RECENT SUPREME COURT DECISION IMPACTS LENDERS’ CONTRACTUAL RIGHT TO ENTER AND TO SECURE HOMES IN DEFAULT

RECENT SUPREME COURT DECISION IMPACTS LENDERS’ CONTRACTUAL RIGHT TO ENTER AND TO SECURE HOMES IN DEFAULT

February 9, 2017

By: Tricia D. Usab

 

On July 7, 2016, the Washington Supreme Court handed down a decision in Jordan v. Nationstar Mortgage, 185 Wn.2d 876 (2016), that directly impacts a lender’s ability to exercise standard provisions found in many mortgages and deeds of trust recorded throughout the state of Washington.  Many mortgages and deeds of trust contain provisions that allow a lender to enter into a borrower’s real property for the purpose of securing it after an event of default, but prior to a foreclosure.  The provisions usually allow the lender to change the locks, winterize structures, or take other steps necessary to protect the value of the real property.

 

In Jordan v. Nationstar Mortgage, the Court held that provisions in a deed of trust or mortgage that allow a lender to enter into real property and change the locks, prior to a foreclosure, are an exertion of physical control by the lender, and that such physical control exercised by the lender amounts to possession of the real property.  The court examined various definitions of the word “possession” and determined that possession is an exertion of control over property.  In Washington, an act of possession of real property by a lender prior to a foreclosure is prohibited by law.  RCW 7.28.230, states “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.”  In other words, a lender or mortgagee has a right to place a lien on the real property and to foreclose upon that lien, but the lender does not have a right to possess the property prior to the foreclosure.  Accordingly, the court held that provisions in a deed of trust or mortgage that allow a lender to enter into a property for the purpose of changing the locks to secure it, prior to a foreclosure, are prohibited by Washington law, as an act of possession by the mortgagee.

 

The Court reasoned that a lender changing locks on a borrower’s real property is similar to a landlord changing locks on a tenant’s real property, and in Washington, the act of a landlord changing the locks on a tenant is deemed an exertion of control over the real property and an unlawful eviction against the tenant.  The Court applied this rule to lenders and borrowers, even though the lender in the case thought the real property was abandoned and the borrower was provided with a telephone number to obtain access to the property.

 

After this decision, it is difficult to know what a lender may do prior to a foreclosure sale in order to protect or secure the real property pledged to the lender as collateral following an event of default under the loan.  Clearly a lender may not enter into the real property to change the locks, even if the lender believes that the real property is abandoned and the lender provides a means of contact to the borrower for future access.  Moving forward what acts will constitute an exertion of control by the lender under Washington law?  Is winterizing without changing the locks an exertion of control over the real property?  What about transferring payment of the electricity bill to the lender, in order to ensure that payment and services are continued in the winter months to avoid pipes from freezing?

 

According to the Spokesman Review, Washington appears to be the first state in the nation to invalidate these types of provisions, so we are venturing into new territory.  The Spokesman Review article may be found by following the link below:

 

http://www.spokesman.com/stories/2016/jul/17/washington-state-invalidates-common-mortgage-provi/