A controversial appellate court decision about the Mortgage Electronic Registration Systems in Oregon is stalling lending in the state with smaller banks worried about the decision’s impact on access to the secondary mortgage market.

The case, which is called Niday v. GMAC Mortgage, is on appeal to the Oregon Supreme Court.

Until a decision is reached, Paul Cosgrove, a government relations spokesperson for the Oregon Bankers Association, expects uncertainty to scale back lending in the state’s mortgage market, especially among smaller players. 

The appellate court in the Niday decision limited the meaning of the term beneficiary of the mortgage contract as the agent or person that is owed repayment on a loan.  Under this equation, MERS has no authority to assign foreclosing authority, which disempowers the construction of many lending assumptions made by financial firms in their contracts. This construction has forced many institutions in Oregon’s nonjudicial foreclosure state to pursue judicial foreclosures by default, Cosgrove added.

MERS is now appealing the Niday decision to the Oregon Supreme Court. And in a brief supporting MERS’ position it argues there’s nothing in the state’s law governing deeds that should be interpreted as preventing MERS from serving as a beneficiary of a trust that can exercise foreclosure rights.

But until there is change or certainty, smaller banks are especially impacted, said Cosgrove.  “The smaller institutions who fear the problems that may occur until this is all resolved are holding back on lending activity because of all the uncertainty,” he explained. The reason is simple, he says, firms use Fannie Mae, Freddie Mac and MERS as a means to access the secondary market.

“If you can’t sell a loan on the secondary market, it means you are limited in how much lending you can do,” he added.

The worry for smaller firms is whether they will have that secondary market access since they rely in part on the MERS’ mechanism to structure their lending businesses.

The fact that lenders are rushing into judicial foreclosures now that nonjudicial foreclosures are too difficult is another issue, Cosgrove said.

If a borrower fails to contest or respond to a pending foreclosure proceeding in 30 days, the judicial foreclosure process can literally kick into high gear quickly. But in a nonjudicial foreclosure, brorowers can generally stretch it out for 120 days or more and get extra time, Cosgrove noted.

With more lenders going the judicial foreclosure route, Oregon — much like California in response to passage of the Homeowner Bill of Rights — is becoming a judicial foreclosure state by default.


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