In a widely followed and reported decision – U.S. Bank Assoc. v. Ibanez – the Massachusetts Supreme Judicial Court earlier this year ruled that two banks which held mortgages as trustees of securitization trusts did not have the right to foreclose those mortgages based upon inadequate documentation of mortgage assignments and transfers.
The court, however, left the door open to establishment of the chain of assignments required for foreclosure authority through proper securitization and mortgage purchase documentation.
Ibanez arose out of two mortgage foreclosures by two different banks as trustees of securitization trusts. The history and trail of the mortgages are lengthy, but important to the court’s analysis. The Ibanez mortgage was initially granted to Rose Mortgage, then assigned to Option One Mortgage Corp. and eventually pooled with approximately 1,220 other mortgage loans and assigned to U.S. Bank as trustee of a securitization trust. The trust agreement was not in the court record, but a private placement memorandum which described the mortgage pools and the entities involved and summarized the provisions of the trust agreement did not contain a mortgage schedule which identified the Ibanez mortgage as one of the mortgages that were assigned in the trust agreement.
U.S. Bank, as trustee, conducted a foreclosure sale on the Ibanez property on July 5, 2007, and purchased the property at the foreclosure sale. Subsequent to the foreclosure auction, on Sept. 2, 2008, American Home Mortgage Servicing, as successor-in-interest to Option One, executed a written assignment of that mortgage to U.S. Bank as trustee, which was then recorded on Sept. 11, 2008.
The second mortgage in Ibanez was granted by Mark and Tammy LaRace to Option One, then assigned to Bank of America and subsequently pooled with other mortgages and assigned to Wells Fargo, as trustee of a securitization trust. The mortgage loan purchase agreement contained clear language assigning the mortgage, but it was not executed and it did not contain a schedule listing the assigned mortgage loans. The pooling and servicing agreement also contained language of transfer and assignment of the mortgage, but was not signed and did not contain loan schedules identifying the subject mortgages.
The LaRace mortgage was foreclosed and sold by Wells Fargo, as trustee on July 5, 2007. On May 7, 2008, Option One executed an assignment of the mortgage to Wells Fargo as trustee. The assignment was recorded on May 12, 2008, but recited an effective date of April 8, 2007, a date preceding the publication of notice of sale and the foreclosure sale.
SJC Rules
In September and October 2008, U.S. Bank and Wells Fargo brought separate actions in the Massachusetts Land Court and asked the court for a judgment that the interests of the mortgagors were extinguished by the foreclosures, and that title was vested in the plaintiff banks. The mortgagors did not answer the complaints and the plaintiff banks moved for entry of default judgment.
The Land Court, however, entered judgment against the plaintiffs, ruling that the foreclosure sales were invalid because the notices of foreclosure named U.S. Bank and Wells Fargo as the mortgage holders, but the mortgages had not yet been assigned to them. The plaintiffs then moved to vacate the judgment and were allowed to supplement the record with the securitization and transfer documents. The Land Court judge eventually denied the plaintiffs’ motion to vacate the judgment and the Supreme Judicial Court took the case on direct appellate review.
The SJC rejected the widely accepted common law rule that “the mortgage follows the note.” Under Massachusetts law, the plaintiff banks had the authority to exercise the power of sale contained in the mortgages only if they were assignees of the mortgages at the time of the notice of sale and the subsequent foreclosure sale. The plaintiff banks claimed that the securitization documents contained valid assignments of the mortgages, but the SJC found that documentation lacking because it did not use the language of assignment or transfer and did not identify the Ibanez and LaRace mortgages.
The SJC did not require, however, that the assignments be in recordable form, and ruled that securitization and pooling documents could provide the trail necessary for assignments of a mortgage and eventual foreclosure as long as those documents specifically identify the mortgage at issue. Moreover, the court ruled that a confirmatory assignment, which is an assignment of the mortgage executed in recordable form and often recorded after the foreclosure sale, can confirm an assignment of the mortgage by pre-foreclosure securitization agreements.
Avenues Of Resolution
Commentaries in the media have described the Ibanez decision as a “train wreck” and a disaster for the mortgage and title industries, but the decision actually recognizes that mortgages can be transferred and assigned through securitization and pooling agreements so long as the documentation is proper and adequate.
The decision also recognizes that alternative foreclosure by entry may provide a separate ground for clear title apart from foreclosure by execution of the power of sale. In a concurring opinion, two justices also questioned the rights of parties whose property was foreclosed where those parties had defaulted on their mortgages, received notice of the foreclosure and did not contest it. The rights of those parties may be addressed by the SJC in another case which the court has under consideration.
Thus, even though the Ibanez decision invalidated a common practice concerning mortgage assignments, it also provided an opening for clearance of those title issues and foreshadowed other potential avenues of resolution which the title industry can utilize.
Attorney Lawrence P. Heffernan is chair of the real estate litigation and title insurance group at Robinson & Cole, Boston. Email: lheffernan@rc.com.
