Deed of Trust Provisions Allowing Lenders/Servicers to Enter, Maintain, and Secure Encumbered Properties May be Unenforceable Under Washington Statute

Financial Industry Alert

On July 7, 2016, the Supreme Court of the State of Washington issued its opinion in Jordan v. Nationstar Mortgage, LLC, which, prior to foreclosure, may prevent servicers from securing property after a default or, at least, require heightened inquiry and investigation to ensure that the property has been abandoned or that notice of the anticipated entry has been provided to the borrower.  The Court answered two questions certified by the U.S. District Court for the Eastern District of Washington in the negative: 

  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 post-default consent by the borrower, for a lender to gain access to an encumbered property prior to foreclosure?

In Jordan, Nationstar serviced a residential mortgage loan owned by Fannie Mae, secured by Fannie's standard form deed of trust.  Two months after the borrower defaulted on her home loan, Nationstar sent a vendor to secure Jordan's encumbered property by changing the locks on the front door.  The front door was the only means of egress into the residence.  Nationstar believed its conduct was authorized by a provision in the standard form deed of trust that allowed the lender to secure the property after the borrower defaults or abandons the property.  In case it had not been abandoned, the vendor left a notice informing Jordan that the home was vacant and that she could obtain a key to the new lock by calling a designated number.  The borrower returned from work, called, and obtained a key to the new lock, but then immediately removed all of her belongings.  Subsequently, she filed a complaint alleging trespass, breach of contract, and violations of Washington and federal debt collection laws on behalf of herself and a class (later certified) of 3600 Washington homeowners who were allegedly locked out of their homes pursuant to similar deed of trust provisions enforced by Nationstar.  In motion practice, the borrower argued that the property was occupied despite Nationstar's representations that a pre-entry inspection revealed otherwise.  The parties, however, agreed that Nationstar did not provide advance notice of its intention to inspect and secure the home. 

Under the relevant deed of trust, either default or abandonment triggered Nationstar's right to entry.  Since the vacancy of the property was disputed by the parties, the Court assumed the property was occupied and analyzed whether Nationstar's entry on the premises constituted "possession".  Drawing from the Restatement, real property, tort, and landlord-tenant law, the Court reasoned that the key element of "possession" was control and that Nationstar's conduct—changing the locks to secure the property—was an exercise of control that resulted in its possession of the property in violation of the statute.  The Court dismissed Nationstar's argument that it did not possess the property because it provided the borrower immediate access and a key.

The majority held that Nationstar's post-default/pre-foreclosure entry by changing the lock constituted an exercise of possession prohibited by the statute, and that Fannie's standard form deed of trust provision to the contrary was unenforceable.  The Court found that the standard form deed of trust provision that allowed the lender to enter the property post-default conflicted with the statute prohibiting a lienholder from taking possession of the property pre-foreclosure. 

Despite its rejection of the entirety of Nationstar's arguments, the Court intimated that its holding may be limited to borrowers who can establish some or all of the following factors:

  1. The lender did not provide advance notice of its intention to change the locks;
  2. The property was not abandoned;
  3. The borrower's only means of entry and egress in the property were controlled, in any way, by the servicer; and/or
  4. The deed of trust provides that default, in itself, allows lender entry.

The majority's comment about alternative provisions based solely on default and potential limitation of its holding to the facts in Jordan is underscored by its answer to the second certified question, which declared that judicial receivership is not the only way for a lender to access post-default/pre-foreclosure property.  In other words, the majority left open the possibility that a non-judicial entry, like the one in Jordan, could fall short of "possession" and thus not fall within the prohibition found in RCW 7.28.230(1).  Perhaps the non-occurrence of one or more of the above factors would have been enough in Jordan.  

The dissent portends potential limitations of the decision.  There, Justice Stephens referenced Washington case law prohibiting the limitation of express contract terms in the name of public policy.  Justice Stephens also disagreed with the majority's conflation of entry with possession to reach its conclusion.  According to the dissent, Nationstar's right to "make reasonable entries upon and inspections of the properties" did not exclude the borrower from possession, and therefore did not constitute possession.  Further, the dissent attacked the majority's resort to the Restatement and related areas of law to derive the meaning of "possession" because, according to Justice Stephens, those bodies of law only consider actual possession (and exclusion of the borrower) as opposed to the mutual possession Nationstar afforded to the borrower.  Justice Stephens added that abandonment, which she thought was supported by the facts, was an exception to the general prohibition against a lender's pre-foreclosure possession of the property.

The decision in Jordan calls for servicers to adopt a more cautious approach to preserving post-default/pre-foreclosure properties in Washington, and possibly in other states that may have similar statutes.  Servicers and lienholders should consider the following:

  1. Analysis of deed of trust and mortgage forms to determine whether property entry/preservation provisions require investigation, notice, and abandonment;
  2. Increased investigation and confirmation efforts (i.e. additional door knocks and property inspections, postings, letters, email and phone calls etc.) to confirm abandonment prior to entry to secure premises;
  3. Advance notice of the servicer's intention to enter the property to change locks.

Owners and servicers should also be aware of the following:

  1. Consumer groups and borrowers in other states have applauded Jordan, so servicers and lienholders in other states may face challenges and follow-on class action lawsuits similar to Jordan; and
  2. Additional disclosures about the risks of securing and maintaining abandoned properties should be considered for securitizations involving properties in the state of Washington.
 We look forward to discussing the case and any questions you may have regarding these issues.