In a closely watched case concerning faulty foreclosure paperwork, the Massachusetts Supreme Judicial Court has issued a ruling in favor of homeowners. The court upheld a state land court's ruling invalidating two foreclosure sales because the plaintiff banks "failed to make the required showing that they were the holders of the mortgages at the time of foreclosure."
Lawyers and groups that represent homeowners are hailing the Jan. 7 decision in
U.S. Bank National Association v. Ibañez as a victory.
But attorneys on the other side say the ruling's nuances give them leeway to foreclose on transferred mortgages. Lenders' lawyers point to language in the ruling that states that an assignment of a mortgage to a new owner doesn't have to be recorded at the registry of deed at the time of the assignment or even in a recordable form.
The Ibañez case consolidates two banks' appeals of a state land court ruling that
nullified two foreclosure sales in Springfield, Mass.
The land court handles title disputes and various types of real estate cases. The other land court case is
Wells Fargo Bank N.A. v. LaRace.
According to court papers, Option One Mortgage Corp. created blank mortgage assignments and sold the mortgages of Mark and Tammy LaRace and Antonio Ibañez without recording them. Option One was the original lender to the LaRaces and the first buyer of Ibañez's loan. The subprime loans were resold a couple of times prior to the foreclosures.
The banks initially filed separate land court cases asking for rulings that publication in the Boston Globe of foreclosures met state law requirements.
While the land court judge ruled that the publication was legal, he invalidated the foreclosures because neither bank had an assignment of mortgage at the time of publication. Also, the foreclosure notices failed to identify the mortgage holders.
Associate Justice Ralph Gants wrote the majority opinion. Chief Justice Roderick Ireland and Associate Justice Francis Spina joined him. Former Chief Justice Margaret Marshall, who is now retired, was also at the hearing.
Associate Justice Margot Botsford joined Associate Justice Robert Cordy's concurring opinion.
In his ruling, Gants noted that "U.S. Bank did not provide the judge with any mortgage schedule identifying the Ibañez loan as among the mortgages that were assigned in the trust agreement."
Similarly "Wells Fargo did not provide the judge with a copy of the flow sale and servicing agreement, so there is no document in the record reflecting an assignment of the LaRace mortgage by Option One to Bank of America."
"For the plaintiffs to obtain the judicial declaration of clear title that they seek, they had to prove their authority to foreclose under the power of sale and show their compliance with the requirements on which this authority rests," Gants wrote.
Gants later explained that the majority does "not suggest that an assignment must be in recordable form at the time of the notice of sale or the subsequent foreclosure sale, although recording is likely the better practice."
"Where a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder," Gants wrote. "However, there must be proof that the assignment was made by a party that itself held the mortgage."
Gants later concluded that the land court judge correctly concluded that the plaintiffs' securitization documents "failed to demonstrate that they were the holders of the Ibañez and LaRace mortgages, respectively, at the time of the publication of the notices and the sales."
Gants also briefly addressed three of the plaintiff banks' arguments. First, he wrote that assignments that identify the assignor but leave the assignee portion blank are not lawful. The plaintiffs' concession of that point in their reply briefs, "is appropriate," Gants wrote.
Second, Gants explained that under longstanding state law, foreclosing parties must hold a written assignment of the mortgage, not just the mortgage note.
Gants also wrote that Massachusetts law does not allow assignments of mortgages following a foreclosure sale. Although the plaintiffs argued that such practices were common in the industry, their reliance on them "is misplaced," Gants wrote.
Cordy's concurring opinion stated that the surprising feature of the cases is "the utter carelessness with which the plaintiff banks documented the titles to their assets."
"There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure," Cordy wrote. "Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order."
It's important for Massachusetts to strictly adhere to its foreclosure laws because the state "allows for extrajudicial foreclosure," Cordy wrote.
Cordy also emphasized that the securitization of mortgages and the sale of mortgaged-backed securities "are not barred nor even burdened by the requirements of Massachusetts law."
The plaintiff banks "have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments."
Ibañez's lawyer, Paul Collier III, a Cambridge, Mass. solo practitioner, said that the securitization industry, in its mortgage underwriting, securitization practices and its foreclosure practices, has acted as though it was immune from obeying the law.
"I believe [the SJC ruling] is only the beginning of the exposure of the unlawful and improper underwriting securitization and foreclosure practices of the industry," Collier said.
"I'm quite thrilled about the decision," said the LaRaces' lawyer, Glenn Russell Jr., a Fall River, Mass., solo practitioner in a short telephone message.
Wells Fargo did not respond to requests for comment.
U.S. Bank stated that its role in the case "is solely as trustee concerning a mortgage owned by a securitization trust."
"As trustee, U.S. Bancorp 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," stated the bank.
Bruce Allensworth, a Boston litigation partner at K&L Gates and the banks' lawyer on the case, said, "The result the SJC came forward with here is really quite good for banks and loan originators.
"It establishes the basic premise that if you have pooling and servicing agreements that have the language of assignments, and the particular mortgage at issue was one of the loans transferred, then that's a basis for foreclosure," Allensworth said.
The case also attracted amici on both sides.
The Massachusetts Supreme Judicial Court's ruling "condemned the contemporary securitization practices in the banking industry," said Kevin Costello, a litigator at Boston-based Roddy Klein & Ryan. Costello co-authored an amicus brief for the National Consumer Law Center and six law center clients that filed a purported Massachusetts federal class action involving similar issues, Manson v. GMAC Mortgage LLC.
"Thousands of foreclosures that were subject to these faulty practices have now been called into doubt," Costello said. "The consequences of this outcome are properly placed squarely at the feet of the banking industry that created the problem."
The Real Estate Bar Association for Massachusetts Inc. also submitted a brief.
The state's high court addressed specifically what was in front of it and didn't address "the elephants in the corner," or the thousands of titles that are now cloudy because foreclosures were performed in a similar fashion, said the organization's president, Edward Bloom. Bloom is also a partner at Boston-based Sherin and Lodgen. "There's going to be a lot of litigation," he predicted.
"There's still a mess to be addressed," Bloom said. "The ruling doesn't solve the problems of the real estate industry and the title companies that have insured all of these titles….Title companies and owners are going to have to go into court and clear up their titles."
Sheri Qualters can be contacted at squalters@alm.com.
