In a move that places a permanent title cloud on thousands of previously foreclosed properties, the Massachusetts Supreme Judicial Court affirmed a lower court ruling in the Ibanez case Friday.
The ruling invalidates a common practice in the mortgage securitization industry, repudiating the idea that an assignment of a note in blank means that the noteholder also has the right to foreclose on the loan (in other words, that they have a right to the mortgage).
“The securitization industry has been acting as though it were immune from state laws,” said Paul Collier, the defense attorney for Antonio Ibanez, the defendant in the case. “The Supreme Judicial Court has looked squarely at that industry and said you are not above the law, and the fact that complying with the law makes it less convenient for you to securitize people’s mortgages and foreclose on their homes is not a justification for violating the homeowner protections that state laws afford.”
Minor Detail, Major Ramifications
Historically, in order for a lender to have the right to foreclose, the change in ownership of the mortgage must be recorded in the state’s registry of deeds. During the securitization boom of the last two decades, however, this procedure was often not followed, with assignments often being recorded only after the foreclosure had been carried out. Today’s ruling clarifies that practice as invalid, potentially clouding the title of thousands of properties.
“I can’t quantify how many foreclosures fall into this category, but given the shoddiness of the overall documents I saw being recorded throughout the recent housing boom, I suspect there are quite a few,” Lowell Register of Deeds Richard Howe said in a blog post following the ruling.
The case involved two foreclosure actions carried out against homeowners in Springfield – Ibanez and Mark and Tammy LaRace. The original loans on the properties had been issued by Rose Mortgage and Option One Mortgage in 2005, but the 2007 foreclosure auctions were carried out in the name of Wells Fargo and U.S. Bancorp, as the notes had been transferred into trusts for which they were trustees.
However, the mortgages themselves had not been assigned to Wells and U.S. Bancorp.
When Wells and U.S. Bancorp attempted to have the title cleared following the foreclosure, Judge Keith C. Long of the Massachusetts Land Court ruled they could not and that the foreclosure was invalid, as they had not proved they had the right to foreclose at the time of the foreclosure auction. Had the firms demonstrated a clear mortgage assignment prior to their foreclosure action, then the foreclosures would have been legal – a seemingly small technicality at the heart of the controversy.
Wells and U.S. Bancorp argued that the securitization documents alone were sufficient to prove they had the right to foreclose, despite the lack of an assignment. The SJC rejected that reasoning.
“This type of an error could easily have been prevented if someone had taken the time and been careful,” said Martin Pomeroy, a partner with Boston-based law firm Bernkopf Goodman.
Left more ambiguous in the ruling was what documents would be sufficient to prove an assignment. While the SJC ruling states that making sure all assignments are recorded at the registry of deeds before beginning a foreclosure action is the “better practice,” it also “clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.” It is unclear from the ruling what documentary evidence is sufficient to prove an assignment had been effectuated.
‘Elephant In The Corner’
Ed Bloom, president of the Real Estate Bar Association (REBA), termed the ruling “half a loaf.”
While the SJC specifically supported REBA’s position that a proper assignment may have been made, even if it was not recorded at the time, the fact that the SJC specifically declined to make the ruling “prospective” leaves many titles with problems.
“By not addressing the elephant in the corner, which is all these bad titles, the mess is still out there, and it’s going to require more litigation,” said Bloom.
A “prospective” ruling applies only to cases from the point when it was made going forward. The Ibanez ruling is not prospective – despite pleas from the plaintiffs to make it so – and applies to both past and future cases. In denying the plaintiffs’ motion to make the ruling prospective, the court was particularly scathing.
“A prospective ruling is only appropriate, in limited circumstances, when we make a significant change in the common law,” the ruling states. “We have not done so here. The legal principles and requirements we set forth are well established in our case law and our statutes. All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.”
The lack of a prospective ruling means foreclosures which have already occurred – possibly years, even decades ago – could be legally void if the proper assignments were not made.
“I have a number of cases where the foreclosure has already happened and it’s a ‘fait accompli,’” said Collier. “And the simple answer is it’s no longer a fait, much less an accompli.”
The case has national implications, as the majority of states have laws similar to Massachusetts’s regarding the assignment of mortgages. Other courts across the country will likely be influenced by today’s ruling, as Massachusetts’ is the first state supreme court to weigh in on this particular issue. The ruling goes beyond legal ramifications, as well – shortly after the ruling was announced, Reuters reported a more than 50-point drop in the Dow Jones Industrial Average, led by sagging bank stocks.
Representatives from Wells Fargo did not return requests for comment by press time. Teri Charest, a spokeswoman for U.S. Bancorp, said the bank “has no responsibility for the terms of the underlying mortgage or the procedure by which they were transferred to the trust and has no ownership interest in the underlying mortgages.”
