The Massachusetts Supreme Court recently issued a highly-anticipated opinion in the case of U.S. Bank National Association v. Ibanez. The Court affirmed a Land Court ruling that invalidated two foreclosure sales after the foreclosing banks failed to show they were the legal holders of the mortgages at the time they foreclosed.
The Massachusetts Supreme Court in Ibanez decided two cases with similar facts and legal issues, which had been consolidated in the Land Court. The plaintiffs, U.S. Bank (whose mortgagor was named Ibanez) and Wells Fargo Bank (whose mortgagor was named LaRace) had foreclosed on mortgages under the Massachusetts statute permitting non-judicial foreclosure under power of sale, and were seeking a Land Court declaration that they held valid title to the foreclosed properties. In both cases, the bank was not the original mortgagee under the mortgage: it was a trustee for a securitization trust, which had acquired a large number of mortgages (1,220 in the Ibanez case) which were pooled so that interests in the pool could be sold as mortgage-backed securities (MBS). When the mortgages went into default, the banks foreclosed upon the properties, bought them by a "credit bid" at the resulting auction sale, and then sought orders confirming they had valid title to the foreclosed properties. The Land Court ruled against the trustee banks, and the Supreme Court upheld this ruling.
In both cases, the mortgage in question had purportedly been transferred on several occasions before being transferred to the trustee bank. In both cases, the record holder at the time of the foreclosure was an earlier party in the chain of assignments, Option One Mortgage Corporation ("Option One"). In both cases, an assignment of the mortgage to the trustee bank was delivered and recorded after the foreclosure sale (one year after the sale in the Ibanez case and ten months after the sale in the LaRace case).
After an initial adverse ruling in the Land Court, the banks submitted to the Court various documents to support their argument that the mortgages had in fact been transferred to the trustee banks prior to the date of the foreclosures. In the Ibanez case, the bank claimed that the mortgage in question had been transferred from Option One through intermediate holders, and then transferred to the securitization trust pursuant to a trust agreement. However, no copy of the trust agreement, signed or unsigned, was delivered to the Court. Instead, the trustee bank delivered a private placement memorandum prepared for prospective investors in the MBS offering, which stated that the mortgages "will be assigned into the trust." Moreover, no schedule identifying the Ibanez loan as included in the mortgages assigned to the securitization trust was submitted to the Court. In the LaRace case, the bank delivered a pooling and servicing agreement (PSA), a common document in MBS transactions, which was claimed to pertain to the LaRace mortgage, but the PSA was unsigned and did not include schedules identifying the specific mortgages being transferred. Finding this evidence insufficient to document the trustee banks' ownership interests in the mortgages, the Court upheld the Land Court ruling that the trustee banks had failed to show that they were the owners of the mortgages at the time of the foreclosure sale, and as a result, the foreclosure sales were void. The Court also rejected the banks' arguments that (1) the banks' possession of the underlying promissory notes gave them a sufficient interest in the mortgages to foreclose, and (2) the banks' receipt of assignments after the foreclosure sales gave them standing to foreclose.
The Court explained that because state law provided the banks with substantial nonjudicial power to foreclose, they were expected to strictly follow the procedures for doing so. One of the requirements of the foreclosure law is that only "the mortgagee or his executors, administrators, successors or assigns" can exercise the statutory power of sale. As prior cases have held, any attempt to foreclose by any other party renders the foreclosure sale void.
The Ibanez holding—that to fulfill the statutory power of sale requirements, a foreclosing party must be "[t]he mortgagee or his administrators, successors or assigns"—does no more than apply basic legal principles and requirements well established under Massachusetts law. On the other hand, the decision has received a great deal of attention for at least two important reasons: first, because of the explosion of MBS transactions, particularly over the last decade, there is a huge number of transactions that have been documented—or have failed to be documented—in the manner that the Ibanez and LaRace transactions were, in Massachusetts and elsewhere around the country, and are subject to delay. Second, there are a large number of foreclosures that have either occurred or are in process that could be attacked on similar grounds, creating uncertainty for lenders (and oftentimes for those that may have purchased properties out of flawed foreclosures), as to who properly holds title to the property.
For foreclosures that have not yet been commenced, the impact of the holding may simply require more work: in a concurring opinion, one of the justices criticized "the utter carelessness" that the banks demonstrated in documenting their ownership of the mortgages and pointed out that before, and not after, commencing a foreclosure action "the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order." Although more attention to the necessary paperwork will be required going forward, some of this work may not be as simple as it appears to be, because a number of parties in the MBS world are either in bankruptcy or have ceased to exist since the beginning of the financial crisis.