Last week, the Massachusetts Supreme Judicial Court handed down its decision in a closely-watched case which some believed might become a watershed for many homeowners facing foreclosure.1 Now that the decision has been announced, the long-term impact remains a subject of debate. Some have already hailed the decision as a victory for homeowners while others have expressed the view that it will have little broad impact on the securitized mortgage industry. For example, The Wall Street Journal, The New York Times and on-line commentators, as well as advocates on both sides of the debate, have expressed varying reactions.

To begin with, Massachusetts is one of the states2 which permit mortgage holders to foreclose without the filing of an adversarial judicial case, a process known as “non-judicial foreclosure.” In Massachusetts, the mortgage holder must simply certify that it is exercising its contractual right to sell the property as a result of a default and that the mortgagor is not protected by the Servicemembers Act (a federal statute restricting foreclosures on property owned by a person serving in the military). The question presented in Ibanez was whether the plaintiffs, who were trustees of securitized mortgage pools, had acquired clear title as a result of their purchases of the properties in conjunction with the exercise of the non-judicial foreclosure powers granted by the mortgages on the properties.

The Court held that the foreclosure sales had been improper and therefore clear title had not been conveyed to the trustees. The trusts had failed in proving the one essential element of the foreclosure procedure: the requirement that they had been the holders of the mortgages at the time of the foreclosure sale. The trustees’ counsel had failed to introduce facts sufficient for the trial court to find that the mortgages had been assigned to the trustees prior to the dates on which the foreclosures had taken place.

Although there were slight differences in the facts surrounding both sales, essential elements in both sales were that the original mortgagee had assigned the mortgages “in blank,” that is, without specifying the name of the new mortgage holder, and that the ownership of these mortgages passed through several entities before ending up in the custody of the ultimate loan servicer as is the case in many securitized mortgage transactions. Along the way, many of the various parties purporting to “own” the mortgages did not execute assignments of the mortgages as the loans passed through the various levels on their way to the trusts which eventually initiated the foreclosure sales. Rather, the parties evidently relied on the fact that there were blank assignments for each loan, apparently assuming that no further documentation was needed. For one of the properties, specific assignments were actually executed after the sale in an attempt to cure any defects.

In holding that the foreclosures were defective, the Supreme Judicial Court, the highest court in Massachusetts, cited well-established Massachusetts precedent that only the true holder of a mortgage can foreclose; that Massachusetts’ law requires strict compliance with the procedures; and that failure to identify the holder of the mortgage in the notice of sale will render the sale void. The specific problem for the trustees was that neither could present sufficient evidence to the trial court that the mortgages had actually been assigned to them as of the date that the foreclosures occurred. The court found that execution of appropriate documentation of the assignments after the fact was not sufficient to satisfy the strict requirement that the foreclosing party must be the holder of the mortgage when the foreclosure takes place.

While the full impact of the decision may not be known for some time, it is important to note that the Court emphatically based its decision on factual deficiencies, that is, that the trusts’ counsel had been unable to prove that the trusts had actually been assigned the mortgages at the time of the foreclosures. The Court did spell out guidelines for documentation it would find to be acceptable:

  1. “[We] do not suggest that an assignment must be in recordable form at the time of the notice of sale or the subsequent foreclosure sale, although recording is likely the better practice. 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 issue as among those assigned, may suffice to establish the trustee as the mortgage holder. However, there must be proof that the assignment was made by a party that itself held the mortgage.”
  2. “A foreclosing entity may provide a complete chain of assignments linking it to the record holder of the mortgage, or a single assignment from the record holder of the mortgage.”
  3. “The key in either case is that the foreclosing entity must hold the mortgage at the time of the notice and sale in order accurately to identify itself as the present holder in the notice and in order to have the authority to foreclose under the power of sale.”

Similarly, the Court did declare that three specific documentation practices would be unacceptable for future foreclosures in Massachusetts:

  1. Assignments in blank are ineffective. “[A] conveyance of real property, such as a mortgage, that does not name the assignee conveys nothing and is void; we do not regard an assignment of land in blank as giving legal title in land to the bearer of the assignment.”
  2. The mortgage does not follow the note. “In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage . . . . In the absence of a valid written assignment of a mortgage or a court order of assignment, the mortgage holder remains unchanged.”
  3. A post-sale assignment of a mortgage will not cure a defect existing at the time of the sale. “If the plaintiffs did not have their assignments . . . at the time of the publication of the notices and the sales, they lacked authority to foreclose . . . . Nor may a post-foreclosure assignment be treated as a pre-foreclosure assignment simply by declaring an ‘effective date’ that precedes the notice of sale and foreclosure.”

Finally, the Court did affirm the validity of a practice apparently common in the mortgage lending industry: a defective (but real) assignment may be cured after the fact, or after the sale. The Court declared that “where an assignment is confirmatory of an earlier, valid assignment made prior to the publication of notice and execution of the sale, that confirmatory assignment may be executed and recorded after the foreclosure, and doing so will not make the title defective. A valid assignment of a mortgage gives the holder of that mortgage the statutory power to sell after a default regardless whether the assignment has been recorded. Where the earlier assignment is not in recordable form or bears some defect, a written assignment executed after foreclosure that confirms the earlier assignment may be properly recorded. A confirmatory assignment, however, cannot confirm an assignment that was not validly made earlier or backdate an assignment being made for the first time.”