First the robo-signing controversy. Then the U.S. Bank v. Ibanez ruling. Now the next bombshell ruling in the foreclosure mess has just come down from a New York federal bankruptcy judge.
The case is In Re Agard (click here to download), and essentially throws a huge monkey wrench into a hugely important cog of the entire U.S. mortgage market, the Mortgage Electronic Registration System, Inc. known as MERS.
What Is MERS?
MERS, even for many seasoned real estate professionals, is the most important entity you’ve never heard of. In the mid-1990s, mortgage bankers created MERS to facilitate the complex mortgage securitization system where hundreds of thousands of mortgage loans were (and still are) packaged and bundled as securities for sale on Wall Street. Each mortgage entered into the MERS system has a unique 18 digit Mortgage Identification Number (MIN) used to track a mortgage loan throughout its life, from origination to securitization to payoff or foreclosure. The MERS system was vital to the proliferation of the $10 trillion U.S. residential securitization mortgage market.
Critics say that the decision to create MERS was driven, in large part, to avoid paying recording fees charged by county registry of deeds which required that all mortgage transfers and assignments be properly recorded and indexed in publicly available registries of deeds. Thus, MERS was designed essentially as a privately run, national registry of deeds under which MERS would act as the record “owner” and depository of all mortgages participating in the system, while the mortgage notes and loans themselves were freely bought and sold on the secondary market. About 50% of all U.S. mortgages participate in the MERS system.
The Ruling: MERS Cannot Legally Transfer & Assign Mortgages
Bankruptcy court judge Robert E. Grossman’s ruling is a bombshell and appears to be the first federal ruling holding that MERS cannot legally do what it was set up to do: transfer and assign mortgages through its electronic registry. Judge Grossman ruled that the foreclosing lender had to show that it owned both the note and the mortgage — rejecting the popular theory that the “note-follows-the-mortgage” — and there was no evidence that it held the note. “By MERS’s own account, the note in this case was transferred among its members, while the mortgage remained in MERS’s name,” Grossman wrote. “MERS admits that the very foundation of its business model as described herein requires that the note and mortgage travel on divergent paths.”
The judge found that the MERS membership agreement wasn’t enough to assign the mortgage and that to do so the lender would have to give power of attorney or similar authority to MERS. MERS’s membership rules don’t create “an agency or nominee relationship” and don’t clearly grant MERS authority to take any action with respect to mortgages, including transferring them, Grossman wrote. Because the interests at issue concern “real property” — land and buildings — under state law, any transfer has to be in writing, which isn’t done under the MERS system, he said.
The judge concluded, rather harshly, that “MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”
Impact of the Decision
The impact of this ruling may be quite muted. First the ruling is “dicta” which means that the ruling didn’t have much to do with the case since the judge upheld the validity of the foreclosure. Second, this ruling comes from the lowest level of the federal bankruptcy court system in New York, and will surely be appealed to a federal appeals court, and then possibly to the U.S. Supreme Court. Other courts have ruled in favor of MERS on the same issues, as well. The ruling could be overturned ultimately–if it gets there. Third, Congress and state legislatures could intervene, and bless what MERS has been doing for the past decade. The judge invited lawmakers to do just that.
Thus, it’s hard to say how much, if any, impact this ruling with have in other states or nationally. Plus, any easy fix would appear to be for MERS and its lender partners to go back, and record their mortgage assignments and pay the recording fees due.
That said, the decision definitely sends a shot across the bows of MERS and its partners (Fannie and Freddie), and should be watched closely by industry experts.
Since Nov. 3rd when the Federal Reserve Bank released details of QEII (Quantitative Easing II), we have seen a very rapid rise in mortgage rates. On a national basis, the Freddie Mac 30 year fixed rate has moved from 4.20% to 5.05% this week. The 10 year Treasury has risen above 3.70% and Inflation seems to be the word of this month.
Last year at this time the 10 year was at 3.73% and it hit 4.00% on April 5th. It then started a fairly rapid descent all spring and summer to its low of 2.38% on October 8th. There were several economic events that brought this about, but the question in every mortgage company’s and consumer’s mind is “Will history repeat itself this year”?
Wishful thinkers will say YES. Many think the stock market is overbought. The Mid-East and Egypt situation is still very unstable. Inflation remains low according to the FED. Unemployment is stubbornly high and the housing market is continues to be very sluggish. Until these issues are resolved, rates cannot rise too far or consumer demand will fall and economic growth will not be sustained.
HOWEVER, there are a few wrinkles that have nothing to do with Macroeconomics that will be in play in the coming months and years.
Changes In Loan Officer Compensation
As part of the Dodd-Frank Bill, loan officers’ compensation is about to undergo a dramatic change. Loan officers will no longer be paid based on certain loan characteristics such as interest rate. The intention is to have consumers with like profiles receive the same interest rate when quoted from one loan officer to another within the same company. One the surface this makes sense. In practice, the policy is very unfriendly to the consumer, limits consumer choice, and is uncompetitive for the marketplace. Loan officers already have a fiduciary responsibility to their clients to put them in the best loan for them, while compensation to the loan officer is not a major factor. This is a higher standard than the financial planning or brokerage environment which must merely come up with a suitable product, not the best product for their clients.
The anticipated effect of this change, coupled with the reduced volume of loan transactions due to rising rates, will further increase the profit pressures on lending institutions, thereby requiring them to make their loans more profitable. This may be done through reduction of expenses and overhead (read layoffs) or higher rates to the consumer, and will eventually lead to fewer choices to the consumer as companies go out of business. The large lending institutions will then be free to control the market even more so.
Fannie/Freddie (GSE) Reform
A bigger factor is the Fannie/Freddie GSE reform now being detailed by the Treasury. This plan, which may take affect over several years, will reduce/eliminate the government’s backing of the mortgage market, except perhaps through FHA, VA and USDA loans. When the government moves to a private secondary market, those investors are going to want a greater return on their investments and rates will almost certainly rise and may do so dramatically. Less than 10 years ago 7.25% was considered a great rate!
Current programs such as a 30 year fixed rate may vanish in favor of the adjustable rate mortgages which move with the interest rate market and would be more profitable for investors. Additionally, for those programs that are somewhat or fully guaranteed by the government, I would expect the fees associated with these programs to rise substantially.
The GSE reform options include reducing the Agency Jumbo Limit to $625,000, down from $729,000 in the highest cost areas. In Massachusetts those high cost areas are Martha’s Vineyard and Nantucket Islands off Cape Cod. The highest max loan amount in other counties is $523,750. Will this reduction of loan size have a big impact? I don’t think so. Current rates may be .250% to .500% higher with portfolio lenders that offer loans over these limits, but these jumbos have come way down in rate compared to the depths of the financial crisis. Most of the risk is relieved through very strict underwriting guidelines.
I have Portfolio lenders offering under 4% on ARM rates on loans to $1MM at 5 year interest only for the right borrower! While ARMs may not be the right product for everyone, they are for certain individuals and these folks are saving tremendous sums compared to where rates were just a couple of years ago.
A big concern for for future homeowners with GSE reform will be the minimum down payment requirements. There is talk that borrower’s may be required to put down 10 or 20% to qualify. Some major lenders have suggested 30%. Yeah, that’ll work…not. If that becomes the requirement you can kiss home ownership goodbye for the next generation or so, and rents will rise very rapidly.
I certainly recognize the need for GSE reform. Taxpayers have been getting killed by the losses from the mortgage giants, and the bleeding will not stop anytime soon. The plan as outlined by the Obama administration will gradually make changes to the GSEs over 5-7 years. But hopefully the market will understand what will be happening well in advance of the changes occuring.
Interest Rate Predictions For 2011 and Beyond
So what do I think? I think (unfortunately) rates will:
increase to 5.875%-6.125% for a 30 year fixed rate by the end of 2011;
increase to 6.50% by end of 2012; and
level out at closer to 7% by 2013.
By that time hopefully there will be a more clear path to GSE reform.
I want low rates. It’s good for my business, helps pay for my mortgage, and keeps the house heated.
All of this rate speculation, however, could be meaningless if Congress decides to finally act on the deficit. If they do, then rates could stay low for a very long period. One thing is for sure, my 3 kids are going to see a very different economic and housing landscape when they are ready to buy a home.
To see the the full report on Reforming America’s Housing Finance Market, click here .
I put together my first YouTube video, and thought a good topic would be the impact of the U.S. Bank v. Ibanez case on the foreclosure and REO market. The case underscores the necessity of obtaining an owner’s policy of title insurance for any REO transaction, and really any conventional transaction for that matter. Appreciate any feedback, good or bad. I’m no Ryan Seacrest obviously!
Having spent the entire weekend in a feeble attempt to shovel the snow and bludgeon the one foot thick ice dams off my roof, I’ve bit the bullet and hired a professional. No use risking life and limb, and doing a third rate job. I also have a nice one inch crack along my family room ceiling, no doubt caused by the huge ice damn above it.
My Facebook stream is filled with pleas from homeowners about ice dams and related winter snow and ice damage. I’m also hearing stories about price gouging on roof snow and ice removal. (According to Sudbury Realtor Gabrielle Daniels Brennan, you should be paying only between $300-$800, max.)
So, time to call in the professionals, and dust off my trusty Massachusetts homeowner’s insurance policy to see what’s covered and what’s not.
Ice Dam Insurance Coverage
Very few insurance policies cover ice dam or snow removal from your roof or anywhere else on your property for that matter. However, interior or exterior damage caused by an ice dam on your roof is typically covered. As with any insurance claim, call the claims department immediately and take photos of the damage.
Ice Dam Treatment & Prevention
In the short term, there are a couple things you can try.
Try to remove snow from the roof but only if it can be done safely. A roof rake or push broom can be used but may cause damage to the shingles. If it’s not possible to remove the snow safely, call a professional like I did.
Chisel grooves into the dam to allow the water behind it to drain off. This is a good emergency measure, especially if rain or a sudden thaw is coming. Be careful not to damage those shingles!
Fill an old pair of your wife’s pantyhose with calcium chloride snow melt and lay it across the dam. I’m not kidding! I did this over the weekend and it seemed to work. It will help to melt the dam and also keep that area of the roof clear. DO NOT USE ROCK SALT! It will stain the roof and siding. It is best for small dams or prevention. It’s also a good idea to scrape the snow off the roof first.
To prevent ice dams in the longer term, keeping warm air from escaping into the attic is the first course of action. In addition to helping resolve ice dam issues, it will result in a more comfortable and less expensive to heat home.
Frozen Pipes Insurance Coverage
Not all companies pay to have frozen pipes thawed by professionals. Some will though. Most policies cover pipe replacement and water damage. The coverage may not apply if you turned the furnace off for the winter without winterizing the house and its contents.
Frozen Pipe Prevention
Frozen water in pipes can cause water pressure buildup between the ice blockage and the closed faucet at the end of a pipe which leads to pipes bursting at their weakest point. Pipes in attics, crawl spaces and outside walls are particularly vulnerable to freezing in extremely cold weather. Holes in outside walls for TV, cable or telephone lines allow cold air to enter the house.
To keep water in the pipes from freezing, take the following precautions:
• Fit exposed pipes with insulation sleeves or wrapping to slow the heat transfer. The more insulation the better.
• Seal cracks and holes in outside walls and foundations near water pipes with caulking.
• Keep cabinet doors open during cold spells to allow warm air to circulate around pipes, particularly in the kitchen and bathroom.
• Keep a slow trickle of water flowing through faucets connected to pipes that run through and unheated or unprotected space. Drain the water system especially if your house will be unattended during cold periods.
Interruption of Services
If you lose power during a storm, an all-risk homeowner’s policy usually pays for spoiled food, repairs to damage caused by loss of power, and appliances damaged by the outage. Many policies also will pay for shelter when you lose power for extended periods during the winter. If you lose heat and fail to take steps to prevent pipes from freezing, your policy may not cover the resulting damage.
I am honored to be a panelist — along with the lawyers who prevailed in the U.S. Bank v. Ibanez case –in an upcoming online seminar on February 12 and 15. Here are the details:
The Massachusetts Ibanez Decision:
The Ruling and its Implications for the Industry, the Practitioner and the Consumer
Saturday, February 12th, 2011
12:00 PM Eastern Time
and
Tuesday, February 15th, 2011
8:00 PM Eastern Time
Hear from the attorneys and experts directly involved in the recent landmark Massachusetts Supreme
Judicial Court decision that shook up the foreclosure defense landscape.
A virtual panel discussion followed by audience Q&A.
Max is recognized as one of the leading lawyers in America in the area of Predatory Mortgage Servicing and the standing of Mortgage Servicers in consumer bankruptcy cases. His position on the front lines of the war against predatory lenders and mortgage servicers has captured the attention of ABC News Nightline, CNN, Business Week, The New York Times, The Washington Post and many other news outlets across the country.
**Only participating in the event on Saturday, February 12 at 12:00 PM EST
Marie McDonnell is the President of McDonnell Property Analytics, Inc., a foreclosure defense training and support services company. Her Amicus Brief is widely cited as a key factor in the Ibanez decision. Marie has been a nationally recognized mortgage auditing and forensics expert since 1987.
Jamie is one of the leading foreclosure defense lawyers in Massachusetts, with a current caseload of approximately 85 cases. He has worked closely with Glenn F. Russell, Jr., and Thomas B. Vawter to develop innovative foreclosure defense strategies, including challenging a foreclosing bank’s standing in Servicemembers cases in the Massachusetts Land Court and in raising standing challenges to post-foreclosure evictions.
Glenn is a solo practitioner based in Fall River, Massachusetts, whose practice is 100% devoted to the defense of mortgage foreclosure. Attorney Russell represented Mark and Tammy LaRace in the recent Massachusetts Supreme Judicial Court ruling in U.S. Bank v. Ibanez.
Richard D. Vetstein, Esq. is the creator and principal author of the Massachusetts Real Estate Law Blog. Rich is a nationally recognized real estate attorney, having written extensively on real estate legal issues and been featured or quoted by the Boston Globe, Bloomberg News, Financial Times, Associated Press, Wall Street Journal, and Banker & Tradesman. Rich was recently selected as one of Inman News’ Top 100 Most Influential in Real Estate.
**Only participating in the event on Tuesday, February 15 at 8:00 PM EST
I recently came across a very provocative and interesting idea to address the foreclosure and bankruptcy crisis: a new Chapter M for Mortgage bankruptcy. As described on FireDogLake:
“Prof. Adam Levitin has proposed this with his Chapter M for Mortgage bankruptcy. It would remove foreclosure actions from state court to federal bankruptcy court. Successful petitions can be offered a standardized pre-packaged bankruptcy plan. The plan would be based on HAMP modification guidelines (interest rate reduction to achieve 31% DTI goal, but without federal funding) plus cramdown to address negative equity.
We can make this fair on the backend. If the homeowner redefaults we can speed up the foreclosure process. It wouldn’t affect non-mortgage lenders. It is fast-tracked relative to traditional Chapter 13. It can have clawback mechanisms to address potential future appreciation.
And going through the process can give the lender clean title. Because there’s this whole issue of who owns what in the securitization chain which is a few court cases away from putting our financial system over a cliff. And the best feature is that it has no cost to the federal government. Like other smart policy, it builds off already existing infrastructure, so it can be started immediately using existing courts and Chapter 7 panel trustees for sales.”
Any solution which can simultaneously address banks’ unwillingness to offer loan modifications to otherwise qualified distressed homeowners and the litany of title problems created in the wake of cases like U.S. Bank v. Ibanez should be seriously considered. The recent foreclosure legislation proposed by Secretary of State Bill Galvin and Attorney General Martha Coakley contains mandates following these ideas. Galvin’s would create a special court to deal with Ibanez issues, and Coakley’s requires loan modifications for certain sub-prime loans before foreclosure.
We certainly need out of the box thinking to deal with these problems. What are your thoughts?
Why Investors Are Actively Pursuing Net-Leased, Investment Grade Commercial Real Estate As A Safe Haven In Today’s Troubled Economic Environment.
The investment community is slowly continuing its recovery from the effects of the sub-prime mortgage crisis as well as the collapse of the CMBS market. At this time, public and private, institutional and non-institutional real estate investors have continued to actively invest in an asset class where the laws of supply and demand are creating CAP rate compression where real estate values across the board have largely depreciated. The genre of commercial assets that is being referred to is comprised of single tenant, net leased, investment grade properties.
Analysis Factors
In acquiring an asset of this nature, the investor typically purchases a fee simple interest in the property. The property, comprised of the land and the structure that sits on top of the land, is leased by a corporate tenant with an investment grade credit rating (S&P rated BBB- or better) on a long term basis. In analyzing the merits of a single tenant, net-lease deal an investor will research and underwrite the strength of the corporate credit that guarantees the lease payments, the terms of the lease and any lease options, the landlord and tenant responsibilities that are enunciated in the lease and the relative strength of the demographics and trade corridor where the property resides. In addition, the investor will look at the intrinsic value and location of the property, the rent that the tenant is paying per square foot and the sales data for the location if available. This analysis is critical in underwriting the viability of the tenant and their ability to successfully operate in the location over the duration of the lease term. The investor will also look at the capitalization rate as a function of determining the rate of return on the investor’s equity in the event that acquisition is made entirely with cash. An investor looking to utilize leverage will also search out financing options if higher returns are mandated by that investor’s acquisition criteria and may also depend upon the amount of equity the investor is looking to place.
Risk Factors
The obvious worst case scenario for an investor in a net lease deal would arise in the event that the tenant abandons the location. This scenario emphasizes the importance of underwriting the tenant’s credit worthiness as the tenant would still be responsible for paying rent through the balance of the term regardless of their occupancy of the real estate. Furthermore, the importance of evaluating the intrinsic value and location of the real estate in addition to the rent being paid by the tenant as a function of whether the rent is in line with the local market is critical in the event that the tenant is ever declared insolvent or adjudged bankrupt as the responsibility of re-letting the building would fall on the property owner. The risk assumed in this absolute worst case scenario is more than offset by conservatively underwriting the tenant and their credit in addition to the overall market demand for the real estate.
Benefits of Asset Class
Furthermore there are a number of reasons why investors looking for higher yields in today’s economic climate are looking to invest in this asset class. Where yields in the stock market, bond market, money market accounts and CD’s have clearly suffered, investors in single tenant net-leased, credit real estate are experiencing returns in the seven to twelve percent range depending upon how the real estate is financed. Considering the non-management intensive nature of ownership, the tax benefits of real estate ownership, and the principal reduction of the debt that is afforded by the tenant in the event that the acquisition is financed, these investments are highly preferential for a wide variety of cash return driven investors including those that are in the process of estate planning.
If you are interested in obtaining further information on investing in single tenant, net-leased, commercial real estate or would like a free consultation/valuation of your investment property, please contact Bryan Gitlin via email (click here) or by telephone at 617-964-1031.
Bryan Gitlin, J.D. has been actively involved in the acquisition, re-development, management, leasing and disposition of commercial real estate since 1998. A founding member ofCambridge Capital Advisorsand seasoned investment broker, Mr. Gitlin’s concentration is the acquisition, disposition, underwriting and deal sourcing of investment properties with a primary focus on single-tenant net leased properties and shopping centers nationwide.
Harold Clarke, Esq., Senior Underwriter for Westcor Title Insurance Company–New England say the U.S. Bank v. Ibanez decision could be one of the most important real estate decisions in recent memory. He explains how it will impact the Massachusetts real estate market, and what may happen in the future. Also check out Westcor New England’s new YouTube channel.
You knew this was coming. The politicians smell a big political opportunity with the foreclosure mess in Massachusetts, and are filing legislation left and right.
The latest is legislation filed by State Senator Karen Spilka and Attorney General Martha Coakley mandating loan modifications in certain circumstances.Specifically, the loan modification legislation requires creditors to take “commercially reasonable efforts” to avoid foreclosure upon certain sub-prime loans. The legislation also provides a safe harbor for creditors to comply with this requirement of commercial reasonableness.
The legislation also addresses problems with foreclosures highlighted in the recent decision by the Massachusetts SJC, U.S. Bank v. Ibanez by prohibiting foreclosures where creditors lack the documents supporting their purported right to foreclose, and prohibits passing on certain fees and costs to homeowners. Specifically, this legislation:
Codifies the recent SJC decision in Ibanez by requiring a creditor commencing foreclosure to show it is the current legal holder of record of the mortgage. The bill also forbids misrepresentations to courts concerning holder status;
Prohibits passing on to third parties the costs of remedying prior improper foreclosures or absence of recorded assignments;
Prohibits “junk fees” (for goods or services not performed) tacked on during foreclosure and prohibits bribes, referral and similar fees for foreclosure business; and
Requires recording of assignment establishing the creditor as present holder of the mortgage before it can foreclose on the property.
A violation of this legislation would constitute a violation of the Massachusetts Consumer Protection Act, Chapter 93A which carries triple damages and attorneys fees.
Massachusetts Secretary of State William Galvin filed legislation last Friday to give the Land Court authority to create a special master to deal with foreclosures that may have occurred improperly. Anyone seeking to challenge the legitimacy of a foreclosure would have one year to file a lawsuit in the court.
Galvin’s bill follows a Supreme Judicial Court decision in U.S. Bank v. Ibanez, upholding a 2009 Land Court ruling that a bank or lender must have proper documentation proving it holds a title before foreclosing on a home.
“It’s opened the door to anyone that wants to question a foreclosure that’s already moved forward,” Galvin said of the decision. As the secretary of state, Galvin is the state’s register of deeds. Galvin’s bill will go to the Legislature for debate.
The special court could play host to homeowners who purchased a foreclosed home staking claim against a former homeowner who may have faced an improper foreclosure. Galvin pointed out that about 40,000 foreclosures have taken place in Massachusetts since 2006.
“I doubt that half of them are going to be involved in this,” Galvin said. “I don’t know if it’s 5 percent. But if it’s 5 percent, that’s 2,000 properties.”
Depending on the numbers of foreclosure affected, this may be a step in the right direction–as long as homeowners are able to obtain clear title and get reimbursement of any out of pocket expenses dealing with a problem they didn’t create. As with any special court or master, there’s always a short statute of limitations imposed. So we’ll keep an eye out on that.
It’s been awhile since we had one of our mortgage guest bloggers here, and there’s been a number of recent changes and news in the mortgage industry. Today we have David Gaffin from Greenpark Mortgage talking about rising borrower costs for those with less than stellar credit scores (i.e., the vast majority of folks). Tomorrow, we’ll have Brian Cav of Smarterborrowing.com talking about current interest rates.
Fannie To Increase Borrower Costs
David Gaffin, Greenpark Mortgage
Fannie Mae recently announced that it will be increasing the charges for Loans with Certain Credit Score/LTV Combinations and Loans with Subordinate Financing. Known as Loan Level Price Adjustment or LLPAs, the theory is that loans with higher loan to value ratios and borrowers with less than perfect credit scores represent a higher risk of default to Fannie Mae. As such, Fannie is charging these borrower’s a premium, which will translate into a higher interest rate or points to be paid at closing.
This is the latest attempt for Fannie and Freddie to become more profitable after the mortgage meltdown. Taxpayers have spent billions trying to keep these institutions afloat, and with 2011 expected to be another huge year in foreclosures, the losses will keep coming.
So what is the damage this time? Fannie and Freddie already had a hit of .75 points if you were buying a condominium with less than a 25% down payment. They have added a new hit for single family homes of at least .25 points regardless of credit score, if you are not putting down 25%. If your credit score is below 740, expect this adjustment to be higher.
These new adjustments will add at least .125% and possible more than.25% to the typical borrowers rate. If we are trying to improve the economy by allowing borrower’s to refinance to put more money in their pockets, this is not going to help.
Lending guidelines are already tight. By adding these new adjusters, the interest rates to borrower will rise and therefore they can afford less house or their refinancing opportunity is reduced.
Eventually it will smooth out, but borrower’s are already seeing the hits when they call for rate quotes. The common response is “I thought interest rates went down this week”, to which I reply, “They did but Fannie just added new risk hits to the pricing and therefore rates are higher.” Some people are skepital so I refer them to the Fannie link.
As the saying goes, “It is what it is,” and what it is just got more expensive.
Breaking News (10/18/11): The Court has issued its opinion, affirming the Land Court’s dismissal. For a full analysis, click here.
The Massachusetts Supreme Judicial Court has taken up an appeal about whether a home buyer can rightfully own a property if the bank that sold it to him didn’t have the right to foreclose on the original owner, after the U.S. Bank v. Ibanez landmark ruling a few weeks ago. This case may determine the rights of potentially thousands of innocent purchasers who bought property at foreclosure sales that have been rendered invalid after the Ibanez ruling.
The case is Bevilacqua v. Rodriguez, and can be read here. In Bevilacqua, Land Court Judge Keith Long (ironically the same judge who originally decided the Ibanez case) ruled that the buyer of property out of an invalid foreclosure has no right to bring a “quiet title” action to establish his ownership rights because he never had good title in the first place. “I have great sympathy for Mr. Bevilacqua’s situation — he was not the one who conducted the invalid foreclosure, and presumably purchased from the foreclosing entity in reliance on receiving good title — but if that was the case his proper grievance and proper remedy is against that wrongfully foreclosing entity on which he relied,” Long wrote. The net effect of the ruling is that the innocent buyer’s only remedy is to sue the foreclosing lender for damages–not a great option–or force the lender to fix the deficiencies with the original foreclosure–if that’s possible at all.
Estimating how many purchasers have been affected by Ibanez defects is difficult. There have been over 40,000 foreclosures in Massachusetts in the last 5 years, and over 12,000 last year alone, up 32% from the year before. A Boston Globe columnist recently performed a rudimentary analysis of foreclosed properties in Chelsea, and found that about 33% may have been afflicted with Ibanez-type deficiencies.
Many people who purchased homes at foreclosure sales may not even know their titles are problematic–until they try to refinance or sell. So this problem will likely take years to ultimately resolve, unless the legislature comes up with some type of solution. And these problems may go back a very long way–5 or even 10 years in the past.
Bloomberg News has a great write up about the case here. I was quoted in the Bloomberg piece about the significance of the problem:
The third-party issue has become a major one for title insurers in the state, said Richard D. Vetstein, a real-estate lawyer in Framingham, Massachusetts.
“What’s going to happen to all these people?” Vetstein said. “The people who don’t have title insurance are really in big trouble.”
The court may have left the issue of third-party buyers unaddressed in Ibanez anticipating a ruling in the Bevilacqua case, said Thomas Adams, a partner at New York law firm Paykin Krieg & Adams LLP.
“That’s a big issue to leave outstanding,” said Adams, a former analyst at bond insurer Ambac Financial Group Inc. “If Judge Long’s decision holds, then that’s a big deal.”
If you purchased property out of a foreclosure sale within the last 10 years, you should have a title examination performed to assess whether you have defective title. Needless to say, if you are considering buying property out of foreclosure (or not), these cases are the very reason why you must obtain an owner’s title insurance policy! Contact us for more information.
I read The Big Short, by Michael Lewis a few months ago. Now after the U.S. Bank v. Ibanez ruling exposed possible widespread irregularities in the mortgage securitization industry, I thought it would be a great blog topic. If you are going to read one book about the market this year, read this one.
Back in 2005, credit default swaps, Alt-A tranches, and interest-only negative-amortizing adjustable-rate sub-prime mortgages were exotic pieces of the Wall Street mortgage securitization machine. Now, and after cases like U.S. Bank v. Ibanez, we know the dark and insidious side of the industry.
The Big Short teaches us that Wall Street bankers knew as early as 2006 about the rising default rate on sub-prime mortgages but engaged in an elaborate scheme to hide that reality from ratings agencies and investors. Lewis explains that when investor demand for sub-prime mortgages outpaced inventory, Wall Street came up with “synthetic” mortgage-backed securities whose performance would mirror that of the real thing. Then the bankers conspired to inflate the price of mortgage-backed securities well into 2007, even when they knew the true value was falling, only marking them down in value after their own hedging strategies were in place. And bank CEO’s knew as much as a 5th grader about the risks their organizations were taking.
Lewis is a great storyteller. He made the sub-prime mortgage meltdown riveting by following a handful of characters and personalities who bet on the collapse of the sub-prime mortgage market, and by extension, the entire U.S. housing market. My favorite was Steve Eisman, whose profanity laced diatribes were as legendary as his repeated tirades to anyone who cared to listen that the entire sub-prime industry was a fraud and a scam.
Thinking about the book in the aftermath of the recent U.S. Bank v. Ibanez case, I am not at all surprised to witness the “foreclosure fallout” and the exposure of major flaws in the U.S. mortgage securitization industry, given how much fraud, obfuscation, and greed went into creating the U.S. sub-prime industry in the first place. Lewis ends with two young hedge fund managers pondering that they “had always sort of assumed that there was some grown-up in charge of the financial system whom they had never met; now they saw there was not.” Is there some grown-up in charge now? I often wonder…
A new Harvard report predicts a big jump in home remodeling – and with markets like Greater Boston that have lots of older homes leading the way. With the real estate market in recovery mode, a lot of folks in the last few years have put their money towards additions, in-law suites, finished basements, expanded garages, tear-downs, and other major home remodeling projects. In some cases, however, these projects require a special permit from the local zoning code. Here are some frequently asked questions about special permits under the Massachusetts Zoning Law. (I will cover variances for the next post).
Why Do I Need A Special Permit?
The most common reason why a Special Permit is necessary is that the proposed dwelling or the new addition does not meet the setback requirements set forth in the local zoning bylaw. Setbacks are buffer zones surrounding your boundary lines which provide for a “no-build zone.” For example, in the Sudbury, Mass. zoning code for the basic residential district, the side yard setback is 20 feet, the rear yard setback is 30 feet, the front yard set back is 40 feet, and the maximum structure height is 2.5 stories, or 35 feet. So if your proposed in-law suite juts into the side yard setback of 20 feet, then you will need to obtain a special permit from the zoning board of appeals (ZBA).
The other reason you may need a special permit is if your property is “non-conforming” and you wish to make a major expansion or alteration to it. “Non-conforming” means that the zoning code has changed since your home was originally built. For example, in Sudbury, the basic residence zoning district is now a minimum of nearly 1 acre. Many Sudbury homes built in the 60’s are way under 1 acre, so they are “non-conforming.” Virtually any tear-down and major reconstruction or alteration of a non-conforming property will trigger review by the building inspector and the application for a special permit from the local zoning board.
What Do I Need To Do To Get A Special Permit?
Obtaining a special permit requires a formal application to the zoning board with your plan, notice to your abutters, and the presentation of your application in front of the board at the public hearing. It is a formal legal proceeding, and can be complex giving the nature of the zoning issues and the extent of any neighborhood opposition. The chances of success rise dramatically if you have an experienced Massachusetts zoning attorney handling the zoning application. I was an associate member on the Sudbury zoning board for 9 years, and have appeared before countless boards in other towns.
What Are The Legal Requirements For A Special Permit?
The specific requirements for a special permit differ from town to town. But they all have the same general theme. Here is the Sudbury Mass. standard:
That the use is in harmony with the general purpose and intent of the bylaw;
That the use is in an appropriate location and is not detrimental to the neighborhood and does not significantly alter the character of the zoning district;
Adequate and appropriate facilities will be provided for the proper operation of the proposed use;
That the proposed use would not be detrimental or offensive to the adjoining zoning districts and neighboring properties due to the effects of lighting, odors, smoke, noise, sewage, refuse materials or other visual nuisances;
That the proposed use would not cause undue traffic congestion in the immediate area.
What Happens At The Public Hearing?
The Board Chairman will open the hearing by reading the application or legal ad into the record. The applicant and/or their attorney is then called to make their presentation to the Board. Correspondence received from other town boards and or committees is read into the record as well as any correspondence from abutters. The Board members may ask questions of the applicant. The Chairman will ask if any audience members wish to speak.
For residential additions, tear downs and the like, the board is generally concerned with the general impact, if any, to the abutters, any safety or traffic issues, stormwater runoff, septic issues, and visual issues. Early communication with your neighbors is vital to ensuring the approval of your project. Neighborhood opposition to your application will decrease the likelihood of approval. While the board is technically not supposed to be a “second architect” on the project, many board members often provide comments and suggestions about the design of the project.
After all of the input the Board may close the public portion and discuss the request among themselves. The Board typically makes a decision at the end of their deliberations.
What Happens After The Board Reaches A Decision?
Once the Board makes a final decision, it is written up and and recorded with the Town Clerk. After a 20 day appeal period, the permit is mailed to the applicant, who then files the permit with the county Registry of Deeds. A copy is forwarded to the Board of Appeals Office and the Building Department. The Building Department may not issue a building permit or occupancy permit without receiving a copy of that recorded decision.
Can I Appeal The Board’s Decision?
Yes, you may appeal the decision in the Superior Court. You must act very quickly however, as appeals must be filed within 20 days of the filing of the decision with the Town Clerk. Zoning appeals are very complex and involve the submission of evidence at a trial before a Superior Court judge. It’s not something that should be undertaken without an attorney.
Richard D. Vetstein, Esq. is an experienced Massachusetts Zoning Attorney, who formerly sat on the Sudbury, Mass. Zoning Board of Appeals. Attorney Vetstein handles zoning matters across the state including the Metrowest towns of Framingham, Natick, Wayland, Weston, Ashland, Sudbury, Wellesley, Northborough, Southborough and Westborough. He can be reached at[email protected]or 508-620-5352.
On January 7, 2011, the Supreme Judicial Court (SJC) rendered its decision in the U.S. Bank v. Ibanez case. Before discussing the Court’s decision, here is a brief review of the procedural history of the case.
The Land Court’s decision in the Ibanez case and its two consolidated cases had created a conflict with the Massachusetts Real Estate Bar Association’s Title Standard #58 and its underlying rationale. Pursuant to the title standard, a title is not defective by reason of “The recording of an assignment of Mortgage executed either prior, or subsequent, to foreclosure where said Mortgage has been foreclosed, of record, by the Assignee.” In a nutshell, this means that if B forecloses a mortgage originally held by A, it is immaterial whether A’s assignment predates or postdates the foreclosure sale.
In Ibanez and in the other two companion cases-Rosario and Larace-the Land Court ruled on the validity of three different scenarios relating to the date of the assignment vis- a- vis the date of the first publication of the mortgagee’s sale of real estate/foreclose sale. In Rosario, the assignment was in existence and in recordable form (although not recorded) at the time of the first publication. In Larace, the assignment was dated after the date of first publication but had an “effective date” which predated the first publication. In Ibanez, the assignment was executed after the date of first publication.
At first blush, based on the Title Standard, it would appear that all three foreclosures were valid. Unfortunately, the Land Court disagreed. In fact, the Land Court found that only the Rosario foreclosure was valid. The Land Court held that G.L. c. 244, Section 14 must be given by the “holder of the mortgage.” Failure to do so renders the “sale void as a matter of law.” As a result, the foreclosures in Ibanez and Larace were invalidated since they did not comply with the statute. The Land Court held that it is not necessary to record the assignment prior to publishing but only that it be in existence and in recordable form at such time.
The plaintiffs filed a motion to vacate the judgment. On October 14, 2009, Judge Long rendered his decision which denied the plaintiff’s motion to vacate the judgment.
The Land Court noted that in each case the bank was the only bidder and bought back at a discount from appraised value which wiped out the defendants’ equity and created a deficiency. The foreclosing mortgagees could not get title insurance. The plaintiffs suggested that there were documents that would demonstrate that pre-notice and pre-foreclosure assignments existed. The Land Court granted the plaintiffs leave to produce such documents provided they were in the form they were in at the time the foreclosure sale was noticed and conducted. The plaintiffs produced the notes and assignments in blank which are not suitable for recording since there is no assignee listed. The Land Court found that the plaintiffs’ own securitization documents showed that such assignments were required. With all available files, it took 10 months in one of the cases and 14 in the other to obtain the assignments in recordable form. Such a burden should not fall on the high bidder at the foreclosure sale. “A bidder does not expect to purchase the right to a potential lawsuit, which only entitle him or her to actually obtain the property if such lawsuit is successful.”
The plaintiffs argued that they followed “industry standards and practice.” The Land Court said that if this is true, they should seek a change in the law.
The SJC granted direct appellate review and affirmed the Land Court’s judgment. The SJC held that “We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure. As a result, they did not demonstrate that the foreclosure sales were valid to convey title to the subject properties, and their requests for a declaration of clear title were properly denied.”
The plaintiffs had the burden of proving the validity of their foreclosures. Since Massachusetts is a non-judicial foreclosure state, there must be strict compliance with the terms of the statutory power of sale. The Court noted that only “the mortgagee or his executors, administrators, successors or assigns” can exercise the statutory power of sale.
Unlike the Land Court, however, the Court continued:
“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.”
The Court ruled that possession of the note does not allow the holder to foreclose.
“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. Rather, the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment.”
The Court stated that “the mortgages securing these notes are still legal title to someone’s home or farm and must be treated as such.”
The Court was not persuaded that post-foreclosure assignments were valid pursuant to REBA Title Standard No. 58 and industry practice. The Court found that such “reliance is misplaced because this proposition is contrary to…G.L. c.244, Section 14.”
The Court rejected the warning in REBA’s amicus brief that “If the rule as announced in these decisions is not limited to prospective application, inequitable results that will cause hardship and injustice are inevitable, and will likely be widespread.”
The Court noted that its rulings are prospective only if they make a “significant change in the common law.” Such was not the case here where the law was well settled. “All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.” In a concurring opinion, this was referred to as “the utter carelessness with which the plaintiff banks documented the titles of their assets.”
As Judge Long had suggested in his decision, perhaps it is time to change the law. Since the SJC began its discussion by noting that “Massachusetts does not require a mortgage holder to obtain judicial authorization to foreclose on a mortgaged property,” and reading between the lines, one solution would be for Massachusetts to adopt judicial foreclosures. Another possibility would be to return to the earlier practice in which the Land Court/Superior Court would review and approve in writing the foreclosure documents prior to recording. Perhaps the easiest solution would be to require the plaintiff in its Complaint to Foreclose Mortgage to cite the recording information for the assignment(s) by which it became the holder rather than simply to state “Your plaintiff is the assignee and holder of a mortgage.” If the assignments did not exist, the complaint could not be filed.
I think that the problem in Ibanez is that US Bank laid out the chain of title to the mortgages on the record but then could not document the supposed assignments into it. Justice Cordy referred to this as utter carelessness. Therefore, I don’t think that reforeclosure is possible since US Bank can’t show that it was either then or now the holder.
In general, I believe that you can reforeclose under the theory that since the original foreclosure was invalid, the power of sale was never exercised.
The case stands for the proposition that the foreclosing lender must be the holder of the mortgage at the time of foreclosure. The SJC said that this is well established law and that reliance on REBA Title Standard No. 58 is misplaced as it is contrary to the law.
It will be interesting to see how “widespread” the SJC’s decision becomes.
If you would like to discuss this or any other issue, please contact me directly via email.
Harold Clarke, Esq.
New England Regional Counsel, Westcor Land Title Insurance Co.
The case certainly has national implications as the Massachusetts SJC is the first state supreme court to weigh in on the legal ramifications of widespread irregularities in the residential securitized mortgage industry. Over half of U.S. states have foreclosure laws similar to Massachusetts’ regarding the assignment of mortgages, such as California and Georgia. Other courts across the country will likely be influenced by the ruling, especially since the SJC is widely regarded as one of the most respected state supreme courts in the country.
But is the Ibanez ruling really the next Foreclosure Apocalypse?
That remains to be seen. But the answer to the question will likely rest with what has transpired under little-known, complex mortgage securitization pooling and servicing agreements, known as PSA’s. These complex agreements may unlock the key to who, if anyone, owns these non-performing mortgage loans and has the legal right to foreclose.
The Ibanez Fact Pattern: Mortgage Assignments In Blank, A Common Practice
On December 1, 2005, Antonio Ibanez took out a $103,500 loan for the purchase of property at 20 Crosby Street in Springfield, MA secured by a mortgage to the lender, Rose Mortgage, Inc. The mortgage was recorded in the county registry of deeds the following day. Several days later, Rose Mortgage executed an assignment of this mortgage in blank, that is, an assignment that did not specify the name of the assignee. The blank space in the assignment was at some point stamped with the name of Option One Mortgage Corporation (Option One) as the assignee, and that assignment was recorded in the registry of deeds on June 7, 2006. Before the recording, on January 23, 2006, Option One also executed an assignment of the Ibanez mortgage in blank.
Option One then assigned the Ibanez mortgage to Lehman Brothers Bank, FSB, which assigned it to Lehman Brothers Holdings Inc., which then assigned it to the Structured Asset Securities Corporation, which then assigned the mortgage, pooled with approximately 1,220 other mortgage loans, to U.S. Bank, as trustee for the Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2006-Z. With this last assignment, the Ibanez and other loans were pooled into a trust and converted into a mortgage-backed securities pool that was bought and sold by investors.
On April 17, 2007, U.S. Bank started a foreclosure proceeding in Massachusetts state court. Although Massachusetts requires foreclosing lenders to follow the Soldier’s and Sailor’s Servicemember’s Act to ensure the debtor is not in the military, it is considered a non-judicial foreclosure state. In the foreclosure complaint, U.S. Bank represented that it was the “owner (or assignee) and holder” of the Ibanez mortgage. At the foreclosure sale on July 5, 2007, the Ibanez property was purchased by U.S. Bank, as trustee for the securitization trust, for $94,350, a value significantly less than the outstanding debt and the estimated market value of the property.
On September 2, 2008–14 months after the foreclosure sale was completed – U.S. Bank obtained an assignment of the Ibanez mortgage.
The major problem was that as the time U.S. Bank initiated the foreclosure proceeding, it did not possess (and could not produce evidence of) a legally effective mortgage assignment evidencing that it held the Ibanez mortgage.
Pooling and Servicing Agreements are part of the complex mortgage securitization lending agreements. As one securitization expert explains, a Pooling and Servicing Agreement is the legal document creating a residential mortgage backed securitized trust. The PSA also establishes some mandatory rules and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the securitized trusts which hold the millions of bundles of mortgage loans.
The Ibanez ruling clearly invalidates a common practice in the sub-prime mortgage securitization industry of assigning the mortgage in blank and not recording it until after the foreclosure process has started. The Court held that there must be evidence of a valid assignment of the mortgage at the time the foreclosure process starts which would establish the current ownership of the mortgage.
Left open by the Court was what evidence would suffice to establish such ownership, specifically referencing PSA’s:
“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.”
This language opens the door for Massachusetts foreclosing lenders to move ahead with foreclosures and cure title defects by using PSA’s to prove proper assignment of the mortgage loans. That is, if they can produce proper documentation that the defaulting mortgage was actually transferred into the pool and assigned to the end-holder before the initiation of foreclosure proceedings. Whether lenders can do this is another story.
Have Lenders Complied With The PSA’s?
The major problem for banks is mounting evidence is that originating lenders like Countrywide and Bank of America never transferred a vast number of loans into the securitized trusts in the first place. Josh Rosner, a well respected financial analyst, issued a client advisory in October, advising of widespread violations of pooling and servicing agreements on mortgages. Mr. Rosner counseled that although PSA’s require transfer of the promissory notes into the securitized trusts, that hardly ever occurred in the white hot run-up of securitized loans in the last decade. He also says that the mortgage assignments which must accompany each note are routinely ignored or left blank. (This was the major problem in the Ibanez case).
Mr. Rosner said:
“We believe nearly every single loan transferred was transferred to (securitized trusts) in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the (securitized trusts) as required by the PSA.”
Mr. Rosner concludes in this chilling statement:
There have been a large numbers of foreclosure proceedings where, because of improper assignments, the trust has been unable to demonstrate the right to foreclose. It is thus that we raised concern about the transfer “in blank name.” We do believe it likely the rush to move large volumes of loans may well have resulted in operational failures in the “true sale” process by some selling firms and trustees. Were this “missing assignment” problem, which we are witnessing in individual foreclosure proceedings, to be found to have resulted from widespread failure of issuers and trusts to properly transfer rights there would be appear to be a strong legal basis for the calling into question securitizations.
“It may mean investors who think they bought mortgage- backed securities bought securities that aren’t backed by anything,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California. Well, that’s already happened. Check out this lawsuit by MBIA Insurance against Credit Suisse 0ver a bad securitization loan deal.
Using the Ibanez case as a guide, CNBC.com Senior Editor, John Carney wrote a humorous yet ominous hypothetical conversation between U.S. Bank, the servicer, and Option One:
US Bank dude: “Hey, can I speak to whoever it is who is handling the Ibanez mortgage?”
Option One guy (after some delay): “No one handles that mortgage. We sold it five years ago to Lehman and closed the file.”
US Bank: “Right. Okay. Well, I need you to find someone who will execute an assignment of the mortgage to me.”
Option One: “First of all, no one who handled that mortgage still works here. You might have heard about the mortgage meltdown, right? Second, we sold it to Lehman, according to the file.”
US Bank: “Right. But I bought it from Lehman.”
Option One: “So get the assignment from Lehman.”
US Bank: “They’re an empty company that is in bankruptcy.”
Option One: “I’ve heard about that. Thanks for the news.”
US Bank: “So I need you to execute the assignment.”
Option One: “First of all, you’re going to have to show me that you bought the loan from Lehman. Second, I need to talk to legal to make sure I can assign a mortgage to someone we never dealt with. Third, how much are you willing to pay me to do all this?”
US Bank: “Pay you? I already own the mortgage.”
Option One: “The mortgage we sold to Lehman. If Lehman asks for the assignment, we’ll do it as part of that deal. But, as far as I can tell, I don’t owe you anything. If you want an assignment, you’re going to at least be paying the legal bills for the legal opinion that says it’s okay for us to do this.”
US Bank: “You don’t have to be an [expletive deleted] about this.”
Option One: “I also don’t have to give you an assignment.”
Now take that scenario, and multiple it by a factor of 10,000 or 50,000 or 100,000….see what we are talking about here? As Georgetown Law Professor Adam Levitan so artfully commented, “deal design was fine, deal execution was terrible.”
Before the Ibanez ruling came down Bloomberg News said the best scenario is that the disputes are deemed as legal technicalities, which would cause a one-year delay in foreclosures. In the medium case, years of litigation will ensue. In the worst case, the problem becomes systemic, causing “the mortgage market to grind to a halt as title insurers refuse to insure mortgages involving existing homes.”
Well, we now know from the Ibanez decision that this is hardly a “legal technicality.” So we are in the medium or worst case scenarios.
For those thousands (or millions?) of defaulted loans which were “assigned in blank,” I’m simply not sure if or how mortgage lenders are going to be able to cure the title defects they created. It’s going to take some major effort and creative lawyering, that’s for sure.
In some cases, I’m afraid, these problems may be fatal. That is, once U.S. Bank, for example, obtained a mortgage assignment executed and effective after the start of the foreclosure, which the SJC said was no good, they cannot then go back and re-create a new assignment dated prior to the foreclosure. That’s called back-dating, and would be fraudulent. And there’s also the issue of all these original promissory notes which were never transferred. Where are those? In some dingy warehouse in Texas. Good luck finding them.
Rather scary, huh?
Don’t Believe The Hype? Proceed At Your Own Peril
Not all investment analysts, however, expect financial chaos. The controversy may cause a six-month delay in foreclosures and “have a muted effect on valuation” of about $154 billion of mortgage-backed securities, Laurie Goodman, senior managing director of Amherst Securities Group LP in New York, wrote in a note to investors. “Servicers will incur high costs both from re-processing loans that are in the process of foreclosure as well as from defending themselves in litigations,” Goodman wrote. “And investors definitely need to question the cash flows they are receiving on private-label MBS, to ascertain that they are not paying for expenses that rightfully belong to servicers.”
There are several important and unanswered questions which remain. How many pools of mortgage loans are affected by the “assignment in blank” and related irregularities in the servicing pools? How many pools are affected by the missing or lost promissory notes? How many pools are affected by assignment executed after the foreclosure started? Will California and other states with huge foreclosure rates follow the Ibanez ruling?
“[W]hat is surprising about these cases is … the utter carelessness with which the plaintiff banks documented the titles to their assets.” –Justice Robert Cordy, Massachusetts Supreme Judicial Court
Today, the Massachusetts Supreme Judicial Court (SJC) ruled against foreclosing lenders and those who purchased foreclosed properties in Massachusetts in the controversial U.S. Bank v. Ibanez case. Here is the link for the decision. I’ve posted the decision below, and I’ve done a video blog embedded below.
Background
For those new to the case, the problem the Court dealt with in this case is the validity of foreclosures when the mortgages are part of securitized mortgage lending pools. When mortgages were bundled and packaged to Wall Street investors, the ownership of mortgage loans were divided and freely transferred numerous times on the lenders’ books. But the mortgage loan documentation actually on file at the Registry of Deeds often lagged far behind.
In the Ibanez case, the mortgage assignment, which was executed in blank, was not recorded until over a year after the foreclosure process had started. This was a fairly common practice in Massachusetts, and I suspect across the U.S. Mr. Ibanez, the distressed homeowner, challenged the validity of the foreclosure, arguing that U.S. Bank had no standing to foreclose because it lacked any evidence of ownership ofthe mortgage and the loan at the time it started the foreclosure.
Mr. Ibanez won his case in the lower court in 2009, and due to the importance of the issue, the Massachusetts Supreme Judicial Court took the case on direct appeal.
The SJC Ruling: Lenders Must Prove Ownership When They Foreclose
The SJC’s ruling can be summed up by Justice Cordy’s concurring opinion:
“The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court’s opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.”
The Court’s ruling appears rather elementary: you need to own the mortgage before you can foreclose. But it’s become much more complicated with the proliferation of mortgage backed securities (MBS’s) –which constitute 60% or more of the entire U.S. mortgage market. The Court has held unequivocally that the common industry practice of assigning a mortgage “in blank” — meaning without specifying to whom the mortgage would be assigned until after the fact — does not constitute a proper assignment, at least in Massachusetts.
My Analysis
Winners: Distressed homeowners facing foreclosure
Losers: Foreclosing lenders, people who purchased foreclosed homes with this type of title defect, foreclosure attorneys, and title insurance companies.
Despite pleas from innocent buyers of foreclosed properties and my own predictions, the decision was applied retroactively, so this will hurt Massachusetts homeowners who bought defective foreclosure properties.
If you own a foreclosed home with an “Ibanez” title issue, I’m afraid to say that you do not own your home anymore. The previous owner who was foreclosed upon owns it again. This is a mess.
The opinion is a scathing indictment of the securitized mortgage lending system and its non-compliance with Massachusetts foreclosure law. Justice Cordy, a former big firm corporate lawyer, chastised lenders and their Wall Street lawyers for “the utter carelessness with which the plaintiff banks documented the titles to their assets.”
If you purchased a foreclosure property with an “Ibanez” title defect, and you do not have title insurance, you are in trouble. You may not be able to sell or refinance your home for quite a long time, if ever. Recourse would be against the foreclosing banks, the foreclosing attorneys. Or you could attempt to get a deed from the previous owner. Re-doing the original foreclosure is also an option but with complications.
If you purchased a foreclosure property and you have an owner’s title insurance policy, contact the title company right away.
The decision carved out some room so that mortgages with compliant securitization documents may be able to survive the ruling. This will shake out in the months to come. A major problem with this case was that the lenders weren’t able to produce the schedules of the securitization documents showing that the two mortgages in question were part of the securitization pool. Why, I have no idea.
The decision opens the door for foreclosing lenders to prove ownership with proper securitized documents. There will be further litigation on this. Furthermore, since the Land Court’s decision in 2009, many lenders have already re-done foreclosures and title insurance companies have taken other steps to cure the title defects.
We don’t know how other state court’s will react to this ruling. The SJC is one of the most well respected state supreme courts in the country. This decision was well-reasoned and I believe correct given that the lenders couldn’t even produce any admissible evidence they held the mortgages. The ruling will certainly be followed in states (such as California) operating under a non-judicial foreclosure system such as Massachusetts.
Watch for class actions against foreclosing lenders, the attorneys who drafted the securitization loan documents and foreclosing attorneys. Investors of mortgage backed securities (MBS) will also be exploring their legal options against the trusts and servicers of the mortgage pools.
The banking sector has already dropped some 5% today (1.7.11), showing that this ruling has sufficiently spooked investors.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
