August 2, 2016
by John McIntosh
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washington)
The Washington Supreme Court recently held that deed of trust provisions allowing a lender to “enter, maintain, and secure” a defaulted borrower’s property before foreclosure are unenforceable under Washington law. [Jordan v. Nationstar Mortgage, No. 92081-8 (Wash. July 7, 2016)].
In Jordan, the Court held that entering and securing a property by changing the locks before foreclosure completion constitutes “taking possession” in violation of Washington law. Further, because the standard “entry provisions” found in Paragraph 9 of the Fannie Mae/Freddie Mac Uniform Deed of Trust permit the lender to “take possession” by changing the locks, those provisions are unenforceable in Washington.
The borrower defaulted on her mortgage in January of 2011. Three months later, pursuant to the deed of trust’s entry provisions, the servicer’s vendor inspected the property, determined the house was vacant, and had the lock on the front door changed. The servicer’s vendor posted a sign listing a telephone number to call to gain access to a lockbox with the proper key.
The borrower, who disputes that the property was vacant, came home from work one night and regained access to her home by calling the posted telephone number. She asserts that she vacated the house the next day.
In April 2012, the borrower filed a class action lawsuit in state court against Nationstar Mortgage, alleging trespass, breach of contract, and violations of the Washington Consumer Protection Act and the Fair Debt Collection Practices Act. The trial court certified the class and Nationstar removed the action to federal district court. After both parties moved for partial summary judgment, the district 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 foreclosure?
The Court answered both questions in the negative.
Response to Question One — The Court pointed to Washington’s lien theory of mortgages and RCW 7.28.230(1), which prohibit a lender from taking possession of property before foreclosure of the borrower’s home, expressly quoting from the statute: “A mortgage of any interest in real property shall not be deemed a conveyance so as to enable the owner of the mortgage to recover possession of the real property, without a foreclosure and sale according to law.”
The Court held that the servicer’s conduct in this case constituted taking possession because its actions were representative of control. Specifically, rekeying the property had the effect of communicating to the borrower that the servicer “now controlled the property.” The Court stated that even though the servicer did not exclude the borrower from the premises (as she was able to gain a key and enter), she left the next day and did not return. “[The servicer] effectively ousted [Borrower] by changing her locks, exercising its control over the property.”
The Court then held that because the entry provisions authorized changing the locks, these provisions are unenforceable because they conflict with state law.
Response to Question Two — The Court determined that the plain language of the statute and public policy support finding that Chapter 7.60 RCW (receivership) does not provide an exclusive remedy to lenders, but that “[i]t is not before us to determine what particular remedies are available.”
In light of the Jordan decision, lenders and servicers should encourage the legislature to amend RCW 7.28.230(1) to provide for exceptions to the rule that mortgagees cannot take possession of property before foreclosure.
Until then, lenders should not rekey property before foreclosure even if they have evidence that a property is vacant or abandoned. Further, the Jordan holding does not distinguish between abandoned and occupied property. The prohibition on pre-foreclosure possessory actions applies regardless of occupancy status. Moreover, the Court does not address the numerous other actions that lenders take to preserve property under the entry provisions, such as making repairs or maintaining a lawn. If a deed of trust contains the same entry provisions that were held to be unenforceable in this case, lenders cannot rely solely on those provisions as authority.
Servicers or mortgagees seeking possession prior to foreclosure sale should commence the necessary receivership proceedings to legally take possession by court order in advance of the foreclosure sale.
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