FAQ Real Estate

Avoiding Foreclosure

Can a lender foreclose my house without the original promissory note?  Probably yes.  It’s a common rumor that a bank or mortgage servicer must produce your original promissory note in order to foreclose on your house.  The Idaho Supreme Court has yet to rule on this legal theory.  However, a Blaine County district court has ruled against this theory in a couple of cases: “Doan V. Columbia Mortgage” #11-0516 and “Doan v. Sun Valley Brokers” #11-0517.  Moreover, under Idaho Code § 28-3-3, a court will enforce the promissory note if the lender was in possession of the note when it was lost, and the loss was not the result of a transfer.  In a nutshell, a homeowner who is in default will likely have a tough time getting out from under his financial obligation just because the lender cannot produce the original promissory note.

What if MERS is the record holder of the deed of trust?  MERS is the Mortgage Electronic Registration Systems, Inc.  This company tracks the beneficial owners of promissory notes and deeds of trust.  The service has become necessary because originating lenders typically sell the mortgage to an investment bank, that then packages it with hundreds or thousands of other mortgages, and sells the packages off as a mortgage back security (MBS), collateralized debt obligation (CDO), or other type of bond, all of which are sometimes referenced as “toxic assets.”  The idea behind MERS is to avoid the requirement of recording all the transfers of the mortgage by having the deed of trust name MERS as the nominee of the beneficiary(s) of the deed of trust.  There’s an argument that MERS is not entitled to foreclose the deed of trust under Idaho’s statutes because, as a mere nominee of the owner(s), it lacks a substantive right to initiate a foreclosure.  A second argument goes like this: even if MERS can establish a right to foreclose, it can’t show that the assignments of interest in the deed of trust comply with the requirements of Idaho law governing nonjudicial trust sales, Idaho Code §§ 45–1502 to –1515, and recording of interests in property, Idaho Code § 55–601.  The Idaho Supreme Court, in “Trotter v. Bank of New York Mellon,” is considering a case on this very issue but has yet to rule.  One district has reserved judgment on this issue pending the outcome of Trotter.  Thus, we are advising clients to await the Trotter decision, if time permits, before asserting MERS ownership as a defense to foreclosure.

If the Court rules against MERS will I then be able to avoid foreclosure?  Not certain at this point.  Some advocates(*) argue that Idaho has a “tender rule” that requires a borrower to first satisfy a threshold test before even getting into court: Citing the case of “Trusty v. Ray” (73 Idaho 232 (1952)), these advocates proffer the general rule that a borrower cannot quiet title against a lender/mortgagee as long as the secured debt remains unpaid.  In almost all cases of foreclosure, the borrower is, in fact, in default.  Thus, if these advocates are correct in their application of the “Trusty v. Ray” case, a borrower would be barred from even asserting the “missing note” or “MERS” defense to foreclosure.

So are you saying I can’t get a free or reduced priced home?  Every case must stand on its own set of facts.  If you think you’re entitled to avoid foreclosure, even though you are in default of your loan, then you should seek the advice of qualified legal counsel.  However, as a general principal, the courts are very reluctant to make decisions that are patently inequitable.  Fairness is an overarching standard.  In a nutshell, this story has yet to be fully told. 

(*) Thanks to Kelly Greene McConnell of Givens Pursley LLP in Boise for her article on this subject in the January, 2012 edition of “The Advocate.”