Now that the mortgage industry has had time to absorb this month’s seemingly game-changing Supreme Judicial Court Ibanez ruling – which, at the time, caused ripples in Bay State legal circles and on Wall Street – some are questioning its lasting impact.
Though any wider impact of the SJC’s reasoning in other states will be determined in coming months, the lower court ruling which the SJC affirmed had already been in place since 2008 – means that lawyers on the ground have already adjusted their practices.
“I don’t think it’s going to be much of a problem going forward, because banks are going to get all of these documents in order before they foreclose, because it’s very expensive if they mess it up,” said Kathleen Engel, a law professor at Suffolk University. What the effect of the decision will be on previously foreclosed properties remains unclear, however. The SJC declined to make the ruling prospective – that is, one that only applies going forward – meaning that flawed foreclosures which may have already been processed and sold to new owners could be subject to litigation.
“[Ibanez] may mean that these properties don’t have good title. So the question is, who will bear that burden?” Engel asked. “Certainly if they have title insurance, the title insurance company is going to have to be financially responsible, at least initially. My guess is that what the court was thinking by not ruling on this situation is that they want the industry to come up with a solution. And this is not an area of the law that is well-developed at all.”
Statute Of Limitations
The industry seems to believe they have that solution – “foreclosure by entry,” a legal doctrine which provides a de facto statute of limitations on a debtor’s right to litigate a wrongful foreclosure. Under the rule, if three years go by after the lender takes possession of the property without the debtor having contested the foreclosure, the lender holds clear title.
Richard Howe, register of deeds at the Middlesex North Registry in Lowell, said it’s standard practice for lenders to file a notice of possession at the same time as a foreclosure deed.
Since the original ruling was handed down in 2008, more than two years have passed since lenders were put on notice to change their ways. That gives many in the industry confidence that if lenders can simply hang tight, many potential title problems may clear themselves.
“From the title industry perspective, when the lower court handed down the ruling two years ago, title insurers in Massachusetts have been asking lenders to demonstrate that they’re the owner of the mortgage and have a right to foreclose on the property,” said Jeremy Yohe, spokesman for the American Land Title Association, a title insurance trade group based in Washington, D.C. That means the SJC’s ruling is “not earth-shattering, the sky’s not falling…consumers who have purchased in good faith have several protections at the state level.”
But some analysts question whether the pool of potential litigants will be as small as the industry hopes. The key issue in the Ibanez case was banks’ requirement to prove they own the note and mortgage for the property they’re foreclosing on at the time they foreclose, and what documents can provide that proof.
Proper Documentation
A central question, which yet remains unclear, is whether the type of documentation used by banks to transfer the loans between themselves will be sufficient to prove ownership of the mortgage at the time of transfer under Massachusetts law.
The ruling states that contracts such as the “pooling and servicing” agreements which transferred the loans into trust, “may” serve as sufficient documentation of a loan transfer, if they specifically identify the loan in question. K&L Gates, a national law firm which helped argue the case for the trustees in the Ibanez case, have pointed to this part of the ruling as a vindication, interpreting the judges’ words to mean that such documents are always sufficient proof.
But in the Ibanez case itself, the pooling and servicing agreement was submitted for one of the loans at issue, and both the Land Court and the SJC found that the information contained in the agreement did not clearly identify the loan. The PSA did not, for example, contain the specific address of the property or names of the debtors, only the amount of the loan, the city, state, and zip code.
Adam Levitin, a Georgetown University law professor specializing in securitization law, said that while PSAs do vary in what information they include, it is fairly typical for such documents to leave out specific addresses and other information found on originating documents. If a mortgage assignment has not been recorded and the only evidence of the banks’ ownership of the note is a PSA, that may not be enough to prove the bank had the right to foreclose in Massachusetts, he argued.
Further, in the Ibanez case – which involved the foreclosure of two Springfield homes, Ibanez’ and property owned by Mark and Tammy LaRace – only one of the loans at issue had a PSA submitted as evidence. Despite having several months to assemble evidence, the lender was unable to provide such documentation for the other loan. It’s unclear whether the sloppy record keeping for that security was an anomaly, or represents typical industry practices during the boom years.
That issue may become clear sooner rather than later. The Office of Consumer Affairs is now pushing to force lenders to include proof they own the loan when issuing a foreclosure notice. The Division of Banks is also set to issue new regulations for lenders, following passage of a bill extending the state’s right-to-cure period to 150 days when starting a foreclosure, and similar wording may be included.
