The Massachusetts Supreme Judicial Court’s decision in US Bank National Association v Ibanez, No. SJC-10694, 2011 Westlaw 38071 (Mass. January 7, 2011) has caused a firestorm in the world of residential and commercial mortgage-backed securities. In this consolidated case, the Court invalidated two residential foreclosure sales because the Court found that U.S. Bank National Association (“U.S. Bank”) and Wells Fargo & Company (“Well Fargo” and together with U.S. Bank, the “Trustees”) could not show that they were the holders of the subject mortgages at the commencement of foreclosure proceedings. The Court held that without proof of a proper assignment prior to the commencement of foreclosure proceedings, the Trustees for the REMIC trusts purporting to hold the mortgages could not rely upon assignments after the fact to cure the deficiency.
Massachusetts allows nonjudicial foreclosure of mortgages by exercise of the statutory power of sale. Because a mortgage holder may foreclose without immediate judicial oversight, under Massachusetts law the terms of the power of sale in the applicable mortgage must be strictly followed. “If [the mortgage holder] fails to do so, there is no valid execution of the power, and the sale is wholly void.” 1 The statutory power of sale can be exercised by the mortgagee or his executors, administrators, successors or assigns. 2 Under the plain language of the statute, the Trustees only had the authority to exercise the power of sale if they could establish that they were the assignees of the subject mortgages at the time of the notice of sale and the subsequent foreclosure sale. 3
To support their claim to be the holders of the mortgages at the time of the notice of sale, the Trustees proffered, among other documents, mortgage assignments executed in connection with the establishment of the REMIC trusts by the prior holder of the mortgages “in blank” (i.e., without specifying to whom the mortgages were to be assigned). The Court quickly rejected the assignments in blank as invalid, stating that “a mortgage that does not name the assignee conveys nothing and is void; [Massachusetts does] not regard an assignment of land in blank as giving legal title in land to the bearer of the assignment.” 4
Although each of the Trustees purported to hold its mortgage through a series of assignments, neither could establish that it was the holder of record of its respective mortgage. The Trustees asserted ownership of the mortgages pursuant to the terms of their securitization documents. 5 The Court rejected the securitization documents as insufficient evidence that the Trustees were present holders of the subject mortgages. While an assignment of mortgage need not be in recordable form at the time of the notice of sale or subsequent foreclosure sale, the Court specifically noted the following:
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 issues as among those assigned may suffice to establish the trustee as the mortgage holder. 6
Because the Court found that the Trustees failed to establish that they held the mortgages at the time of the notice of sale, the Court held that they did not have the authority to foreclose under the power of sale.
The Ibanez decision reinforces the fundamental requirement that a trustee of a REMIC trust must obtain a valid assignment of all mortgages and underlying loan documents in the pool prior to commencing foreclosure proceedings or exercising a power of sale against a particular defaulted mortgage loan. The availability of nonjudicial foreclosure in Massachusetts allowed conditions to arise in which the Trustees were not the present holders of the mortgage, rendering the foreclosure sales invalid. However, in states requiring judicial oversight of foreclosure, such as New York 7 and New Jersey, the Ibanez decision merely confirms standard foreclosure practices.
In New York and New Jersey, judicial oversight of mortgage foreclosure requires that the foreclosing lender submit for the court’s review the loan documents, including all written assignments of mortgage. Under New Jersey law, a mortgage assignment must be in writing 8and may be recorded in the county recording office, although the failure to record an assignment of mortgage does not affect the validity of the assignment. 9 If the plaintiff is not the original mortgagee, the name of the original mortgagee and a recital of all assignments in the chain of title must be included in the foreclosure complaint. 10 In order to obtain a judgment in foreclosure, the plaintiff must produce the original or a certified true copy of the mortgage, evidence of indebtedness, assignments, and any other original document upon which the claim is based.11
Under New York law, an assignment of mortgage need not be in writing but may be accomplished by delivery of the mortgage with the intention of assigning same. The assignment must be complete at the time a foreclosure action is initiated and the assignment to the foreclosing plaintiff is recited in the complaint. 12 Where a written assignment is executed subsequent to the initiation of the foreclosure action, and there is no proof of earlier file delivery, the action will be dismissed. 13 It should be noted, however, that prior to the execution of a foreclosure deed to the purchaser at the foreclosure sale, any written assignment of the mortgage must be filed with the clerk or, if same is in recordable form, the assignment must be recorded in the county where the property is located. 14
While the Ibanez decision has caused a firestorm in some residential and commercial securitization circles, the case merely confirms the standard practice that a foreclosing mortgage holder must have its documentation in place prior to commencing foreclosure proceedings. While assembly of such documentation may prove to be a challenge to trustees of REMIC trusts that were created under more lax underwriting and record-keeping practices, it should have no significant impact on foreclosure practices in New York and New Jersey, which have always mandated that a foreclosing plaintiff establish that it is the holder of the applicable mortgage.