This material looks at the doctrine of merger including the ramifications of credit bids in foreclosures and deed of trust trustees selling liens. It also touches on WA SC's recent decision on MERS as beneficiary in Washington state deeds of trust.
It may be that none of us, and that would include the author, have been paying proper attention to what a foreclosure actually is / means. A foreclosure of a deed of trust is, by design, a quiet title action, with the defaulting borrower being the loser. The borrower is stripped of all title, both equitable and legal. The interest held by the deed of trust trustee for the benefit of the deed of trust beneficiary as well as the borrower's interest, now lost, are united in the successful bidder: everyone else's interests are extinguished in favor of the successful bidder. The title is now quieted in fee simple absolute in the successful bidder by way of the trustee's deed.
There have been rumblings lately of deed of trust trustee's attempting to sell the lien created in the deed of trust in lieu of foreclosure. Some believe this is an effort to dodge the responsibility taken on as a matter of course and law by substitute trustees, including the duty to foreclose for the proper party. Selling a lien is not only unauthorized and contrary to its duties, it does not fulfill a trustee's actual duty. Such an act attempts to put that duty on another party. The deed of trust empowers, authorizes, the trustee to perform an act which quiets title, because that's what foreclosure is and does. A trustee selling the lien is not only not contemplated or authorized in a deed of trust; the deed of trust trustee is not authorized to convey a less than fee absolute interest. Selling a lien will not convey fee absolute and will not quiet title.
Historically, before the advent of MERS, the successful bidders at foreclosure sales were by and large arm's length third parties. While credit bidding has always been available to the legitimate lender, its use did not become rampant until recently. The credit bid is no slight matter.
Under the doctrine of merger, certain significant things happen with foreclosure. A full credit bid extinguishes the collateral instrument as a matter of law. The lesser interest, that created in the deed of trust for the beneficiary, merges with the greater interest, the fee, when the lender / beneficiary is the successful bidder at sale. This means the successful bidder is the recipient, grantee, of the trustee's deed, is now the holder of fee simple absolute to the real property. It is only the beneficiary who has a right to make a credit bid, and this right flows from the beneficiary's rights in the note which the deed of trust secures.
MERS has been most insistant that it is the beneficiary. For years, prior to its Consent Order, foreclosures were done by or in the name of MERS as beneficiary using credit bids. Under the doctrine of merger, the beneficiary foreclosing with a credit bid (or cash) becomes the fee owner of the real property; in other words, by operation of law, MERS, the beneficiary, held title to every property foreclosed in its name when a credit bid was used. If that's not problematic enough, it means the deed to every resale of a foreclosed property had to come from MERS or there may be a fatal break in the chain of title, if there weren't already.
As a side note, in a recent landmark case, the Washington State Supreme Court recently disagreed with MERS' claim of being the beneficiary, finding in the "Bain"case that MERS does not meet Washington's statutory definition of a beneficary, apparently leaving the deed of trust with no beneficiary. It's too early to pontificate too much on what will happen with foreclosed properties foreclosed by "MERS" in WA state, other than to note the obvious, which is that only a beneficiary may command foreclosure or for that matter, make a credit bid.
Perhaps the lenders will argue that even if MERS were not the beneficiary, MERS remained its agent, an allegation which does not survive the statute of frauds. As to future events, the lenders will likely argue that if that's the case, i.e., MERS is not the beneficiary, the lender named in the deed of trust is the "default" beneficiary and only its nominee or agent (pick one) is missing. But, even if courts were to sustain such an averment, procuring the missing if not unexecuted assignments is going to present some very real problems for current claimants. It doesn't seem likely that under Washington statutes they'll get far in averring the deeds of trust follow the notes.
A legitimate owner of a note secured by a deed of trust has a right to an assignment of its collateral instrument, but pursuant to the statute of frauds, imo, that owner does not have an assignment until he has an assignment, even if he has to sue to get it. And one cannot legitimately ignore the strict compliance required by trust law, which strict compliance does not recognize equitable anything, including that which is relevant to cut-off dates.
All or many of these issues might have been avoided if the lender had first appropriately been named the beneficiary in the deed of trust and if MERS had then legitimately been appointed its agent by written expressed agreements which met the provisions of the statute of frauds. MERS, however, vigorously sought to avoid that relationship, although this non-existant relationship became the 'go-to' relationship when claimants found it beneficial.