BY LINDA BAKER
For those who track the foreclosure market, the hot property today is the number of judicial foreclosures in Oregon. “Everybody wants to know,” says Fernando Velez, consumer information specialist with the Oregon Department of Consumer and Business Services. Why the sudden interest? Until recently, the vast majority of foreclosures in Oregon have been non-judicial foreclosures, which take place out of court and are generally considered to be a cheaper and more streamlined option than going through the courts.
But two changes to the foreclosure process have triggered what John Helmick, CEO of Gorilla Capital, a company that buys distressed homes, describes as a "paradigm shift": a decline in the number of non-judicial foreclosures and increase in court procedures. The first development is a July 18th Oregon Court of Appeals decision, ruling that non-judicial foreclosures listing MERS (Mortgage Electronic Registry Systems Inc.) as a beneficiary violated the state’s recording law for non-judicial foreclosures. (MERS was created by the industry as a way to package and sell loans to investors.) The second development is an Oregon law that went into effect on July 11, requiring banks to offer mediation in a non-judicial foreclosure.
The MERS ruling and mediation requirement will shift foreclosures to the courts, agree banks, lawyers and consumer advocates. Under the MERS ruling, lenders now have to go back and figure out how to record a loan's history, a difficult task since most mortgage loans change ownership multiple times. Even if lenders can comply with the recording law, they will still be faced with the mediation process in the new bill, said William Larkins, a Portland attorney who represents lenders. "That is driving trends."
There is less agreement as to whether shifting foreclosures to the courts will have a positive or negative impact on homeowners facing foreclosure.
About those numbers. According to data provided by Gorilla, in August, 122 non-judicial notices of defaults were filed in the 20 Oregon counties (including Multnomah) that the company tracks. These numbers are down 71% from July, the month in which the mediation law went into effect.
David Ambrose, a Portland real estate attorney, tracks filings in Deschutes and Jackson counties. After July 11, the number of non-judicial foreclosures declined to about one every two week period, Ambrose said. At the same time, "the number of judicial filings skyrocketed." During a single two-week period, said Ambrose, there were about 43 judicial filings in Deschutes and Jackson counties.
So what's the takeaway? Responses to the changes in Oregon's foreclosure process depend on the interest at stake.
Department of Justice spokesperson Jeff Manning says the uptick in judicial filings will have “real implications for the judicial system. We have a civil system already under some strain, then you start adding thousands of judicial foreclosures. The courts don’t need additional burden.” On the other hand, notes Manning, early evidence suggests lenders are winning default judgments in the judicial foreclosures. If homeowners don't respond to the complaint, Manning said, the impact on the courts will be minimal.
Intended as consumer protections, the MERS and mediation rulings could be harmful to homeowners, some foreclosure experts say. Judicial foreclosures make it easier for lenders to seek a "deficiency judgment" against non-resident homeowners. A deficiency judgement is the difference between the value of the mortage note and value of property foreclosed. The owner of the judgment can garnish the wages and accounts and lien property of the former homeowner, said Helmick. Thus, by modifying the foreclosure statutes, thousands of Oregonians are now subject to judgment liens rather than having the underwater portion of their mortgage forgiven, he said.
Consumer advocates disagree. A shift to the courts "is no cause for concern for anyone who represents homeowners," said Angela Martin, executive director of Economic Fairness, Oregon. The judicial process affords homeowners greater rights and protections, she said. Many housing assistance organizations will pay lawyers fees for homeowners facing a court ordered process. Judicial foreclosures also provide homeowners with a "right of redemption," in which homeowners have 180 days after the property is sold in a foreclosure sale to redeem the property from the purchaser. There is no right of redemption in a non-judicial foreclosure.
As lawyers work through the implications of the new ruling and law, one thing seems clear. The Oregon developments add to the barrage of legal challenges to the processes lenders use to foreclose homes. Those legal challenges are adding to the uncertainty surounding the nation's foreclosure crisis — and an overall decline in the number of foreclosures.
"At the end of the day, what all this is leading to is more short sales," said Ambrose.
Larkins isn't so sure.
"It's not good for anybody to have this much of uncertainty in the system," he said. " And that’s what we have right now. There’s so much uncertainty in non-judicials right now that judicials look like a very certain path for a lender. If a lender has the note and the borrower is in default there is very little doubt about outcome for lender. The lender will win."
The non-judicial concept was put into law in Oregon in 1959, following more than 100 years of judicial foreclosures, said Larkins. "Now it's back to the old alternative, which no one would have expected three years ago."
Linda Baker is managing editor of Oregon Business.
Clarification: This article has been amended to distinguish between resident and non-resident homeowners in the judicial foreclosure process.