By John McIntosh (USFN Member OR, WA)
RCO Legal, P.S.
The Washington Supreme Court held on July 7, 2016 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
In Jordan v. Nationstar Mortgage, LLC, the Washington Supreme Court held that entering and securing a property before foreclosure completion by changing the locks 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.
Background: 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.
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, Borrower filed a class action lawsuit in state court against Nationstar Mortgage, LLC (“Nationstar”) alleging trespass, breach of contract, and violations of the Washington Consumer Protection Act and FDCPA. The trial court certified the class and Nationstar removed the action to federal district court. After the both parties moved for summary judgment, the district court certified two questions to the Washington Supreme Court:
- 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?
- Does chapter 7.60 RCW, Washington’s statutory receivership scheme, provide the exclusive remedy, absent post-default 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.
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, stating:
- 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 actions 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 lock, 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.
Question Two: The Court found 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.”
Conclusion: After this case, 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, this holding does not distinguish between abandoned and occupied property. The prohibition on pre-foreclosure possessory actions applies regardless of occupancy status.
Finally, the Court does not address the numerous other actions 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.
What does this mean for you? It is the recommendation of this firm that servicers or mortgagees seeking possession prior to foreclosure sale commence the necessary receivership proceedings to legally take possession by court order in advance of the foreclosure sale. RCO maintains a robust Receivership practice to assist clients with this process.
RCO will update you again in the coming weeks when a case citation becomes available. In the mean time, the full opinion is available here. Jordan v. Nationstar