Real estate lenders may face liability for acting to "secure" a property before a foreclosure sale under a recent Washington Supreme Court decision.
In this case, the court held that certain provisions in the standard FNMA/FHLMC trust deed contradict Washington law and are unenforceable.
The provisions in question allow a lender upon either default or abandonment to enter the property and take measures to protect the property such as make repairs, change the locks, and winterize. The court found that such actions amount to taking possession of the property, which conflicts with Washington laws that prohibit a lender from taking possession until after foreclosure has been completed.
Overview of the Case
The case in question, Jordan v. Nationstar Mortgage, LLC, is a class action before the federal district court for the Eastern District of Washington. The district court certified two questions for the Washington Supreme Court, which issued its opinion on July 7, 2016. The first question was whether under Washington law a borrower and lender can enter into a contractual agreement before default (e.g. through a deed of trust) that allows the lender to enter, maintain, and secure the encumbered property prior to foreclosure. The second question was whether Washington's statutory receivership is the only means by which a lender may gain access to the property prior to foreclosure.
In this case, the standard FNMA/FHLMC deed of trust permitted the lender to enter, maintain, and secure the property upon the borrower's default or abandonment. In January 2011, Jordan went into default on her loan serviced by Nationstar Mortgage. In March 2011, a Nationstar vendor went to the home and changed the locks, leaving a notice on the front door informing Jordan that the property was found to be "unsecure or vacant" and that the property had been secured to protect the lender's (and borrower's) interest in the property. The parties disputed whether the home was in fact vacant. The notice also provided Jordan with a phone number she could call to get the code to a lockbox containing a key so she could enter the home. Jordan called the number, re-entered, and then vacated the property the next day. Nationstar subsequently maintained the property's exterior and winterized the interior.
The Court's Decision
The court emphasized that Washington law prohibits a lender from taking possession of a borrower's property prior to foreclosure, and held that the lender's actions pursuant to the relevant provisions in the deed of trust constitute taking possession prior to foreclosure. In particular, the court focused on the act of changing the locks on plaintiff's home. Although the plaintiff was not excluded from the premises, as she was able to obtain a key by calling Nationstar, the court noted that the act of changing the locks nonetheless communicated to plaintiff that Nationstar was now in control of the property.
The court held that receivership statute is not the exclusive remedy for a lender to gain access to encumbered property prior to foreclosure, citing other decisions holding that a receiver should only be appointed when there is no other adequate remedy available. However, the court did not address what other remedies may be available.
Impact on Lender Actions
As a result of this decision, lenders will need to carefully evaluate the circumstances and risks in any given case before acting to secure a property prior to foreclosure. The lender should certainly investigate carefully before making a determination that a property has been abandoned. Lenders should also carefully document all specific risks to which the property is exposed.
While the court's decision raises difficulties for lenders, it leaves a number of significant questions unanswered. For instance, the court suggested-but did not explicitly rule-that pre-foreclosure possession might be permissible if the borrower has actually abandoned the property. The court did not need to address this issue as the provisions in question allowed the lender to enter and secure the property after the borrower's default or abandonment.
Also, as the court's opinion focused exclusively on changing locks, it is unclear whether other actions authorized by the deed of trust provisions, such as repairs and inspections, replacing or boarding up doors and windows, eliminating building or other code violations, also amount to possession. Any action deemed to indicate "control" of the property by the lender could run afoul of the statute. As a result, lenders should be cautious in acting to secure or protect property before a foreclosure. Consult with counsel if there is any doubt about a particular action.
If you have any questions about this issue, contact Marisol McAllister, Michelle Bertolino, Kelley Washburn, or Hal Scoggins