Just when lenders and attorneys thought they crawled out of the crater blown in the foreclosure process by the Supreme Judicial Court’s 2010 affirmation of the landmark Ibanez ruling, another SJC ruling last week kicked them right back in.
And this time, it threw thousands of owners of previously foreclosed homes into the pit as well.
In the Ibanez ruling, the Massachusetts Land Court ruled, and the SJC affirmed, that banks must be assigned a mortgage prior to foreclosure in order to legally foreclose on a homeowner.
The court’s ruling last week in Bevilacqua vs. Rodriguez took the Ibanez principle one step further: If the original foreclosure was illegal, then the foreclosing entity also had no right to sell a property it never legally owned to a third party.
Essentially, buyers of foreclosed properties are being told that if the original foreclosure was faulty, they may not actually own what they think they do. It puts anyone considering purchasing a previously foreclosed home on notice. And given how much of the housing inventory could include homes with troubled pasts, the ruling has the potential to sink an already ailing market.
“Believe me, I would tell people, ‘Do not buy a foreclosed home. You’re doing it at your own peril,’” said John O’Brien, register of deeds in Southern Essex County and a vocal critic of the kinds of flawed mortgage assignments that led to this mess.
Through August, REO sales made up 7.6 percent of the residential sales market in Massachusetts, according to an estimate from CoreLogic. From January 2007 through September 2011, 47,789 foreclosure deeds have been issued in Massachusetts – approximately 22,862 of which were issued pre-Ibanez, according to data obtained from The Warren Group, publisher of Banker & Tradesman.
In other words, there are tens of thousands of currently or previously distressed properties that potentially traded hands pre-Ibanez – and presumably may have had a faulty mortgage assignment – that may now be rendered unmarketable going forward.
“I’m just afraid of what it will do to our housing market today – anytime you have an upset, people get afraid,” said Linda Kody, principal of Kody & Co. in North Andover, which specializes in selling distressed properties. “This is not a good thing.”
A Missed Opportunity
The case involves a Haverhill property previously owned by Pablo Rodriguez.
In 2006, U.S. Bank, acting as trustee, foreclosed on the property, and later sold it to Francis Bevilacqua. But the mortgage wasn’t transferred to U.S. Bank until after the foreclosure – a no-no under Ibanez.
In 2006, U.S. Bank had granted Bevilacqua a “quitclaim deed,” affirming it no longer had an interest in the property.
Given the court’s Ibanez ruling, in 2010 Bevilacqua elected to file a “try title” action, intended to clear up any potential problems with the title to his previously foreclosed Haverhill property.
But the Land Court ruled Bevilacqua couldn’t even attempt to try title. Since U.S. Bank’s original foreclosure was illegal, the bank never had the right to sell the property to him in the first place, quitclaim deed notwithstanding.
From the perspective of many real estate lawyers, the decision represents a missed opportunity. If the court had ruled in Bevilacqua’s favor, it could have created a clear path toward resolving many of the titles left clouded in the wake of Ibanez.
But because try title actions were rendered insufficient at establishing title or fixing a faulty foreclosure post-Ibanez, the market remains unsettled – and will likely remain so until future cases offer another solution.
That could take years.
“They left all those people with Ibanez problems in limbo,” said Ed Bloom, a partner Sherrin and Lodgen and president of the Real Estate Bar Association. “It’s a disappointment to the real estate industry, and the real estate bar and to homeowners. They didn’t pull the rabbit out of the hat.”
If you can’t prove who owns a property through traditional means – trying title and quitclaim deeds – then just how are buyers and lenders alike supposed to clear clouded titles? The answers remain unclear.
“We’re still a little bit in the dark about what to do in order to give homeowners the assurance that we need to give that they’re not going to lose their property,” said Steve Gottheim, legislative and regulatory counsel for the American Land Title Association, a national title insurance trade group.
An Uncertain Path
The court states in its ruling that Bevilacqua and other owners like him may have at least one option to establish clear ownership: “Re-foreclosing” on the property. The evidence recorded in Bevilacqua’s case may be enough to establish that U.S. Bank had transferred its interest in the property to him – and along with it, the right to foreclose.
“We think it’s a viable option,” said Jeffrey Loeb, Bevilacqua’s attorney.
But that option presents another potential minefield.
Conducting a foreclosure in Bevilacqua’s name would require him to go through the same procedure any lender would, sources said, including holding a foreclosure auction – where he might get outbid for the property.
Additionally, if it came to that, the original owner would also have a chance to pay off the original mortgage and take back title – which creates problems for owners like Bevilacqua, who invested thousands of dollars converting the property into condos.
“If somebody finds Rodriguez and says to him, ‘I’ll give you $100,000 to go redeem your mortgage, [then flip the property to me’],” Bevilacqua could lose the property, said Kathleen Engel, a law professor at Suffolk University. The new owner would then get all the advantages of the improvements at a steep discount.
Additionally, the “re-foreclosure” option runs smack dab into another legal quandary: Does a party need to possess the note in order to execute a foreclosure? A case revolving around this question, Eaton vs. Fannie Mae, was recently argued before the SJC, and the court is expected to rule in coming weeks.
Fannie Mae has suggested that being able to foreclose (being assigned the mortgage) is a separate right from being owed money (possessing the note), and that in order to execute a foreclosure the lender only has to prove they have been assigned the mortgage.
If the two are separate, an owner like Bevilacqua might be able to re-foreclose on the property on the basis that U.S. Bank transferred its interest to him. But if you have to have the note in order to foreclose, it’s unclear whether re-foreclosures by third parties that never had any interest in any underlying debt would even be possible.
‘You Guys Fix It’
It all may leave many purchasers of clouded-title properties turning to the original lender for a solution.
“This idea that [U.S. Bank’s] title was defective, and therefore so was Bevilacqua’s, is important,” said Elizabeth Renuart, a law professor at Albany Law School who has studied the impact and implications of the Ibanez decision. She suggested that a purchaser of foreclosed property can’t simply rely on a bank’s assurances and presume they have good title.
“It poses a question….should [the purchaser, like Bevilacqua] go back to U.S. Bank and say, ‘you guys fix it’?” said Renuart. “Frankly, it’s a lot less trouble than everybody trying to litigate this stuff.”
There may be one other option, lawyers said. A purchaser can bypass the lender and pursue the former owner to get them to sign over a deed relinquishing their right to the property.
“I’ve tracked down prior owners all over the country and gotten deeds from them. I’ve paid them in plasma TV’s,” said Richard Vetstein, of the Vetstein Law Group in Framingham. “That’s the best way to resolve Ibanez titles. Cuts out the middleman.”
