On January 7, 2011, the Massachusetts Supreme Judicial Court issued an important ruling regarding foreclosures in U.S. Bank National Association vs. Antonio Ibanez (pdf). The court ruled that foreclosing lenders must strictly follow the statutory requirements when conducting a foreclosure under a non-judicial "power of sale" in Massachusetts, and that failure to document assignments of the mortgage from the originating lender to the foreclosing lender will void the entire foreclosure. This is a widely watched case nationally, and other states with similar processes may reach similar conclusions.
The decision was really two cases combined into one. After separate foreclosures, the trustees of the mortgage pools (the loans had been pooled and securitized, making the foreclosing trustees the assignees from the originating lenders) conducted non-judicial foreclosures, and then later brought suit in Land Court to confirm that the title they received from the foreclosure was good (namely, that they had "clear" title that could be sold to new buyers and insured by title insurance companies).
The Land Court denied the trustees their requested relief (for the reasons noted below). After the trustees appealed, the SJC on its own ordered a review of the Land Court decisions rather than waiting for the cases to go through the intermediate appellate courts. The SJC agreed with the Land Court, finding that the foreclosures were void because at the time they started the non-judicial foreclosure process, the lenders could not demonstrate they held the mortgages being foreclosed.
To support their claims that they held the mortgages they foreclosed on, the trustees produced hundreds of pages of documents regarding the pools into which the loans at issue were purportedly transferred. Unfortunately, the trustees could not show that the securitization documents had schedules which actually transferred the loans at issue into the pools. Thus, the trustees could not show any documentation that at the time they foreclosed, they were the actual holders of the underlying mortgages.1 The actual assignments of the underlying loans to the foreclosing lenders were executed (and recorded at the registry of deeds) after the foreclosures were completed.
The Land Court found that absent proof of ownership by assignment of the mortgages at the time of the foreclosure, the foreclosures were defective under the rules for the power of sale in the Massachusetts statues. The SJC agreed, noting that while recorded assignments to the foreclosing lender (at the appropriate Registry of Deeds) are not required, at a minimum there needs to be clear written assignments from the originating lender through to the foreclosing lender so that the foreclosing lender holds the mortgage at the time of the notice and sale to have the authority to foreclose under the power of sale.2
Rejecting the lenders' claims, the SJC noted that assignments in blank in Massachusetts do not satisfy this requirement as "assignments in blank did not constitute a lawful assignment…" of interests in real property and are void. Further, holding the note itself is not sufficient in Massachusetts, as an assignment of the note does not carry with it the assignment of the underlying mortgage. Finally, post-foreclosure assignments, even though customary in the industry, do not satisfy the Massachusetts rules for exercising a statutory power of sale. "If the [lenders] did not have their assignments to the…mortgages at the time of the publication of the notices and the sales, they lacked authority to foreclose… and their published claims to be the present holders of the mortgages were false." Attempting to date a post-foreclosure assignment "as of" a date before the foreclosure was rejected.3
The Ibanez ruling applies to all Massachusetts foreclosures, including those done before the date of the decision. The SJC refused to limit its decision only to future foreclosures, stating that the legal principals addressed are well-settled. "All that has changed is the [lenders'] apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities."
On the one hand, this decision does not change the fact that borrowers under defaulted mortgages still are subject to foreclosure. Also, this decision may be limited to states like Massachusetts that operate under a non-judicial foreclosure and "title theory" laws for mortgages. On the other hand, this decision is bad news for lenders. It throws into doubt many properties now held by lenders where there were gaps in assignments as of the notice and foreclosure date. This is likely to chill the ability of lenders to sell properties they now hold and is expected to slow the pace of foreclosures. Unless there is a legislative fix, lenders may have to re-do foreclosures that they had considered final. Of great concern is the impact for banks that have lost paperwork or cannot cure gaps in their assignments (for example, due to intermediate owners who are no longer in business). At a minimum, this ruling is expected to cause longer foreclosure timelines, with higher legal costs for foreclosures (as well as in the securitization process).
The following are a few important take-aways:
For Foreclosing Lenders. Lenders seeking to foreclose in Massachusetts will need to confirm that they have written assignments to them of a mortgage to be foreclosed as of the date they start a non-judicial foreclosure. The chain or ownership needs to extend back from the original lender to them, and assignments in blank are not acceptable.
For Borrowers. Borrowers who were foreclosed on now have a powerful tool to challenge their foreclosures and perhaps seek settlements with the lenders who now find themselves with a chaotic situation.
For Investors. Individuals who purchased foreclosed homes without title insurance now face tremendous uncertainty over their title and are at real risk. Potential buyers of foreclosed properties should analyze title issues carefully before bidding, and are well advised to seek title insurance as a condition of purchase to flush out any defects before going to sale.
1 As was common with loans intended to be securitized, the originating "lender" at the time it transferred the loans did not name the assignee, instead leaving the assignee name blank for filling in at a later date (generally after the loans were finally transferred into the pool created in the securitization). This was done because loans are generally transferred many times before finally residing in a pool from which securities are sold. By finding that the securitization documents failed to list the loans at issue, the Ibanez court undermined any claims that the loans were ever actually transferred into the pools, as had been represented to pool investors. This gap in the securitization paperwork represents a fundamental breakdown in the process and casts a pall not just on what the investors in the pools received, but on foreclosures on loans supposedly in those pools.
2 The SJC stated that assignments do not need to be in recordable form at the time of the notice of sale or the later sale, but it added that recording is "likely the better practice."
3 The SJC rejected use of the Massachusetts Real Estate Bar Association Title Standard 58 to satisfy the ownership requirement of the statute. That title standard says that title is not defective where an assignment of mortgage is recorded either before or after the foreclosure by the assignee. The SJC found that the title standard applies to confirmatory assignments of an earlier valid assignments made prior to the publication of notice and the sale: In the Ibanez case, there was no such prior assignment.
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