The Ibanez case and housing-market catastrophe risk

By Felix Salmon
January 7, 2011
decision in the case of US Bank vs Ibanez does not make for easy reading. But it's a very important case: it's a solid precedent saying that if a bank doesn't own a mortgage, then it can't foreclose on a home.

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The 16-page decision in the case of US Bank vs Ibanez does not make for easy reading. But it’s a very important case: it’s a solid precedent saying that if a bank doesn’t own a mortgage, then it can’t foreclose on a home. That was the decision of the lower court in Massachusetts, back in March 2009, and it has now been unanimously upheld on appeal to the Massachusetts supreme court.

After speaking to crack Reuters reporter Jonathan Stempel, I’m even more worried about this case than I was before.

The immediate effect of the ruling, which covers two separate cases, is that Mark and Tammy LaRace get to stay in their home, despite being foreclosed on in 2007. And Antonio Ibanez gets title to his home back, which means that the bank will either have to let him retake possession or else pay him for his deed.

Essentially, these homeowners bought their homes, defaulted on their mortgages, and then — after a long legal struggle — get to stay in their homes. It’s unclear whether they still owe money to any lender, and Massachusetts is a recourse state, which means that the bank could try to go after them personally, as it might had it lent them money on an unsecured basis. But in reality, if a bank does not have the ability to foreclose and the borrower is genuinely distressed and in default, there’s no point pursuing them for the balance of the loan.

The legal craziness that this decision sets in motion is going to be huge, I’m sure. Anybody who was foreclosed on in Massachusetts should now be phoning up their lawyer and trying to find out if the foreclosure was illegal. If it was — if there was a break in the chain of title somewhere which meant that the bank didn’t own the mortgage in question — then the borrower should be able to get their deed, and their home, back from the bank. This decision is retroactive, and no one has a clue how many thousands of foreclosures it might cover.

Similarly, if you bought a Massachusetts home out of foreclosure, you should be very worried. You might not have proper title to your home, and you risk losing it to the original owner. It might be worth dusting off your title insurance: you could need it. And if you ever need to sell your home, well, good luck with that.

Going forwards, every homeowner being foreclosed upon will as a matter of course challenge the banks to prove that they own the mortgage in question. If the bank can’t do that, then the foreclosure proceeding will be tossed out of court. This is likely to slow down foreclosures enormously, as banks ensure that all their legal ducks are in a row before they try to foreclose.

This decision won’t be appealed: the state law seems pretty cut-and-dried, every judge who’s looked at it has come to the same decision, and there’s no conceivable grounds for the US Supreme Court to take on the case.

What’s more, courts in the other 49 states are likely to lean heavily on this decision when similar cases come before them. The precedent applies only in Massachusetts for now, but it’s likely to spread, like some kind of bank-eating cancer.

If a similar decision comes down in California, which is a non-recourse state, the resulting chaos could be massive. People who are current on their mortgage and perfectly capable of paying it could simply make the strategic decision to default, if and when they find out or suspect that the chain of title is broken somewhere. They would take a ding to their credit rating, but millions of people will happily accept a lower credit rating if they get a free house as part of the bargain.

The big losers here are the banks — of course — as well as investors in mortgage-backed securities, including of course Fannie and Freddie, a/k/a the US taxpayer. No one knows how it’s all going to play out: there’s certainly going to be a lot of litigation in every US state, and there’s a good chance that the federal government is going to feel the need to get involved as well. Not every jurist and legislator is going to see things the same way as the judges of Massachusetts, and there’s a case to be made that banks should have the ability to go back and cure their mistakes once they’re pointed out, rather than just losing the house altogether, as they did in this case.

But of course the problem is that the banks can’t cure their mistakes: in many cases the original mortgage is lost, at this point, if it ever properly existed in the first place.

The tail risk here is enormous, and there’s no easy solution to the problem. And this is over and above the problem of putbacks, or legal risk associated with the scandal of banks lying to investors in many mortgage-bond deals. And it’s certainly yet another reason not to buy a house right now. You don’t know if you really have title to what you’re buying, you don’t know whether you’ll be able to sell it if you have to, and there’s a good chance that as a result of all these problems shaking out, home prices could fall dramatically.

Maybe we’ll muddle through this somehow — that’s still probably the base-case scenario. But maybe we won’t. And if we don’t, the downside here, to the banking system and to the economy as a whole, could hardly be larger.

Update: Adam Levitin emails with three other points, all important:

  • The ruling should (but surely won’t) led to a ratings downgrade of every securitization trust with MA properties in it.  The documentation sloppiness in Ibanez was hardly unique.
  • Notice how MA rejected the “mortgage follows the note” argument and also the “assignment of mortgage in blank” argument that ASF has argued is beyond reproach.  There are (in my opinion) stronger arguments about the mortgage notes, but that wasn’t raised in this case.
  • The MA Supreme Judicial Court is widely considered the best state court in the country.  No one questions the quality of the jurists on the court (unlike in some other states).  It’s one of the few state supreme courts that can routinely compete with federal appellate courts in recruiting top clerkship candidates and the only state court I know of that has had clerks go on to US Supreme Court clerkships.
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105 comments so far

So, if the bank doesn’t own it (they can’t produce documentation showing that they own it), and the mortgagor doesn’t own it (he didn’t finish paying for it, and obviously doesn’t have the deed/title for the home).

Why does the court decide that the mortgagor is the owner? It seems like any random third party could come in and claim they own the home and no one can prove that they actually own it.

Posted by donhalljobs | Report as abusive

Felix: yes, this could have very serious implications, but what’s the alternative? Overlook the fact that the law wasn’t followed?

The parties to blame here are the banks. Their actions in the housing bubble good and screwed the United States — apparently twice over (once through reckless lending, once through reckless disregard for documentation). The govt erred in not taking over the banking industry in 2008/2009, kicking out the rascals who ran it and recapitalizing them with good assets. The govt tried to do this on the cheap. Before this is over, the govt may be forced to do another recap. The wrong thing to do is to finesse things to pretend nothing bad happened. The right thing is to face the issue and fix it.

@donhalljobs: The mortgage owner owns it. That’s some entity further back in the mortgage transfer chain — as I understand it, the court has said that the mortgage wasn’t effectively sold at some point before going into the securitizations. So the non-effective seller in that non-effective sale is presumably still the mortgage holder.

Presumably someone does still own this thing. Of course, that entity might have gone bankrupt and the original mortgage docs lost. In that case, it will be impossible to prove that the owner does still own it.

Posted by enplaned | Report as abusive

Hi Felix:

I generally agree w/your comments, but I’d caution you about this part: “courts in the other 49 states are likely to lean heavily on this decision when similar cases come before them.” Mass. is in the relative minority of states in holding that the mortgage does not automatically follow a validly assigned note (which I knnow only because the decision says as much). So in those states applying a different rule, the particular paperwork failure at issue here (invalid assignments of the mortgages, not the notes) is not so problematic.

Still, for Mass. and those states following similar rules, the implications are potentially huge.

Posted by retr2327 | Report as abusive

I agree with everything you say, except . . . was it really too much to ask for the banks to keep their paperwork in order? We’re dealing with relatively large financial transactions, involving a fundamental asset class. This is most banks’ bread and butter.

A random error here and there seems possible, and even forgiveable. It seems like we’ve had wholesale disregard of even adequate practices. I think that’s what has most people up in arms.

Posted by Curmudgeon | Report as abusive

donhalljobs,

The question is who is listed in the government land records as the owner of the home. The mortgagor’s name is added when he bus the house.

The bank usually doesn’t take title to the house (they don’t want to have the obligations of a landlord or be liable if the kid next door gets hurt on the property), they just place a lien upon it – meaning the house can’t be sold unless they’re paid.

Posted by AnonymousChef | Report as abusive

And if the banks can’t, as you say, cure their mistakes, by most law and common sense they should pay for them. After all, that’s what the rest of us have to do. I recognize that there are a lot of caveats to such a statement, because the banking system is in many respects the backbone of the country. But this may shake up the notion that it’s business as usual in our banks.

Posted by Curmudgeon | Report as abusive

Curmudgeon has it right. If you live in a world where the details & the fine print really matter, then yes, failure to adhere to those details is going to hurt you.

Maybe karma isn’t just a concept…

Posted by caustic01 | Report as abusive

Score one for rule of law here. Property law goes back hundreds of years. I can’t help think this is the conclusion of lots of sloppy loan origination.

This is not about borrowers who aren’t paying their mortgage, and it’s not about bank profits. It’s about respecting rule of law and saying everyone is subject to it, and it goes a long way toward ensuring that when someone buys a home they won’t have clouded title. It also ensures that due process is followed in a foreclosure.

Posted by Sechel | Report as abusive

This is the decision the homeowners have been waiting for. We’ve known the fraud goes so deep that the REMIC Trusts are empty for quite some time. Now, the courts are admitting as such.

I just would have loved to watch Dimon’s face as he got the notice…..or Moynihan’s or Pundit’s. They are all so f***ed.

Hallejulah. This is a champagne evening.

Posted by GeorgeSoros | Report as abusive

Sechel has it right. Rule of law is the basis of our society and ought never be challenged.

The Massachusetts Supreme Court also has it right. In the case in question (and in many others), the rules were NOT followed. And thus the deeds are in question.

Unlike hsvkitty, I’m not going to fall over my feet in sympathy with the borrowers-in-default. But neither am I going to lose sleep over the banks taking heavy losses on this one. They deserve each other.

Posted by TFF | Report as abusive

Would someone with some legal expertise comment on the following implication?

Could a mortgage payer who is current on their mortgage demand that the Bank or mortgage servicer prove that they own both the mortgage and note, and if they do not, withhold their payments with impunity? After all, if the Banks are not entitled to foreclose if they haven’t done their paperwork, they may not be entitled to continue receiving mortgage payments either.

At the least, I think this will give current mortgage holders much bargaining power in renegotiating or refinancing their mortgage. What do you think?

Posted by MartyNH | Report as abusive

MartyNH, I don’t have legal expertise, but then you shouldn’t trust any legal advice you get on a blog site anyways.

I see multiple problems with your scheme. First, it is sleazy. Second, their inability (or unwillingness) to prove ownership of both the mortgage and the note NOW does not necessarily translate to an inability to prove ownership when your foreclosure case comes to trial. They will be highly motivated to repair those deficits. Third, if you don’t pay the loan they can come after you personally for the money (at least in Massachusetts).

Posted by TFF | Report as abusive

The law provides a clear mechanism for “going back and fixing mistakes” such as these, ie which 1) result in massive personal financial gains for the perpetrators and 2) are accomplished via perjury, fraud, and other lawbreaking. The remedy is serious jail time for the perps and disgorgement of unearned “bonuses” by those who hatched the schemes and profited from them.

Posted by melior | Report as abusive

It’s not clear to me that this isn’t just a timing issue. If the issue is that they didn’t have their ducks lined up until the foreclosure began, then there isn’t a structural problem, there’s just a, as they say, paperwork problem that can be fixed (albeit, as CR notes, w/ some expense)

Posted by jpe12 | Report as abusive

Why should this automatically result in a ratings downgrade for securitizations with MA properties?

Doesn’t the securitization get to put the offending mortgage back to the institution that created the securitization (assuming it still exists)? After all, the bank represented in the prospectus that it had the mortgage and was legally transferring it to the securitization.

That now not being the case, why can’t the securitization sue the bank to get its money back? The issuer repped and warranted something that’s not true.

The offending mortgages are then money-good as far as the securitization is concerned (assuming the issuer is still around — obviously somewhat problematic in the case of securitizations issued by, say, Lehman).

Posted by enplaned | Report as abusive

This will be messy and slow in Mass. but remember it is only the banks that didn’t follow proper foreclosure procedure, didn’t destroy notes or falsify legal documents, didn’t ensure that the mortgage was properly registered… that have to worry. *cough*

For anyone livid that this is happening, maybe ask why the banks destroyed mortgage notes, falsified legal documents and didn’t follow through with proper foreclosure procedure? Ask why the law firms and judges robo stamped; Ask why the county has no records and even simplistic MERS procedures weren’t followed; Ask why the mortgages were not properly securitized and why they resold so many times no one even knows who held the mortgages last. (it saved time and legal fees and taxes and hid indiscretions…)

It’s doubtful that many will win as big elsewhere as these folks did, but even so it is going to happen. Each state has its own regulations and there is other precedence where banks disregarded the rule of law and covered up their lack of proper legal process and there are judgements on the other issues as well.

I am sure the Government will intervene to get it all moving again, but hopefully the mortgage mills will stop and judges will take greater care to ensure the legalities are followed.

TFF, you obviously weren’t paying much attention, but having read what you just wrote, I forgive you. The saddest thing is that because banks and lawyers were so careless with the law, there will be plenty of scammers and more bad lawyers slowing down the whole system and the economy.

Posted by hsvkitty | Report as abusive

Felix, I think I may love you. I’d know I love you if you had actually included something substantial like details. I had just gotten done reading the story on another site and thought, what is the economic impact of this. I wonder if Felix has something… Still not sure.

By the way, I’m voting with the ‘can’t do time, don’t do crime’ crowd. Seems like Chrystia might be early on her book. It might be more about Pluto and Goofy, or what it’s like to visit New York on five dollars a day, as a banker.

Here’s philosophical question: If a bank exec sells a mortgage but no one can tell, does he still get a bonus?

Posted by ARJTurgot2 | Report as abusive

Er no. The judgement explicitly deals with most of your claims:

You claim –
“Similarly, if you bought a Massachusetts home out of foreclosure, you should be very worried. You might not have proper title to your home, and you risk losing it to the original owner. It might be worth dusting off your title insurance: you could need it. And if you ever need to sell your home, well, good luck with that.”

The judgement explicitly says:
“What is more complicated, and not addressed in this opinion, because the issue was notbefore us, is the effect of the conduct of banks such as the plaintiffs here, on a bona fidethird-party purchaser who may have relied on the foreclosure title of the bank and theconfirmative assignment and affidavit of foreclosure recorded by the bank subsequent tothat foreclosure but prior to the purchase by the third party, especially where the partywhose property was foreclosed was in fact in violation of the mortgage covenants, hadnotice of the foreclosure, and took no action to contest it.” – ie that this judgement explicitly doesn’t deal with the situation you are talking about.

Also the judgement explicitly doesn’t say that the deals cannot be securitised:

“The type of sophisticated transactions leading up to the accumulation of the notes andmortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law.”

Also the judgement is clear in NOT saying what you seem to be implying which is that the mortgagors are home and dry. It simply means the **particular** bank cannot foreclose, rather it needs to backtrack up the chain until it has someone who can meet the needs of the court. So yes, they get to stay in their homes a little long and pay more lawyer fees but sooner or later someone is going to have an unbroken chain and they will lose their homes unless they can do a deal where it is cheaper for the bank in question to take a writedown than walk the chain.

It also doesn’t mean the loan has become an uncollateralised loan. In fact the whole point was not that the particular banks foreclosing are owed money but can’t claim the house, rather that they cannot prove they are owed anything at all, again it just means someone down the line before any break in the chain now has to foreclose.

Oh for those who no doubt are going to scream about “fraud”, that too is explicitly dealt with:

“Although there was ***no apparent actual unfairness here to the mortgagors***, that is not the point.”

Posted by Danny_Black | Report as abusive

Far be it from me to do something sleazy, TFF, and I won’t take your suggestion personally. Felix mentioned something very similar, “in California, which is a non-recourse state, the resulting chaos could be massive. People who are current on their mortgage and perfectly capable of paying it could simply make the strategic decision to default, if and when they find out or suspect that the chain of title is broken somewhere. They would take a ding to their credit rating, but millions of people will happily accept a lower credit rating if they get a free house as part of the bargain.” Sleazy as any corporate lawyer, eh?

I remember closing on my mortgage, and having to sign my name so many times on so many forms, all assuring some legal loophole would not open, that my hand was tired, and I felt very intimidated that every promise and legal requirement for me to get a mortgage loan had been carefully thought out. Surely the big boys at a bank knew how to negotiate a legal contract. And if they were in too much of a hurry to make a profit when they quickly sold my mortgage to another bank that they couldn’t be bothered to punctiliously fulfill every legal detail, well, I see this ruling as going a long way toward leveling the playing field. I think people who are now being told their credit isn’t quite good enough to refinance their mortgage are entitled to some revenge fantasies, don’t you?

Let me quote the economist Dean Baker (10/18/10; http://tinyurl.com/2f9doec) on this: “The highest rates of foreclosure are on the quick and dirty loans made at the peak of the bubble. These loans were issued to be sold. Almost immediately after the ink was dry, the issuers would sell these loans off to Citigroup, Goldman Sachs or other investment banks to turn them into mortgage-backed securities. The investment banks themselves were running short order operations. More rapid securitization meant more profits.

In this process, the paper work often came as an afterthought. As a result, necessary documents weren’t signed, title transfers weren’t properly registered, the notes tying loans to specific properties may not have been properly filed and other paperwork errors went uncorrected.

If the law were being followed, these issues would create serious problems for servicers trying to foreclose on homes where the owner has defaulted. Banks would have to spend the necessary time, paying high-cost lawyers for their work, to reconstruct the paper trail needed to establish clear title to the house and the documentation that would allow them to foreclose on a delinquent borrower.

f the Wall Street banks were like the rest of us, the policy response would be simple: Follow the frigging law. If banks want to foreclose then they should have to present the court with the proper documents, end of story. Anyone who has ever bought a house or refinanced a mortgage knows the headaches involved. Everything must be in order, a process that can cost thousands of dollars in fees, as a long sheaf of documents is signed in the presence of a lawyer. This process can easily take two hours.

The banks don’t think that they should have to endure the same expensive tedium as the rest of us. For them, these processes are simply formalities that can be circumvented.”

Posted by MartyNH | Report as abusive

enplaned, basically lets say the trust has one one year mortgage for 100,000 with a annual payment of interest of 12% and is promising to pay 5% annually on bond backed by that mortgage. The mortgage is shown to be non-compliant after a month. Then the trust puts back the mortgage, gets accrued interest for a month so it has 101,000USD in the trust but at the end of the year needs to pay 105,000USD. It has defaulted.

NB in most CMO cases the above will not happen because they only promise to pass-through the cash-flows rather than a fixed coupon and principal repayment.

Posted by Danny_Black | Report as abusive

MartyNH, that is exactly what happened here. The judges are not disputing the mortgagors owe money, they are not disputing they defaulted, they are not disputing they should be kicked out of their homes they are simply punishing “the utter carelessness with which the plaintiff banks documented the titles to their assets”. They explicitly have stated there is no new case law here and the issue is whether the specific bank trying to foreclose can foreclose.

Posted by Danny_Black | Report as abusive

Just to be clear:

“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.”

Posted by Danny_Black | Report as abusive

ARJTurgot2, the economic impact is that the paperwork will have to be done again properly.

Posted by Danny_Black | Report as abusive

Felix: A useful follow-up post from you would be to find out just why these banks were unable to find the necessary documentation. You have to have some sources willing to talk about record-keeping, even if they do it anonymously. Or are there any lawsuits by investors against trusts / originators that have proceeded to discovery?

Posted by FrancisL | Report as abusive

jpe12, again the judgement says it is explicitly a timing issue – “failed to make the required showing that they were the holders of the mortgages at the time of foreclosure”.

Not sure this claim by Mr Levintin is correct:

“Notice how MA rejected the “mortgage follows the note” argument and also the “assignment of mortgage in blank” argument that ASF has argued is beyond reproach.” – for instance the whole isssue is there is no record of either loan being assigned at all to either trust at the time of foreclosure and the assignments which did occur – which the court doesn’t appear to have disputed – occured well AFTER the foreclosure sale, for instance in Ibanez the sale was July 5,2007 and the written assignment was Sept 11 2008. Maybe Mr Levintin can clarify where that note was assigned prior to July 5, 2007 or where the court disputed assignment of mortgage in blank.

Posted by Danny_Black | Report as abusive

Ok this was the bit he was talking about:

“In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage.”

So in MA: “the tendency of the decisions here has been, that in such cases the mortgagee would hold the legal title in trust for the purchaser of the debt, and that the latter might obtain a conveyance by a bill in equity” so it suggests that American Home Mortgage Servicing, Inc would do the foreclosure and then convey it to the trust.

Where are the lawyers when you need them….

Posted by Danny_Black | Report as abusive

FrancisL, not sure but don’t think you are allowed to bring new evidence to an appellate court. So they should have brought a new case.

Posted by Danny_Black | Report as abusive

Danny_Black, the economic impact may be in that the court upheld a decision for a state that didn’t require court action.

Also, although you dismiss felix, the Court sounds as though it is inviting those cases to be heard, being the issue wasn’t before them, because they understand the complexities that will bring.

“What is more complicated, and not addressed in this opinion, because the issue was not before us…

And just to be clear, in spite of the mortgagors having been in default, the negligence by the bank meant ruling in the mortgagors favour.

No one says there is any ‘new case law’, it was flagrant disregard for existing property law. And in this case, it is a very big deal and a precedent. I wouldn’t be trying to call it a tempest in a teapot anymore, Danny.

And Felix’s other points and other blogs, about the mortgage pools that banksters like yourself sold, might now be seen as they were … rather devoid of what what promised to investors.

I will leave you with this as you like to read my URLS, Have fun!

http://www.scribd.com/doc/46484089/New-G randma-in-California-Does-Sleuthing-and- Discovers-Major-Robo-Notary-Operation

Posted by hsvkitty | Report as abusive

Danny_Black, I’m with Felix in thinking it won’t stop there. I particularly pessimistic about the possibility that the paperwork even can be fixed. I think it’s possible that all the legal documents are lost or destroyed, and even if not, I don’t think they can actually put it back together correctly. I think the level of collapse in these organizations is pretty much total. They’ve been laying-off heavily for years, and it seems to have been the people that actually do things for their paycheck.

If no title/note means no bank ownership then there is NOTHING of value in those bonds, not even foreclose-able collateral. So, worst case, what is the total value of the securitized bonds that may go into default if they have nada for value and prospect for revenue.

Posted by ARJTurgot2 | Report as abusive

FrancisL, this site has a lot of that information, especially in the last few months.

http://www.nakedcapitalism.com/2011/01/u s-trustee-sides-with-borrowers-in-forecl osures-with-questionable-assignments-mer s.htm

Posted by hsvkitty | Report as abusive

FrancisL, this site has a lot of that information, especially in the last few months.

http://www.nakedcapitalism.com/2011/01/u s-trustee-sides-with-borrowers-in-forecl osures-with-questionable-assignments-mer s.htm

Posted by hsvkitty | Report as abusive

Not sure that the original documentation was lost or destroyed rather in the original case the plaintiffs didn’t bother to dig it up – expensive remember… – probably because it was uncontested in at least one of the cases and as I mentioned above, relatively sure you can’t enter in new evidence in appellate you can just argue there was an error in the judgement based on the evidence there.

Posted by Danny_Black | Report as abusive

ARJTurgot2, it doesn’t say there is no bank ownership. It says the particular banks trying to foreclose didn’t own it at the time of foreclosure. Not even close to the same thing. In fact they make a point of saying who WAS the recorded owner at time of foreclosure and that the mortgage WAS reassigned later, which presumably means if the trust goes back and forecloses again that it can wave this piece of judgement as proof it now does own the mortgage.

Posted by Danny_Black | Report as abusive

ARJTurgot2, also again I think you misunderstand what the trusts are and what the investors are buying. The investors are not buying mortgages. They are buying the cashflows from the mortgages. In theory they don’t care if the originator owns the mortgage and is simply paying what flows from the mortgage into the trust into the bonds. There are two reasons they care in practice – the most important is tax and the other one is that if the originator still owns the mortgage and goes bankrupt there is some uncertainty about the asset, as the trust is then a creditor and under reorganisation is liable to have the terms changed. The bank cares in practice because for regulatory reasons that mortgage is on its books and it needs to set aside capital.

The trusts are simply a bankruptcy remote, tax efficient pass-through vehicle for holding mortgages. They have explicitly no value, because they have no tangible assets and strictly pass through any cash they make. You are confusing them with the bonds they issue.

Posted by Danny_Black | Report as abusive

ARJTurgot2 and hsvkitty and Mr Salmon, why don’t we put our money where our mouth is. I will happily pay 2 dollars each for all the worthless mortgages based securities the three of you own, either directly through a fund or indirectly through you mortgages. If they are truely “worth nothing”, then you basically get a free cheeseburger!

Posted by Danny_Black | Report as abusive

Obviously, this case is one of those where the Federal Government should have jurisdiction. After all the Banks which violated all these petty state laws are involved in interstate commerce and therefore, the Republican Party and enough Democrats should pass a law legalizing foreclosure based on a good faith statement by a bank that they are doing the right thing.

I mean Federalism should not impact the profitability of major financial institutions.

Posted by msobel | Report as abusive

While the issue of “endorsement in blank” came up, the judges made clear that this is fixable. This is basically going to slow down the process and cost the bank money who now has to prove the chain of transfers, something they should have already done, so being sloppy never saves money. The assignments did not need to be recordable but evident from the deal documents.

Posted by Sechel | Report as abusive

The more I read of “journalism”, I think the UK and US should consider something like this:

http://news.xinhuanet.com/english2010/ch ina/2011-01/07/c_13680937.htm

Posted by Danny_Black | Report as abusive

“it’s a solid precedent saying that if a bank doesn’t own a mortgage, then it can’t foreclose on a home.”

Well, duh!

Ordinary folks — Main Street — are expected to follow the rules, Felix. Where is it written that banks are immune from complying with property law?

As other posters note, it may well be that foreclosure is still possible in individual cases IF the correct documentation can be produced. Fair enough. But, if any bank can’t bring the normal, accepted, well-known/understood documentation to the court, it should lose out, the borrower’s default notwithstanding.

It’s amusing that some posters think that people who default on mortgage payments automatically lose their Constitutional rights to due process. The MA court clearly disagrees!

Other posters seem to believe that this decision means nothing for MBS and that the documentation deficiencies can be cured. Yves Smith has written extensively about this point on her blog; the fact is that most MBS trusts are New York residents and, under New York law, it is impossible to correct the docs now.

This drama is taking too long to play out across the country, but the MA decision is a step in the right direction.

The biggest worry is that the federal government will try to intervene to bail out the banks, yet again.

Posted by dbsmith1 | Report as abusive

hsvkitty, I’ve been aware of this case for at least half a year now. Which is part of why I’ve been a little more complacent, a little less concerned about “Why isn’t anybody addressing these problems?”

I don’t know the result, nor does Felix. Only time will tell. I suspect that the banks can dig these papers out of some vault somewhere, but it won’t be easy for them. First they’ll have to dig through all those “lost” loan modification packets that are lying on top of the heap. I suppose they could take the opposite approach — pull a random paper off the stack and attempt to foreclose on that property whether or not it is in default? Would be typical, but even less effective.

Am definitely glad that the banks will be forces to follow the law. I *was* a little worried that “rule of law” would be overturned in favor of expediency.

The eventual upshot is that mortgages will be more expensive, more carefully processed, and perhaps handled by fewer entities. That is a good thing. Once upon a time you went to banks for your mortgages. Simpler that way.

Posted by TFF | Report as abusive

This ruling may not have an impact as severe as some are suggesting. I read the ruling and was shocked by the sloppiness of the banks involved. For example as evidence of ownership they invoked Pooling and Servicing agreements and Private placement memorandums that either were not specific enough as to the instruments involved or were merely promises to convey in the future.

The justices are only requiring sufficient documentation to establish ownership of the mortgage; The paragraph I show at the end indicates an endorsed copy of the mortgage is not even needed and an explicit PSA document could suffice (if the signers have clear title).

The banks can always cleanup the document and then foreclose. People who purchased foreclosed property are going to have to demand proof of clear title; this will be the real problem.

From the Slip opinion (Ibanez vs Us Bank, Jan 7, 2010)

We do 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.

Posted by Jon7 | Report as abusive

dbsmith1, er where did anyone think that banks don’t need to follow the law? Where does it say the docs don’t exist?

Here is what it means for the MBS in question – it has zero to do with any others – for these two mortgages they either do have the docs in which case the foreclosure goes through or they don’t and the mortgage gets put back and the originating bank forecloses. Big whoop.

Posted by Danny_Black | Report as abusive

Jon7, apparently one of the banks gave an unsigned assignment agreement as “proof”…

Posted by Danny_Black | Report as abusive

hsvkitty you make very valid points.

Anyone who wants to learn more of this MERS can go to this page
http://stopforeclosurefraud.com/mers-101  /

Take a look at these NY Cases involving all these same parties and question what is happening to AMERICA!
http://stopforeclosurefraud.com/2010/10/ 20/new-york-state-court-foreclosure-frau d-cases/

It’s just all wrong!

Posted by Susan007 | Report as abusive

Danny_Black

Actually, I don’t know whether or not these two, specific, mortgages are included in a securitization — do you? If they ARE in a securitized transaction then the potential ramifications are greater than a failed foreclosure. But that’s not really my point.

The significance of the court case on MBS is not so much this decision but the fact that courts are starting to study the problem (of systemic procedural failures by the banks) and come down on the side of ‘rule of law’.

If the MBS problem is no ‘big whoop’ then why did BAC’s shares advance strongly on the news that BAC settled a part of its MBS put-back liability with the GSE’s?

It is virtually certain that there will be a significant number of MBS/documentation fraud cases this year and, unlike the fed-controlled GSEs, investors in private label MBS may not be so keen to settle for 2¢ on the dollar.

As I wrote, I still think the danger/likelihood is that the federal government will find a way to subvert state insistence on due process and bail out the banks yet again.

Nevertheless, the problem is a very “big whoop”.

Posted by dbsmith1 | Report as abusive

dbsmith1, yes i do know, it is in the court judgement if you actually bother to read the document. Wells Fargo and US Bank are the trust banks.

BAC shares advanced? Lots of reasons, noise? That people saw a potential 100bn liability become a couple of billion? Uncertainty becomes certainty?

You know how big the MBS market is? You know how many mortgages are even under dispute? You don’t need to answer it is a rhetorical question.

Posted by Danny_Black | Report as abusive

Susan007, this case has sweet FA to do with MERS.

Posted by Danny_Black | Report as abusive

and dbsmith1 will open the offer to you, 2 dollars for all your “worthless” MBS.

Posted by Danny_Black | Report as abusive

I think that there is an overlooked aspect to the case which is fundamental to the arguments about de-regulation.

The ruling makes a very distinct point that foreclosure in Massachusetts does not require judicial action. They then point out that this means that there is little oversight of the process and therefore the actors within the process must make sure that they are dotting all of the i’s and crossing the t’s. One of the reasons that they dumped the banks into the drink was because they were appalled by the “utter carelessness” with which the banks conducted this important business.

In theory, MA should actually be an ideal place for the the banks to do their thing with securitization and subsequent foreclosures. There are well-defined procedures in place that they can simply internally execute on a routine basis, and then foreclose under the rules without ever having court delays etc. I presume that this is nearly nirvana for people who don’t want to have regulators and jusges questioning their every move.

The banks reaction to this lack of oversight was to simply dump the procedures in order to save a few pennies to improve their margins. They viewed the lack of oversight as an opportunity to tear up the rule book. They are now acting shocked that the courts are really pissed off at them for thumbing their noses at MA state law.

This decade has proved over and over again the financial sector is incapable of regulating itself and following basic principles. This case is just another example of their flaunting basic requirements and then demanding that these provision be over-ridden because they would cost the banks money. In most other social scenarios, this would be termed fraud and extortion. In the financial sector, it is just called normal business practice.

Posted by ErnieD | Report as abusive

The sky is not falling. The Mass. Supreme Judicial Court gave the banks a lot of leeway concerning their paperwork, and they’ll simply re-foreclose. If you can show a valid assignment (with accurate description of property & mortgage), including by a contract with accurate schedules of mortgages and actually signed and dated (!), you can go back and get a recordable assignment (for the land records). You just have to show that you’ve got some legit piece of paper showing you own the mortgage at the time the foreclosure commences (publication of legal notices, etc.)
They can buy off the homeowners who have defaulted (whose monetary arrearage has now increased – and who are exposed to an even larger deficiency judgment) with a few grand (wouldn’t you take cash plus getting out of a deficiency judgment of tens of thousands of dollars) and convey confirmatory title to the purchasers after the defective foreclosures. Even cleaning up the records, this probably isn’t more than a few percentage points of the mortgage loan amount. Title insurance companies will probably want some “assurances” and protection to write policies on these properties, until the records are clean. But think about it, you don’t have money to pay a mortgage. How are you going to pay an attorney to challenge the foreclosure? (This case got into court in an unusual fashion.)

As far as the MBS- seems like there is enough blame to go around between seller and purchaser so they’ll sort it out, leaving only the suits against the issuers? I predict boom times for big NY law firms and documentation servicers in India.

Posted by MA_Attorney | Report as abusive
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