New Supreme Court Ruling re Mortgage Foreclosures has HUGE consequences
(snip)In a major ruling in the Massachusetts Supreme Court today, US Bank and Wells Fargo lost the “Ibanez case,” meaning that they don’t have standing to foreclose due to improper mortgage assignment. The ruling is likely to send shock waves through the entire judicial system, and seriously raise the stakes on foreclosure fraud. Bank stocks are plummeting at this hour.
Tracy Alloway of the Financial Times has a very good explainer of the case.
In late 2005, Antonio Ibanez gets a $103,500 adjustable-rate mortgage loan on a Springfield, Massachusetts property from Rose Mortgage Inc. Rose then sells the loan to Option One Mortgage Co., which then passes it to Lehman Brothers Bank, which then sends it to Lehman Brothers Holdings. Lehman Bros Holdings then sends it to its Structured Asset Securities Corp. to be pooled with other loans and assigned to US Bank, acting as trustee for Structured Asset Securities Corp. Mortgage Loan Trust 2006Z.
In other words, the Ibanez mortgage gets pooled and securitised into a typical run-of-the-mill subprime Residential Mortgage-Backed Security (RMBS) [...]
At some point in the foreclosure process, there’s doubt about whether the Boston Globe advertisements (as opposed to say, a Springfield-based paper) satisfy foreclosure notice requirements in the state of Massachusetts.
The two trustee banks go to the Massachusetts Land Court in the fall of 2008 to debate this — when suddenly, Massachusetts Land Court Judge Keith C. Long orders US Bank and Wells Fargo to prove they had the right to foreclose in the first place.
Here’s what happens next:
The Land Court then proceeded to find that (1) neither Appellant had a valid assignment of mortgage at the time of publication of the notices or at the time of the foreclosure sale, (2) the foreclosure notices failed to identify the “holder” of the mortgage, and (3) the notices were deficient under Mass. Gen. L. ch. 244, 5 14. [A592-93]. Put another way, the Land Court held that Appellants lacked authority as assignees to conduct the subject: foreclosures.
The notice requirements are a bit of a sideshow. The point here is that the mortgage assignment and the securitization process was improper. US Bank and Wells Fargo did not have possession of the mortgage note, and thus did not have the standing to foreclose. In addition, they put the endorsement in blank, without naming the entity to which they were assigning the mortgage. This violated Massachusetts law, according to the original judge in the case, and now the MA Supreme Court agreed.
And as we know, this is more the norm than otherwise. But this is one of the first major cases, decided by a state Supreme Court, that affirms that a lack of securitization standards means that the bank who thinks they have the power to foreclose on a delinquent borrower actually does not.
If this ruling gets applied far and wide, you’re basically going to have a situation where most securitized mortgages in the country cannot be foreclosed upon. It depends on state law and the associated rulings, but you can see the Ibanez case being used as precedent.
UPDATE: This is from the concurring opinion from the state Supreme Court:
I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather 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. 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. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it. As the opinion of the court notes, such strict compliance is necessary because Massachusetts is both a title theory State and allows for extrajudicial foreclosure.
The banks are screwed if this precedent holds."(snip)
Depending on how far this Massachusetts precedent is allowed to proliferate, it basically results in the following ...
- any 'homeowner' living in a property where the mortgage was subject to 'repackaging' ( i.e. the vast majority of mortgages written in the last 10 years ) is essentially safe from foreclosure / eviction until the end of time even if the 'homeowner' never pays another dime to the bank ( supposedly ) holding the mortgage note. Or put another way, while a delinquent 'homeowner' will never get clear title to be able to sell or pass on the house they are living in, they will essentially get free lifetime use of the house !
- because a clear title doesn't exist thus foreclosure and resale are now impossible, the mortgage lenders from major banks to Fannie / Freddie will be forced to take a 100% loss write-off on these properties ... which will send them into immediate bankruptcy if accounting standards aren't changed.
- the only ways that a clear title can be created is if A. the homeowner decides to pay off the mortgage in full ( yeah-right ! ), the homeowner fails to pay property taxes to the point where a local gov't can foreclose, or the homeowner dies.
This will obviously be a windfall for many delinquent homeowners, who will see their former $2000 a month mortgage payment ( including property tax escrow ) reduced to perhaps $400 a month ( in property taxes only ). In fact, this may serve as additional incentive for non-delinquent homeowners whose mortgage situations are underwater to simply 'stop paying' on their mortgages but continue living in the house, rather than returning the keys or filing for bankruptcy.
This will just as obviously be a nightmare for banks who are heavily involved in home mortgages ... who face the double loss of (partial) mortgage repayments as well as the asset resale value of the property.
From a property market standpoint, these 'distressed' mortgage properties are now essentially out of play ... since no property title insurer is going to touch them with a 10 foot pole. Collateral effect however is that the non-delinquent owners of homes whose mortgages have been 'repackaged' will now have a much more difficult time trying to sell their properties before their mortgages have been paid off in full due to the same property title insurance questions.
From the standpoint of the price and availability of future mortgages, it is expected that would-be home buyer creditworthiness standards will be tightened even further, that down payment requirements will be increased even higher, that specific foreclosure / default provisions will be spelled out in detail under future mortgage agreements, and that mortgage related costs / interest rates will increase significantly, as a collateral effect of the de-facto 'death' of 'repackaging'.
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Re: New Supreme Court Ruling re Mortgage Foreclosures has HUGE consequences
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Originally Posted by
Melonie
-From a property market standpoint, these 'distressed' mortgage properties are now essentially out of play ... since no property title insurer is going to touch them with a 10 foot pole. Collateral effect however is that the non-delinquent owners of homes whose mortgages have been 'repackaged' will now have a much more difficult time trying to sell their properties before their mortgages have been paid off in full due to the same property title insurance questions.-
I have been saying this for a while now. There is no way I'd consider a property in foreclosure unless it was washed through a bankruptcy. The only way any of these properties have clear title is if the Bankruptcy Trustee auctions them off. I also agree that the mortgage repackaging has clouded titles of even people who pay their loans. Banks are so incompetent, they need to fail.
Z
Re: New Supreme Court Ruling re Mortgage Foreclosures has HUGE consequences
^^^ yes exactly ... either a 'bankruptcy auction', or a 'sherriff's auction'. Absent such a de-facto court ordered transfer of title to 'clear' the title of previous encumberances, under this court ruling it becomes virtually impossible for a bank, or a creditor, or for that matter a willing seller, to 'prove' that they actually have ownership rights thus the ability to exercise those ownership rights.
As you point out, in the absence of the apparent 'owner' going through bankruptcy involving an auction sale of the house to 'wash' the title, would-be future buyers of these properties will indeed be assuming the risk that five years from now some real estate attorney could show up at their door with an eviction notice ... despite the fact that the buyer invested a $50k down payment and has never been late on their monthly mortgage payments !!! That's some fairly expensive 'rent' !
Obviously, if this precedent is widely accepted, it is NOT going to be a positive force for the real estate market, either in terms of market values or in terms of liquidity. Also, this precedent will strongly encourage people still living in 'depressed' cities to remain there forever to take advantage of 'free rent' on their existing home ( as opposed to selling their house and moving to a different city with better economic opportunities ), making local economic problems even worse than they might already be.
Again, the only 'positive' aspect ( which is highly dependent on having a perverse viewpoint ) is that the inability to prove conclusive ownership, thus the inability to exercise ownership rights such as eviction, will allow deadbeat home 'occupants' to remain in these houses without ever having to make another mortgage payment. From that perverse viewpoint, this is 'good' for the economy since the $1000 a month ( or whatever ) that the homeowner had been paying to the mortgage bank can now be spent to purchase food, fuel, and consumer goods instead.
In fact, there is some fairly compelling economic evidence that increased consumer spending in lieu of making mortgage payments has been responsible for heading off an economic 'double dip' over the past few months - given that the average time span between mortgage delinquency and foreclosure / eviction ( during which the deadbeat homeowner can live 'rent free' ) had already stretched out to more than two years prior to this court ruling being issued ! But the larger economic issue is probably that the deadbeat homeowner has created a loss for the lender, which must ultimately be absorbed by some entity. The question remains unanswered whether that entity will wind up being the mortgage bank, the owners of 'packaged' mortgage bonds, or the US taxpayer !!!
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Re: New Supreme Court Ruling re Mortgage Foreclosures has HUGE consequences
The final solution to this problem is to unwind the mortgage backed securities and have them revert to the original lender or the FDIC in the case of failed banks. That of course will bankrupt Bank of America, Wells Fargo and possibly Citibank. However, these too large to fail institutions have failed. Failed at the very simple task of keeping adequate records of their business. For that sin alone, they should be shut down. Yes, there will be some risk to the treasury, but that risk will be more than off set by the revenue collected as the treasury collects on the mortgages as they get paid off or the homes sell. And that is what will happen because once the failed and zombie banks are removed from the picture, the real estate markets will resume normal sales. The FDIC can collect on the mortgages over time and new lenders that are competent will emerge.
Z
Re: New Supreme Court Ruling re Mortgage Foreclosures has HUGE consequences
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And that is what will happen because once the failed and zombie banks are removed from the picture, the real estate markets will resume normal sales. The FDIC can collect on the mortgages over time and new lenders that are competent will emerge.
You're probably correct. However, if these big mortgage banks ( and their investors ) are allowed to go belly-up by being forced to book their actual losses on these mortgages, that fact will NOT go unnoticed by the competent lenders that remain / emerge. In other words, if it becomes impossible for mortgage lenders to shift loan 'risk' to investors and/or US taxpayers, then actual 'risk' will have to be priced into future mortgage loans. This in turn will essentially guarantee that no self-employed small business person or low income employee will ever again get approved for a mortgage loan at an 'affordable' interest rate. As a consequence, the US mortgage market will never return to 'normal' sales.
Personally, I see a more likely alternative being yet another Wall St bailout ... although it will probably be a far more 'stealthy' one ... to keep the 'too big to fail' banks from failing and keep the 'rich' bank / bond investors from experiencing major losses. I also see the development of an official future two tier mortgage lending system ... where the big banks loan to 'middle class' homebuyers, and where the gov't makes taxpayer subsidized loans to qualifying 'low income' homebuyers. If there isn't some form of future subsidized loans to 'low income' homebuyers ( where actual loss risk is borne by US taxpayers), you will essentially be writing off millions of lower priced homes in less desireable locations as being totally unsalable and 'worthless' from a real estate market supply vs demand standpoint ( i.e. any qualified buyer able to obtain mortgage approval will NOT want to purchase a home in these areas ) ... which would lead to 'Detroit Syndrome' infecting virtually every major US inner city and rural area. Another variant that has been discussed in certain circles is for the gov't to essentially become the permanant 'landlord' for lower priced homes in less desireable locations via a new wrinkle on Section 8 low income housing.
At any rate, the fact remains that this supreme court decision is going to force some major economic consequences.
Re: New Supreme Court Ruling re Mortgage Foreclosures has HUGE consequences
more details ...
from
(snip)"The SJC Ruling: Lenders Must Prove Ownership When They Foreclose
The SJC’s ruling can be summed up by Justice Cordy’s concurring opinion:
“The type of sophisticated transactions leading up to the accumulation of the notes and mortgages 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. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, 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. The court’s opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.”
The Court’s ruling appears rather elementary: you need to own the mortgage before you can foreclose. But it’s become much more complicated with the proliferation of mortgage backed securities (MBS’s) –which constitute 60% or more of the entire U.S. mortgage market. The Court has held unequivocally that the common industry practice of assigning a mortgage “in blank” — meaning without specifying to whom the mortgage would be assigned until after the fact — does not constitute a proper assignment, at least in Massachusetts.
This is a very interesting development, and I would like to make note that the buck stops here since this is Supreme Court. I normally do not excerpt or quote this much of another blog or news source, but since the content is legal in matter and this particular blog (Massachusetts attorney) appears to have put a strong legal analysis on the topic, I will continue. I urge others to visit the Massachusetts Law Blog for more info. Back to his write-up…
•Despite pleas from innocent buyers of foreclosed properties and my own predictions, the decision was applied retroactively, so this will hurt Massachusetts homeowners who bought defective foreclosure properties.
•If you own a foreclosed home with an “Ibanez” title issue, I’m afraid to say that you do not own your home anymore. The previous owner who was foreclosed upon owns it again. This is a mess.
•The opinion is a scathing indictment of the securitized mortgage lending system and its non-compliance with Massachusetts foreclosure law. Justice Cordy, a former big firm corporate lawyer, chastised lenders and their Wall Street lawyers for “the utter carelessness with which the plaintiff banks documented the titles to their assets.”
•If you purchased a foreclosure property with an “Ibanez” title defect, and you do not have title insurance, you are in trouble. You may not be able to sell or refinance your home for quite a long time, if ever. Recourse would be against the foreclosing banks, the foreclosing attorneys. Or you could attempt to get a deed from the previous owner. Re-doing the original foreclosure is also an option but with complications.
•If you purchased a foreclosure property and you have an owner’s title insurance policy, you have a potential claim against the title policy. Contact our office for legal assistance.
Here he puts in some self promotion, but hey… I’m one to talk. I actually appreciate the legal analysis and am glad to have him offer services in the arena.(snip)
^^^ of course the author does not follow up with the high probability that title insurance companies are likely to be bankrupted long before new home 'non'-owners are made whole re title insurance payouts.