Christopher R. Vaccaro
On Nov. 25, Gov. Charlie Baker approved Massachusetts Senate Bill No. 2015, entitled “An Act Clearing Titles to Foreclosed Properties.” This new statute pleases real estate professionals who transact in foreclosed properties, because it promises to cure undesirable results of defective mortgage foreclosures.
The statute addresses the mischief wrought by sloppy mortgage foreclosure practices of secondary market investors, as well as two Supreme Judicial Court decisions in 2011.
The first decision, U.S. Bank National Association v. Ibanez, involved foreclosures of properties in Springfield. The mortgage loans were packaged, securitized and eventually sold to trusts managed by U.S. Bank and Wells Fargo Bank. While the loans were transferred from investor to investor, nobody troubled themselves to record mortgage assignments. The borrowers defaulted, whereupon the banks foreclosed and acquired the properties at auction, even though the mortgages had not been assigned to them. Both banks later recorded mortgage assignments to affiliated trusts, but without avail. The Land Court declared the foreclosures void, because the foreclosing banks were not the mortgage holders at the time of foreclosure. The Supreme Judicial Court upheld that decision.
The Ibanez decision was surprising, but understandable. The courts reminded mortgage investors that before foreclosing, they must first actually hold the mortgages. Mortgage investors can remedy this error by recording proper mortgage assignments and foreclosing again. However, Ibanez raised another issue; namely, what happens if an innocent third party buys improperly foreclosed real estate? The SJC soon answered this question in Bevilacqua v. Rodriguez.
Foreclosure Fallout
The Bevilacqua case produced a remarkable result. In 2005, Pablo Rodriguez mortgaged his Haverhill property to Mortgage Electronic Registration System (MERS) as nominee for Finance America LLC. Rodriguez promptly defaulted, then, for all intents and purposes, vanished. U.S. Bank foreclosed the mortgage instead of MERS or Finance America. The mortgage lenders tried to correct this defect by recording a mortgage assignment and confirmatory foreclosure deed after the foreclosure. Francis Bevilacqua, an innocent third party, bought the property from U.S. Bank’s affiliate for $350,000, converted it into condominiums and sold all but one unit, which he kept for himself. Concerned about problems with U.S. Bank’s foreclosure, Bevilacqua filed suit in Land Court against Rodriguez to remove title defects.
Rodriguez never answered the suit, but the Land Court nevertheless ruled that U.S. Bank’s improper foreclosure rendered Bevilacqua’s deed void. According to the court, although Bevilacqua had paid $350,000 and recorded his deed, he had no rights to the property and therefore no standing to maintain his suit because of the defective foreclosure. The court dismissed Bevilacqua’s suit with prejudice. The SJC affirmed the lower court’s dismissal on appeal. Real estate lawyers and title insurance companies were aghast at this result, which threatened to nullify hundreds, perhaps thousands, of real estate sales.
Healing The Harm
The Massachusetts legislature passed the act clearing title to foreclosed properties to mitigate the consequences of the Bevilacqua decision. The new statute, which took effect on Dec. 31, protects titles to foreclosed properties held by “arm’s length third-party purchasers for value,” defined as persons who buy foreclosed properties, excluding foreclosing lenders and their affiliates. Under the statute, when arm’s length purchasers buy foreclosed properties, prior owners seeking to challenge the foreclosure generally must file suit within three years after a foreclosure affidavit is recorded with the local registry of deeds. The statute operates retroactively, so the three-year period begins to run from when the affidavit is recorded, even if recorded before the statute’s effective date.
However, out of concern for victims of predatory lending and wrongful foreclosures, the statute allows challenges to defective foreclosures up until Dec. 31, regardless of when the affidavits were recorded. In addition, the time limit does not apply to foreclosed homeowners who still reside in their improperly foreclosed homes, as long as they record copies of their challenges within 60 days after asserting them.
Now arm’s length purchasers of foreclosed properties, and their title insurers, can look forward to a day when, if the purchasers’ title remains unchallenged, they can relax in the belief that their titles are good. That is, of course, unless the Massachusetts courts find the new statute unconstitutional or otherwise invalid.
Christopher R. Vaccaro is a partner at Dalton & Finegold LLP in Andover. His email address is cvaccaro@dfllp.com.
