I just finished watching the oral argument web-cast in the U.S. Bank v. Ibanez controversial foreclosure case before the Massachusetts Supreme Judicial Court. It was a bit anti-climatic, with the judges and attorneys spending an inordinate amount of time discussing the complex, mortgage securitization documents and process.
Here’s a recap of what caught my eye:
- The justices had many questions about the Wells Fargo/Option One mortgage pooling and servicing agreement, private placement memo, and other mortgage securitization documents. If you’ve read the great book, The Big Short by Michael Lewis, you know how complex these agreements are. Some of the justices clearly weren’t following the complex securitization process and agreements. Justice Ganz characterized the securitization documents as “extraordinarily sloppy.” I wonder what Goldman Sachs and Lehman Brother’s $1,000/hour corporate attorneys would think of that comment.
- The justices were searching for a document in the record evidencing that Option One Mortgage was holder of mortgage that was foreclosed, as the problem in this case was that Option One had an assignment executed “in blank.” That is, without the identity of a new lender who was purchasing the mortgage on the secondary market. They were really struggling with the problems in the documentation filed with the registry of deeds in this case, which was endemic as thousand of securitized mortgages were being foreclosed.
- The attorney for the lenders spent most of his time attempting to explain the securitization process to the justices. I think that took away some of the impact of the public policy arguments he was expected to make.
- Chief Justice Marshall referenced the friend of the court brief filed by the Real Estate Bar Association (REBA), asking an attorney for the foreclosed homeowner whether “the sky will fall if the Land Court’s ruling is upheld”? (Answer was n0). Likewise, Justice Ganz asked what are we to do about the seemingly innocent folks who bought these foreclosed homes unaware that the titles were defective. Justice Ganz and Marshall agreed that these purchasers could be “bona fide good faith purchasers” which under the law means they could be immune from claims challenging their title. That’s an encouraging line of reasoning for many people waiting on the outcome of this case.
- There was also a discussion about changing the current common law which does not require recording of mortgage assignments, to require it. Justice Marshall asked how many states required recording of mortgage assignments, giving a hint of where’s she thinking on this.
- Lastly, Justice Cordy, the former big firm attorney, was clearly on the side of the lenders, even going so far as to ask whether Mr. Ibanez waive his challenge to the foreclosure by not challenging it in lower court.
As with any appeal, the Court takes several months to decide the case and render a formal written opinion. But here’s how I think this could play out. The majority of justices were deeply troubled by the “extraordinarily sloppy” paperwork surrounding the securitized mortgage documents and assignments which is the root problem here. My guess is they probably think Land Court Judge Long is right about the lender’s compliance with the foreclosure laws. They also likely think that in the current foreclosure mess, the chain of ownership of these loans should be more transparent to the consumer and those searching titles. However, the justices don’t want to hurt thousands of innocent homeowners who bought properties out of foreclosure and fixed them up, etc. Chief Justice Marshal and Justice Ganz were clearly concerned about this, and their opinions typically carry substantial weight. So, to play this down the middle, the court could uphold Judge Long’s ruling, holding that all mortgage assignments must be recorded from now on. But the court would not make the ruling retroactive as is usual, so the innocent homeowners won’t be saddled with defective titles.
There are many folks waiting out this important decision, including several of my clients. I hope the SJC will strike the right balance.
