February 01, 2018 Substantive Law

You Can’t Lock the Doors! Are Lenders Powerless to Stop Zombie Properties in Lien Theory States?

By Timothy M. Harris

Reprinted with permission from Real Property, Trust and Estate Law Journal, Fall 2017 (52:2) at 195-203. ©2017 by the American Bar Association. Reprinted with permission. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

This is the first of several excerpts from this article that will appear in GPSolo eReport.

I. Introduction

In the aftermath of the financial crisis of 2007–2008, many homeowners found themselves under water—their houses became worth less than their mortgage balances. As the job market ebbed and housing prices fell, many people simply stopped making payments on their mortgages and abandoned their homes. The proliferation of abandoned homes—or “zombie properties”1—exacerbated the economic situation by further driving down the values of homes in neighborhoods that were the hardest hit. Many lenders attempted to address the situation by entering their borrowers’ abandoned homes to secure and winterize them. Lawns were mowed, locks changed, and trash removed. These steps help maintain a home’s value and may have a positive effect on neighborhood property values, crime, and prevention of squatters.

Against this backdrop, “one of Nationstar’s vendors,” relying on contractual language that permitted entry, attempted to secure a home whose owner had defaulted on her mortgage. Nationstar Mortgage, LLC, (Nationstar) like many mortgage holders, utilizes a standard form deed of trust with a clause allowing the lender to “do . . . whatever is reasonable or appropriate to protect Lender’s interest in the Property” if a borrower fails to perform as agreed under the contract or has abandoned the property.2 This language allows lenders to enter a house to make repairs and to secure a property that might otherwise fall into disrepair or be occupied by squatters.

Nationstar, like many other lenders, relies on this language to secure property in default by changing locks in order to gain access to, secure, maintain, and repair real property. Laura Jordan, like many other borrowers, was surprised to learn that her house was suddenly inaccessible due to a lender changing her door lock.3 Ms. Jordan, joining with 3,600 other borrowers, brought a federal class action lawsuit against Nationstar, seeking damages for trespass, breach of contract, and violations of Washington’s Consumer Protection Act and the Fair Debt Collection Practices Act.4 Her claims relate to Nationstar’s entry onto her property and changing the lock on her front entry door.5

The Federal District Court of the Eastern District of Washington certified two questions to the Washington Supreme Court.6 The question at issue, as characterized by the court, was whether the provisions in the deed of trust conflict with a Washington law prohibiting lenders from taking possession of property prior to foreclosure.7 The court answered in the affirmative, finding the deed of trust language in conflict with Washington law and therefore invalid.8 No court in Washington—or elsewhere in the United States—has found similar entry language in the deed of trust unenforceable or ineffective, and Jordan v. Nationstar Mortgage, llC 9 has been called “a ‘significant’ development in the law  of Washington.”10 Therefore, this ruling has far-reaching implications for lenders and borrowers. As discussed below, the same reasoning in Jordan may also be applied in other jurisdictions where plaintiffs seek class action relief for entry into properties in default. At minimum, the case will chill a lender’s ability to exercise its contractual right of entry upon default in Washington and other states operating under a lien theory of mortgages.

 

II. Background

The facts represent an all-too-common and unfortunate scenario of a property owner defaulting on a loan secured by a deed of trust on a primary residence. These facts have been repeated throughout the United States, particularly as the housing market fell during the great recession. Many borrowers who purchased homes at the peak of the housing market in 2007 found themselves significantly under water in 2011 after the real estate market declined significantly.11

Laura Jordan purchased a home in Wenatchee, Washington, in 2007 at the peak of the housing market.12 She bought the home with a $172,000 home loan from Homecomings Financial.13 The loan was secured by a deed of trust, and Homecomings Financial “assigned the loan to the Federal National Mortgage Association, . . . which hired Nationstar to service the loan.”14

Ms. Jordan defaulted on her loan in January 2011 by failing to make loan payments.15 Two months later, “one of Nationstar’s vendors came to Jordan’s home and changed the locks on her front door.”16 Ms. Jordan “returned home to find a notice on the front door informing her that the property was found to be ‘unsecure or vacant’ and that to protect her and the mortgagee’s interest in the property, it was ‘secured against entry by unauthorized persons to prevent possible damage.’”17 These facts are undisputed.18

The court noted that “the parties dispute whether the home was vacant.”19 Ms. Jordan stated that she was living in the house and left in the morning to go to work.20 She returned and found the door lock had been changed.21 However, “Nationstar contend[ed] that its vendor had performed an inspection of the property and determined it was vacant.”22

In addition to a changed lock on Ms. Jordan’s front door, Nationstar’s vendor left a notice informing her that she could gain access to her home by calling Nationstar Mortgage, LLC to obtain a lock box code to release a key contained therein.23 Jordan called the number, obtained the code, and reentered the house.24 She subsequently “took all of her belongings and vacated the house the next day.”25 Nationstar has since maintained and winterized the property.26 Nationstar stated that its policy “is to change the locks on only one door such that it can access the home, but also so that the owner can still enter the home through another door.”27 Ms. Jordan’s home “had only a front door and a sliding glass door in the rear of the home, effectively giving her no means of entry once the lock was changed.”28

Nationstar relied on standard language in the deed of trust to justify its actions:

If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument, . . . then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property. . . . Securing the Property includes, but is not limited to, entering the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have utilities turned on or off.29

Ms. Jordan represents a class of 3,600 Washington homeowners who had loans with Nationstar as their servicer and were similarly locked out of their homes under identical deed of trust language.30 In 2012, “Jordan filed a complaint against Nationstar, . . . alleging state law claims that include trespass, breach of contract, and violations of the Washington Consumer Protection Act, and the Fair Debt Collection Practices Act. Ch. 19.86 RCW; 15 U.S.C. §§ 1692–1692p.”31 The superior court “certified the class action, with Jordan as the representative for the 3,600 similarly situated homeowners.”32 Nationstar removed the action to federal court, and “[t]he parties each filed motions for partial summary judgment.”33 In reviewing those motions, the United States District Court for the Eastern District of Washington found “that the case raised unresolved questions of Washington state law.”34 The court certified two questions to the Washington Supreme Court:

  1. Under Washington’s lien theory of mortgages and RCW 7.28.230(1), can a borrower and lender enter into a contractual agreement prior to default that allows the lender to enter, maintain, and secure the encumbered property prior to foreclosure?
  2. Does chapter 7.60 RCW, Washington’s statutory receivership scheme, provide the exclusive remedy, absent postdefault consent by the borrower, for a lender to gain access to an encumbered property prior to fore-closure?35

 

III. Deeds of Trust and the Foreclosure Process

The deed of trust in Jordan contains an entry provision that is identical to thousands of mortgages and deeds of trust used by a myriad lenders throughout the United States.36 In a majority of states, lenders use deeds of trust to streamline the foreclosure process, as permitted by express contractual language and the attendant statutory scheme.37 When a borrower fails to make payments on a loan secured by a deed of trust that grants the trustee the power of sale, “the trustee may usually foreclose  the deed of trust and sell the property without judicial supervision.”38  The trustee, in turn, has a duty of good faith to both the borrower and the lender.39 In Bain v. Metropolitan Mortgage Group, Inc.,40 the Washington Supreme Court noted the power to foreclose and sell the property “is a significant power, and we have recently observed that ‘the [deed of trust] Act must be construed in favor of the borrowers because of the relative ease with which lenders can forfeit borrowers’ interests and the lack of judicial oversight in conducting nonjudicial foreclosure sales.’”41

Washington’s statutory method of foreclosure under a deed of trust is similar to the method used by other states. Deeds of trust commonly contain a power of sale clause, permitting a non-judicial foreclosure.42 Under the power of sale clause and the attendant statutory framework, the trustee begins the foreclosure process by sending or posting a notice of default to the borrower and grantor.43 A notice of trustee’s sale is then transmitted at least 30 days after the notice of default.44 The property may be auctioned at a trustee’s sale at least 90 days from the notice of sale45 and 190 days from the notice of default.46 The purchaser at a trustee’s sale has a right to possession 20 days after the sale.47 However, the Fannie Mae standard for the allowable time span between the last mortgage payment to a foreclosure sale varies from state to state.48 For example, the maximum number of allowable days is 630 in Washington, 480 in Idaho, and 1050 in Oregon.49

Proceeds from the ultimate sale go first to the expenses of the sale, “including a reasonable charge by the trustee . . .”; then “to the obligation secured by the deed of trust”; with the remainder deposited “with the clerk of the superior court of the county in which the sale took place.”50 After mailing notices of surplus to the necessary parties, the trustee is then discharged from further duties, and any creditor—and the borrower51—may make a claim against these funds, which are only disbursed on court order.52

 

Another section of this article will be excerpted in the next issue of GPSolo eReport.

 

Notes

1.  See  generally  Wendy  Walter,  Washington  Foreclosure  law:  Is  Our  State  Ready for the Next Chapter in Real Estate Finance?, NW LAW., Sept. 2016, at 40 (“A zombie foreclosure occurs when the owner of a property leaves or abandons the property and assumes that the lender will foreclose the property to recover the debt owed by the owner.”).

2.  Jordan v. Nationstar Mortg., LLC, 374 P.3d 1195, 1199 (Wash. 2016) (en banc); PNC Bank v. Van Hoornaar, 44 F. Supp. 3d 846, 856 (E.D. Wis. 2014); Wells Fargo Bank v. Murphy, 458 S.W.3d 912, 918 (Tex. 2015); see also Wade v. Chase Home Fin., 187 So. 3d 1172, 1182 (Ala. Civ. App. 2015) (evidencing identical entry upon default clauses in deeds of trust from different lenders). The deed of trust at issue in Jordan is the standard form Washington Deed of Trust. See FANNIE MAE, Form 3048: Washington Deed of Trusthttps://www.fanniemae.com/content/legal_form/3048w.doc (last visited Aug. 29, 2017).

3.  See Jordan, 374 P.3d at 1197.

4.  See id. at 1198.

5.  See id. at 1197-98.

6.  See id. at 1197.

7.  See id. at 1199.

8.  See id. at 1202.

9.  374 P.3d 1195 (Wash. 2016).

10.  Bund v. Safeguard Props., LLC, No. C16-0920JLR, 2016 WL 8738677 (E.D. Wash. Dec. 30, 2016).

11.  See generally Daniel Indiviglio, After an Ugly 2010, the Housing Market Won’t look Much Better in 2011, THE ATLANTIC, Jan. 6, 2011, https://www.theatlantic.com/business/archive/2011/01/after-an-ugly-2010-the-housing-market-wont-look-much-better-in-2011/69009/ (stating that the national housing market declined significantly in 2010 and predicting a weak housing market through 2011). For an ugly example of the housing market, see Cook County, Illinois. See SPENCER COWAN & MICHAEL AUMILLER, UNRESOLVED FORECLOSURES: PATTERNS OF ZOMBIE PROPERTIES IN COOK COUNTY 3 (WOODSTOCK INST., 2014),  www.woodstockinst.org/sites/defaultfiles/attachments/140123_unresolved_foreclosures_final_0.pdf (“[S]ervicers initiated 217,035 residential foreclosures in Cook County, Illinois, between 2008 and the end of 2012.”).

12.  See Jordan, 374 P.3d at 1197.

13.  See id.

14.  Id.

15.  See id.

16.  Id.

17.  Id.

18.  See id.

19.  Id. at 1197-98.

20.  See id. at 1198.

21.  See id.

22.  Id. For a discussion of other situations when houses have allegedly been vacant, see Christopher K. Odinet, Banks, Break-ins, and Bad Actors in Mortgage Foreclosure, 83 U. CIN. L. REV. 1155, 1159-61 (2015).

23.  See Jordan, 374 P.3d at 1197.

24.  See id. at 1198.

25.  Id.

26.  See id.

27.  Id.

28.  Id.

29.  Id. at 1199.

30.  See id. at 1198.

31.  Id.

32.  Id. The class subsequently expanded to more than 5,000. Jordan v. Nationstar Mortg., LLC, 240 F. Supp. 3d 1114, 1117 (E.D. Wash. 2017).

33.  Jordan, 374 P.3d at 1198.

34.  Id.

35.  Id. Only the first question is considered controversial. See id. at 1199. The court answered the second question in the negative. See id. at 1204. According to the court, “the plain language of the provision does not indicate that chapter 7.60 RCW was meant to provide an exclusive remedy to lenders. . . . [P]ublic policy also supports the finding that the statute is not the exclusive remedy. . . .” Id. In other words, a court-appointed receiver is not the only method by which a lender can gain access to a property in default. See id. However, the court leaves open the question about a lender’s other remedies. See id. After Jordan, a lender cannot enter a house to maintain it without permission from the borrower, but the lender need not seek a receivership. See id. The court’s discussion of question two is silent about other remedies. See id.

36.  See id. at 1198.

37.  Corpus Juris Secundum explains the differences between a mortgage and a deed of trust:

The primary differences between a mortgage and a deed of trust are that there are two parties to a mortgage, the mortgagor and the mortgagee, while deeds of trust are three-party instruments with a grantor, the grantee and the cestui que trust or beneficiary, and that a mortgage conveys property directly to the creditor, while a deed of trust conveys the property to a third party in trust for the benefit of the creditor.

59 C.J.S. Mortgages § 17 (2009); see, e.g., Wellington Co. Inc. Profit Sharing Plan & Tr. v. Shakiba, 952 A.2d 328, 339 (Md. Ct. Spec. App. 2008) (stating that mortgages are two-party instruments while a deed of trust requires three parties); Bain v. Metro. Mortg. Grp., 285 P.3d 34, 38 (Wash. 2012) (explaining that a deed of trust “is a three-party transaction in which land is conveyed by a borrower, the ‘grantor,’ to a ‘trustee,’ who holds title in trust for a lender, the ‘beneficiary,’ as security for credit or a loan the lender has given the borrower”); see also WASH. REV. CODE §§ 61.24.005-.177 (citing Washington’s statutory scheme for using deeds of trust in real estate).

38.  Bain, 285 P.3d at 38.

39.  See id. at 39.

40.  285 P.3d 34 (Wash. 2012).

41.  Id. at 38-39.

42.  If a deed of trust does not contain power of sale language, the lender can initiate a judicial foreclosure. See WASH. REV. CODE § 61.12.020. A lender can only obtain a deficiency judgment against the borrower at a judicial foreclosure sale (subject to certain limitations, such as if the property had been abandoned for six months or more). See id. § 61.12.070. Deficiency judgments are not available by a lender against a borrower under a nonjudicial foreclosure with a deed of trust under a power of sale clause. See id. § 61.24.100. Any reference to “RCW” refers to the Revised Code of Washington. All state statutory and regulatory citations are up to date at the time of publishing unless otherwise noted. The same applies to ordinances.

43.  See id. § 61.24.03(8).

44.  See id. § 61.24.03(7).

45.  See id. § 61.24.040. The sale may be halted if the borrower pays the amount due under the deed of trust and the expenses occurred by the trustee up to eleven days prior to the date of sale. See id. § 61.24.090.

46.  See id. § 61.24.040(8).

47.  See id. § 61.24.060.

48.  See generally FANNIE MAE, Foreclosure Time Frames and Compensatory Fee Allowable Delays Exhibit (2016), https://www.fanniemae.com/content/guide_exhibit/foreclosure-timeframes-compensatory-fees-allowable-delays.pdf (listing the number of allowable days between the due date of the last mortgage payment and the foreclosure sale for each state).

49.  See id. at 1-2.

50.  WASH. REV. CODE § 61.24.080.

51.  See generally Nako v. Mullen, 306 P.3d 994, 999-1001 (Wash. Ct. App. 2013) (discussing a borrower’s claim under RCW section 61.24.080; however, a second deed of trust beneficiary has priority over a borrower’s claim).

52.  WASH. REV. CODE § 61.24.080(3) (“A party seeking disbursement of the surplus funds shall file a motion requesting disbursement in the Superior Court for the county in which the surplus funds are debited.”).

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Timothy M. Harris

Timothy M. Harris is adjunct professor of law, Seattle University School of Law; assistant city attorney, Seattle City Attorney’s Office. B.A., M.A., University of California, Davis; J.D., University of the Pacific, McGeorge School of Law. The views expressed in this article are those of the author, not necessarily those of the Seattle City Attorneys’ Office.