Generally speaking, Massachusetts is a non-judicial foreclosure state – meaning that lenders can foreclose on mortgages of Massachusetts property without seeking judicial approval beforehand. In certain circumstances, however, a pre-foreclosure judicial proceeding is required solely to determine whether the borrower is in the active military service and entitled to the protections of the Servicemembers Civil Relief Act, 50 U.S.C. §532.
Recently, a number of Massachusetts and Bankruptcy Court cases have set aside foreclosures by lenders who did not have appropriate evidence beforehand that such lenders were holders of the mortgages being foreclosed. See US Bank v. Ibanez, 17 LCR 202 (Mar. 26, 2009) & 17 LCR 679 (Oct. 14, 2009); In re Schwartz, 366 B.R. 265 (Bankr.D.Mass. 2007). These lenders acquired the mortgages through securitizations or other transfers, but did not have evidence of valid assignments of the mortgages prior to commencing the steps to conduct the foreclosure sales.
Somewhat surprisingly, the Massachusetts Land Court recently held that a lender could bring suit under the Servicemembers Civil Relief Act without necessarily having an executed assignment of the mortgage prior to commencing suit. US Bank, N.A. v. Hanlon, et al., No. 10-MISC-429997 (Plymouth Land Court Aug. 20, 2010) at 3. Because an action under the Act is limited to determining whether the borrower is entitled to benefits under the Act, and by law cannot address any other issue, such as whether the borrower breached its loan or mortgage obligations or whether the lender has standing to conduct a foreclosure sale, a lender does not need to be the current holder of the note or the mortgage to have standing under the Act. Id. at 2. Instead, all that is required to establish standing in an action under the Act is to show that the lender has suffered injury as a direct and ascertainable consequence of the challenged action, and such injury was contemplated in the statutory scheme under which the challenged action occurred. Id. at 3.
More specifically, in US Bank v. Hanlon the mortgage at issue had been assigned to a mortgage-backed trust of which US Bank was the trustee. The Land Court held that a mortgage facially appearing to be a part of trust property is sufficient to give the trustee an interest in determining whether the borrower is entitled to the benefits of the Act since such entitlement affects the collectability, and therefore the present value of, that loan. Id. at 4. As the trustee, the lender has a fiduciary responsibility to the trust certificateholders to maintain and collect upon trust assets. Any reduction in the value of the trust assets could expose the lender to liability. The Land Court concluded that such liability is an injury falling within the area of concern of the Act and is therefore sufficient to grant the lender standing to file a complaint under the Act. Id.
Assuming that other Massachusetts courts elect to follow the ruling in US Bank v. Hanlon, the decision allows lenders to begin the foreclosure process pursuant to the Act while continuing to perfect their rights in the mortgage prior to commencing the non-judicial foreclosure sale. Since obtaining a decision under the Act can take several months, the Land Court’s decision potentially expedites the foreclosure process for loans that have been transferred or assigned without all of the documentation in place at the time of transfer or assignment.