Although it’s only been a couple of days since the Massachusetts Supreme Court handed down its ruling in the “Ibanez” case, analysts are already announcing that it won’t be as big of a deal as it might seem.
I don’t share their confidence.
Recall that in a decision released Friday, the highest court in Massachusetts declared that Wells Fargo and US Bancorp wrongfully foreclosed on two properties whose mortgages were unarguably in default. The court held that Well Fargo and US Bancorp had failed to show that the mortgages had been assigned to them at the time of the foreclosure.
In the Ibanez case—actually, it was two mortgage cases decided at once—the banks could not show that they were entitled to foreclose because in the case of each of the mortgages, there were holes in the chain of title that the banks could not—or did not—close.
Although the decision initially will only affect the two foreclosures in question, it’s application by lower courts in Massachusetts will make foreclosures in the Bay State far more difficult and costly for banks. The time it takes to foreclose in Massachusetts is likely to extend beyond the current 11-month period by several more months. Many more attempts at foreclosure in the state will be contested.
Basically, if your bank is foreclosing on your home in Massachusetts, you should be contacting a lawyer and planning to contest the bank’s right to foreclose right now. Foreclosure notices will now become the first step in a lengthy litigation process in Massachusetts.
The effect of this case is unlikely to be limited to Massachusetts. Other states will apply their own laws, of course. But the Massachusetts Supreme Court is regarded as one of the the best courts in the US, which means that this decision will be taken as what lawyers call “persuasive precedent” in other states.
The word that is being passed around by very smart research analysts such as Laurie Goodman at Amherst Securities is that the decision is not going to be what Felix Salmon has called a “bank-eating cancer.” She argues that while this might mean more paperwork and delays in foreclosure, banks should be able to eventually prove their case and seize the properties when borrowers default on mortgages:
One final positive note on the ruling—the court did not say that the lenders could not go back and re-foreclose on these properties. And based on what the lenders have re-documented since the initial actions, the lender should be able to restart and complete the action now, subject to the normal legal delays.
But this might be far more difficult than Goodman thinks. Let’s take the example of the Ibanez mortgage. The case involved a $103,5000 loan on a house in Springfield, Massachusetts made on December 1, 2005. The initial lender, Rose Mortgage, Inc., recorded the mortgage in the county registry of deeds the following day.
Several days later, Rose Mortgage executed an assignment of this mortgage in blank--meaning, they noted that they were assigning the mortgage but left a blank space when it came time to identify to whom the mortgage was being assigned. At some later point, the blank space in the assignment section was stamped with the name of Option One Mortgage Corporation (Option One) as the assignee, and that assignment was recorded in the registry of deeds on June 7, 2006.
As far as the court is concerned, that’s all hunky-dory. Even the fact that Option One executed an assignment in blank in January of 2006—some five months before anyone recorded to assignment to Option One—doesn’t phase the court.
What does give the court pause is what happened next, when the mortgage entered the Wall Street securitization assembly-line.
Option One assigned the Springfield mortgage to Lehman Brothers Bank, FSB, which assigned it to Lehman Brothers Holdings Inc. Next the mortgage was assigned to the Structured Asset Securities Corporation (a Lehman subsidiary), which then assigned the mortgage, pooled with approximately 1,220 other mortgage loans, to U.S. Bank, as trustee for the Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2006-Z.
The rub is that US Trust couldn’t show any evidence of these assignments. As soon as Ibanez mortgage entered the securitization assembly line, the assignments stop being duly noted on the mortgage, much less recorded in any property registry offices. The last proper assignment in evidence was the assignment from Rose Mortgage to Option One.
The court goes out of its way to show that it is not being especially picky about who assigns the mortgage or when the assignment is done. US Bank could have proven its ownership of the mortgage by having Option One simply assign the mortgage to US Bank—skipping all those intermediate Lehman steps. But US Bank didn’t do this before it foreclosed, which made the foreclosure invalid.
The solution to this seems easy enough. From now on, banks seeking to foreclose should just make sure that whoever is the last recorded assignee grants a new assignment to the foreclosing entity before the bank takes any action. No doubt this is what Goodman has in mind when she says banks will go back and re-document the assignments.
It might not be so easy. Let’s say you are US Bancorp and you find yourself with a mortgage whose chain of title is incomplete. You took the mortgage from a now bankrupt subsidiary of the now bankrupt Lehman Brothers. Getting someone at Lehman to go through the process of executing the assignment is going to be very difficult. It’s not even clear if anyone at Lehman Brothers has the legal authority to execute an assignment now, while Lehman is bankrupt.
In any case, getting the assignment from Lehman wouldn’t really help you. You’d still have a gap in the chain from Option One to Lehman. It’s probably best to skip over Lehman all together and go directly to Option One to ask for the assignment.
But you have a bit of a problem. You didn’t buy the mortgage from Option One. They aren’t under any contractual obligation to you to execute any documents. So when you call, here’s how the conversation goes.
US Bank dude: “Hey, can I speak to whoever it is who is handling the Ibanez mortgage?”
Option One guy (after some delay): “No one handles that mortgage. We sold it five years ago to Lehman and closed the file.”
US Bank: “Right. Okay. Well, I need you to find someone who will execute an assignment of the mortgage to me.”
Option One: “First of all, no one who handled that mortgage still works here. You might have heard about the mortgage meltdown, right? Second, we sold it to Lehman, according to the file.”
US Bank: “Right. But I bought it from Lehman.”
Option One: “So get the assignment from Lehman.”
US Bank: “They’re an empty company that is in bankruptcy.”
Option One: “I’ve heard about that. Thanks for the news.”
US Bank: “So I need you to execute the assignment.”
Option One: “First of all, you’re going to have to show me that you bought the loan from Lehman. Second, I need to talk to legal to make sure I can assign a mortgage to someone we never dealt with. Third, how much are you willing to pay me to do all this?”
US Bank: “Pay you? I already own the mortgage.”
Option One: “The mortgage we sold to Lehman. If Lehman asks for the assignment, we’ll do it as part of that deal. But, as far as I can tell, I don’t owe you anything. If you want an assignment, you’re going to at least be paying the legal bills for the legal opinion that says it’s okay for us to do this.”
US Bank: "You don't have to be an [expletive deleted] about this."
Option One: "I also don't have to give you an assignment."
By the way, if you do get Option One to assign it to Lehman, you might find yourself trapped. In that case, the mortgage arguably becomes part of the estate of Lehman—subject to the jurisdiction of the bankruptcy court. Sure, eventually, you may be able to prove that you are entitled to the assignment from Lehman. But you’ll be fighting the other creditors, who will argue that you are just one more unsecured creditor in a long line of people who say that Lehman owes them something.
While this example might be specific to loans that went through Lehman, these kind of problems are not likely to be confined to the sizable part of the mortgage market that went through Lehman at one time or another. A great many of the companies involved have entered bankruptcy or changed ownership. When these companies appear in the ownership chain, “re-documenting” the assignments may be all but impossible.
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