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Massachusetts High Court Slams Banks on Mortgage Foreclosures

Foreclosure Sign
CNBC.com
Foreclosure Sign

There's no way to overstate the importance of today's decision by the Supreme Judicial Court of Massachusetts to void the seizure of two homes by Wells Fargo and US Bancorp.

The unanimous decision holds that the Wells Fargo and US Bancorp lacked authority to foreclose on two houses they seized back in 2007. You can be sure that a tsunami of cases contesting past foreclosures is about to crash down on the Bay State.

It's also about to become much harder to find third-party buyers for foreclosed homes. Buyers won't want to put up money for houses if they are worried that a court may rule the foreclosure was improper.

The decision has serious implications for securitizations. Both of the mortgages in question were bundled into mortgage-backed securities. The court held that the plaintiffs had failed to show that title to the homes had been properly transferred in the process, which meant that the securitization trust never took legal possession of the mortgage. That raises the prospect of empty mortgage bonds or, as I like to think of them, mortgage unbacked securities.

You can be sure that a lot of investors in mortgage bonds will be asking the trustee banks questions about assignment records after today's decision.

The decision is truly explosive. It could lead to another shut down of foreclosures nationwide, and it might lead to a huge mortgage security unwind and the subsequent put back apocalypse.

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