Homeowners won another victory recently against financial institutions that attempt to foreclose on mortgages without evidence of their pre-foreclosure assignment of the mortgage from the original mortgage holders. The Supreme Judicial Court of Massachusetts, the Commonwealth’s highest court, upheld a Massachusetts land court decision that invalidated the foreclosure sales conducted by two banks when they failed to prove that they held mortgages on the foreclosed properties on the date the notice of sale was published. United States Bank Nat’l Ass’n v. Ibanez, 941 N.E.2d 40 (Mass. 2011). The court found that the foreclosure rights granted by the mortgages’ power of sale and under Massachusetts General Law required strict adherence to mortgage-holder requirements and compliance with foreclosure procedural rules.  

Background  

In May 2005, Mark and Tammy LaRace (“LaRace”) took out a mortgage loan from Option One Mortgage Corporation (“Option One”), which granted the mortgage holder the power of sale in the event of default. In December 2005, Antonio Ibanez (“Ibanez”) took out a mortgage loan from Rose Mortgage, Inc. (“Rose Mortgage”), which granted the mortgage holder a similar power of sale. With limited exception, Massachusetts law does not require a mortgage holder to obtain judicial authorization to foreclose on a mortgaged property if the mortgage grants its holder the power of sale.  

On July 5, 2007, the plaintiffs in this case, U.S. Bank National Association (“U.S. Bank”) and Wells Fargo Bank, N.A. (“Wells Fargo”), acting as trustees for certain mortgage-backed securities, foreclosed on the Ibanez and LaRace mortgages, respectively, without resorting to the courts. The banks then purchased both properties at the foreclosure sales. The banks had published notice of the foreclosure sales during the month prior to the sales.  

Over a year after the foreclosure sales, the banks brought separate actions against the Ibanez and LaRace in Massachusetts land court seeking (1) a judgment that the foreclosures had extinguished the mortgagors’ titles, (2) a declaration that the banks were the fee simple owners of the foreclosed properties, and (3) a declaration that there was no cloud over the title arising from the notice of sale. Significantly, the complaints alleged that the banks had become holders of their respective mortgages from assignments made after the date of the foreclosure sales. When neither Ibanez nor LaRace responded to their respective complaints, the banks moved for default judgments.  

Hearing the banks’ default judgment motions together, the land court ruled that the foreclosure sales were invalid. Based on the banks’ own allegations that they acquired the mortgages by assignment only after the published notice of sale, the land court held that the banks had no interest in the mortgages on the notice publication date or at the time of the foreclosure sales themselves and, therefore, lacked the right to foreclose on the mortgages.

The banks subsequently moved to vacate the judgment, alleging the existence of additional evidence establishing they were assigned the mortgages before the notice of sale. After a review of that newly submitted evidence, however, the land court denied the banks’ motions. The banks then appealed to the Supreme Judicial Court for direct appellate review.

Arguments on Appeal

On appeal, the banks argued that the evidence established that they were mortgage assignees at the time of publication of notice and, therefore, the owners of the foreclosed properties in fee simple. Specifically, U.S. Bank alleged that in December 2005, Rose Mortgage first assigned the Ibanez mortgage in blank, but subsequently specified Option One as assignee, which recorded the mortgage. After several additional assignments, the mortgage was assigned to the Structured Asset Securities Corporation (“SATC”). SATC pooled it with other mortgages and converted them into a mortgage-backed security. SATC then assigned the Ibanez mortgage to U.S. Bank, as trustee pursuant to a December 2006 trust agreement, a private placement memorandum (“PPM”), and a schedule listing the assigned mortgages. After Ibanez defaulted, U.S. Bank published notice of the foreclosure sale in June 2007, and purchased the Ibanez property at the sale in July 2007. Additionally, in September 2008, a successor-in-interest to Option One, the record holder of the Ibanez mortgage throughout the purported chain of assignments, executed a written, post-foreclosure assignment of the mortgage to U.S. Bank, which U.S. Bank thereafter recorded.  

Similarly, Wells Fargo alleged that after several assignments originating from Option One, the LaRace mortgage was assigned to the Asset Backed Funding Corporation (“ABFC”) in October 2005. ABFC subsequently pooled it with other mortgages and, pursuant to a pooling and servicing agreement (“PSA”), assigned the LaRace mortgage to Wells Fargo, as trustee to an asset-backed security containing the mortgage. After LaRace defaulted, U.S. Bank published notice of the foreclosure sale in June 2007, and purchased the LaRace property at the sale in July 2007. On May 7, 2008, Wells Fargo finally executed a statutory foreclosure affidavit and foreclosure deed. Additionally, Option One, which was still the record holder of the LaRace mortgage, executed an assignment to Wells Fargo, as trustee, which Wells Fargo thereafter recorded. This assignment listed a retroactive effective date of April 18, 2007, a date that preceded the June 2007 publication of the notice of sale.

The banks further argued in the alternative that (1) their financial interests in the mortgage notes should grant them the right to foreclose even without valid assignments, (2) post-sale assignments are industry custom and should be honored, and (3) an adverse ruling, if any, should apply only prospectively to future foreclosures.  

The Court’s Decision

Finding the banks’ evidence insufficient to meet their burden of proving that they had authority to foreclose under the power of sale and statutory foreclosure requirements, the court affirmed the avoidance of the sales of the Ibanez and LaRace properties. Recognizing that Massachusetts General Law gives the plaintiffs, as holders of mortgages with a power of sale, the “substantial power” to foreclose without immediate judicial oversight, the court ruled that a mortgage sale is void unless the seller acts in strict compliance with the terms of mortgage’s power of sale, acts in good faith and uses reasonable diligence to protect the interests of the mortgagor. According to the court, the strict compliance requirement therefore necessitates that only the present holder of the mortgage, including “the mortgagee or his executors, administrators, successors or assigns,” may foreclose on a property. Because only the present holder may foreclose on a mortgaged property, a valid notice of sale must identify the then-current holder of the mortgage.  

Upon examination of the banks’ evidence, the court determined that neither bank had acquired a fee simple title to the foreclosed properties before publishing notice of sale. Although U.S. Bank claimed it was assigned the Ibanez mortgage pursuant to a trust agreement with SATC as indicated by an attached schedule listing the assigned mortgages, the court noted that U.S. Bank failed to submit a copy of either document to the court. U.S. Bank provided the court with a copy of the PPM, but the court declined to rely on the PPM alone as it described the trust agreement as an agreement that would be executed in the future and, accordingly, merely established the parties’ intention to assign the mortgages to U.S. Bank at some later time. Finally, the court found that U.S. Bank had failed to provide any evidence of the chain of assignment that indicated how SATC was ultimately assigned the mortgage from the original mortgage holder.  

Wells Fargo’s claim that ABFC assigned the LaRace mortgage pursuant to a PSA was similarly rejected. Unlike the aspirational language used in U.S. Bank’s PPM, the PSA expressly stated that ABFC “does hereby . . . assign” the mortgages listed on an attached schedule. Like U.S. Bank, however, Wells Fargo also failed to provide the court with the schedule evidencing that the LaRace mortgage was included in the security. Additionally, the court found that Wells Fargo failed to provide proof of the chain of assignment between Option One and ABFC.  

Finding that the banks did not act in strict compliance with the mortgages’ power of sale and that the remaining two foreclosure requirements were never raised in the land court below, the court did not address whether the banks acted in good faith or exercised reasonable diligence to protect the mortgagors’ interests.  

The court concluded by briefly addressing and rejecting the banks remaining arguments. First, the court held that an assignment in blank fails to convey title and is therefore void. Second, the court ruled that, although the banks may have held the mortgage notes, a financial interest in the mortgage is insufficient under Massachusetts law without proof of a written assignment. Third, the court declined to adhere to a purported industry custom that permits foreclosures with post-sale assignments, as well as post-foreclosure assignments that include retroactively-applying pre-foreclosure effective dates, because this conduct conflicts with Massachusetts law. Finally, the court rejected the banks’ request for the ruling to apply prospectively because prospective rulings are only appropriate where a ruling significantly changes the application of common law, and the court had made no such change here.  

Conclusion  

The U.S. Bank case further illustrates the increasing trend in judicial rulings requiring financial institutions to ensure that their documentation is accurate, complete and organized before foreclosing. The decision reaffirms the need for financial institutions acting as trustees for mortgages pooled together in a trust and converted into mortgage-backed securities, to verify each individual mortgage’s chain of assignment, and to preserve proper documentation establishing proof of their assignments where possible.