the burden of proving that a foreclosure is improper. That’s a costly process for those who can afford an attorney.
The Sirotaks learned that first-hand. When they were told it could cost $17,000 to hire a lawyer to challenge their non-judicial foreclosure, they decided to act as their own attorneys. Will Sirotak says his lender’s paper trail didn’t follow state requirements for foreclosure. But he and his wife were unable to meet the burden of proof to show that the lender didn’t comply with state law. Their suit was dismissed before trial. Oregon’s mediation law came too late to save their house.
With mediation, homeowners now have a chance to renegotiate their mortgage terms to avoid foreclosure. If banks opt to sue, homeowners have far more legal options than the Sirotaks did. A couple doesn’t have to prove they have a right to challenge a foreclosure — instead, the lender must prove it has the right to foreclose.
Tweaks to Oregon’s mortgage mediation program are all but inevitable in the 2013 Legislature. The state senators who negotiated the foreclosure mediation program have said they want to expand mediation requirements to judicial foreclosures, since more lenders are going through the courts.
Christiansen opposes that idea. “Taking mediation and putting it in the courts is going to add cost and further delay,” he says. “This is not going to help the system, the economy or the state.”
With Democrats controlling both branches of the Legislature, Christiansen says he expects the Oregon Bankers Association may have a tough time with its wish list. The group has sought small changes in the mediation program, such as a refund of fees if borrowers opt out of mediation. It also wants to do away with a requirement that lenders enter mediation with borrowers who say they are “at risk,” even if they haven’t missed a mortgage payment.
“I don’t see a scenario where anything gets through committee that doesn’t strengthen the hand of consumers,” says Rep. Chip Shields, D-Portland. But he adds that federal law still limits what Oregon can do, and legislators’ best option may be to pressure state regulators to increase their scrutiny of lenders.
Meanwhile, Multnomah County in Portland, Ore. is suing MERS in an attempt to collect mortgage-related county property recording fees that MERS was set up to help lenders avoid. Will Sirotak sees that decision as a rare bright spot in the mortgage mess. “It’s time to bring those funds back to public coffers where they belong,” he says. “But that money won’t help people who’ve already lost their homes. I have no faith in the system to help them anymore. That’s the tragedy.”
Will and Heather Sirotak stand in front of their foreclosed home in Portland, Oregon’s Beaumont neighborhood.