In the never-ending saga of the foreclosure crisis, it seems one chapter has finally come to a close, with a result that will be a relief to lenders. A new ruling from the Massachusetts Supreme Judicial Court (SJC) will prevent borrowers from challenging foreclosures at a very early state in the proceedings, removing an arrow from the quiver of foreclosure defense attorneys and allowing many foreclosure (and post-foreclosure eviction) cases to proceed.

The case, HSBC v. Matt, involved a federal law called the Servicemembers Civil Relief Act (SCRA), initially passed by Congress in the 1940s to prevent soldiers on active duty from having their homes foreclosed on while they were at war or overseas. The act requires every lender who wishes to foreclose to file an affidavit with the court swearing that they have verified that the homeowner they wish to foreclose on is not a member of the armed forces and therefore not covered by the act. This is one of the first steps lenders take when beginning a foreclosure.

Foreclosure defense attorneys have seized on that requirement as an opportunity to challenge the validity of a foreclosure. During the housing boom, when both the note (the underlying debt) and the mortgage (the right to foreclose on that debt) often changed hands many times during the life of a loan, many foreclosure proceedings were initiated by a loan’s current servicer whether or not the note and/or mortgage had been formally and legally transferred to that servicer.

Following the crucial Eaton decision last year, in which the SJC made clear that in order to initiate a foreclosure banks have to have both the note and the mortgage in their possession, banks have had to take pains to make sure all their ducks were in a row before initiating foreclosure proceedings.

But in many ongoing foreclosure cases – particularly for borrowers currently in the eviction stage, for whom proceedings may have been initiated years in the past – those pains had not been taken at the time the SCRA affidavit had been filed. In HSBC vs. Matt, the lawyers for the homeowner, Jodi Matt, argued that HSBC did not have possession of the mortgage at the time it filed the SCRA affidavit, and since it didn’t, it should not have been allowed to proceed with the foreclosure – despite the fact that Jodi Matt herself was not in the military.

Regardless of whether Matt herself was in the military, her lawyers argued, the lender didn’t have the right to start the foreclosure unless it met the standards laid out in the Eaton case, and filing the SCRA affidavit was a part of those proceedings.

Court Limits Challenges

The SJC agreed, but only so far. It ruled that while lenders do have to meet the Eaton standards in order to file an affidavit, only a borrower who realistically could have been harmed by the bank’s failure to follow proper procedure has the right to challenge the foreclosure.

By making the ruling, the court was basically saying “it may turn out that the procedure wasn’t valid as to a military member … but if you’re not one, you can’t come to our court, you can’t appear in the case, you can’t file papers. We won’t even let you be heard, unless you can tell me that you’re a person entitled to relief under that act. If you’re not military, go away,” explained Jason Manekas, a partner at Bernkopf Goodman in Boston who specializes in real estate litigation.

That limitation will severely circumscribe the number of borrowers who can possibly challenge a foreclosure or a post foreclosure eviction, Manekas’s colleague, Matt Gens, agreed.

“Lately, borrowers have been trying to extend the practical reach of the Ibanez and Eaton cases, to make the argument that at any point in time if there’s what would be considered a defect [in the foreclosure process], that should stop the foreclosure,” Gens said. “I’d say that this [ruling] would put the nail in that, with regard to the Servicemembers Civil Relief Act.”

That doesn’t mean, however, that banks shouldn’t be cautious when filing an affidavit, said Ed Bloom, a partner at Sherin & Lodgen LLP and past president of the Massachusetts Real Estate Bar Association (REBA).

“On the one hand, it once again confirms that you can’t use the Servicemembers Civil Relief Act to fight the foreclosure if you’re not in the military, but they also are saying to banks and other that you better get your paperwork in order even for this proceeding,” Bloom said.  

But at the late state of the game, six months after the Eaton case and more than four years after the equally explosive Ibanez ruling first forced lenders’ attorneys to take a magnifying glass to distressed titles, most lenders and servicers have adapted to the new environment.

“The practical impact of this case is pretty small, because most folks aren’t filing this [affidavit] without having an assignment on hand or on record,” said Paul Mulligan, managing attorney with Orlans Moran PLLC, who helped write REBA’s amicus brief in the case.

Email: csullivan@thewarrengroup.com