Averting The Apocalypse: Foreclosing Lenders Avoid Disaster and Given More Options To Foreclose In Eaton v. Fannie Mae Case

by Rich Vetstein on June 22, 2012 · 14 comments

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages, Title Defects, Title Insurance

Score One For Lenders and Mortgage Servicers In Long-Awaited Eaton v. Fannie Mae Case

The Massachusetts real estate community has been waiting 8 long months for a decision from the Massachusetts Supreme Judicial Court (SJC) in the much anticipated Eaton v. Federal National Mortgage Association (link) case. The decision came down June 22, and now that the dust has settled, I don’t think there is any question that lenders and the title community have been given a judicial Maalox. ((Some smart foreclosure defense folks disagree with me, but I’m confident in my analysis.))

The SJC held that lenders must establish they hold both the promissory note (indebtedness) and mortgage (a major problem for securitized or MERS mortgages where the note and mortgage are split between securitized trust and servicer). However, responding to pleas from the real estate bar, the Court declined to apply the new rule retroactively, thereby averting the Apocalyptic scenario where thousands of foreclosure titles would have been called into question. This would have been disastrous for folks who purchased distressed and foreclosed properties.

Even better, the Court outlined new procedures, including filing a statutory affidavit, to ensure that foreclosures are fair to borrowers going forward. The ruling gave lenders and the foreclosure industry a huge pass for past errors, and will clear the way for foreclosures to accelerate and run their course in Massachusetts and possibly other states if this case is followed. Let’s break it down.

Background: Borrower Used “Produce the Note” Defense To Stop Foreclosure

As with many sub-prime mortgage borrowers, Henrietta Eaton had defaulted on her mortgage to Green Tree Mortgage. This was a MERS mortgage (Mortgage Electronic Registration System) originally granted to BankUnited then assigned to Green Tree.

Ms. Eaton was able to obtain an injunction from the lower Superior Court halting her eviction on the grounds that Green Tree did not possess the promissory note underlying the mortgage when the foreclosure occurred. This is the “produce the note” defense and has been gaining steam across the country. Superior Court Judge Francis McIntyre bought into that argument, and stopped the foreclosure. Given the importance of the case, the Supreme Judicial Court granted direct appellate review.

FHFA Files Amicus Brief and SJC Asks For More Guidance

This case garnered substantial local and national attention from the lending, title and real estate community on one side, and housing advocates on the other side. Notably, the Obama Administration’s Federal Housing Finance Agency filed a rare friend-of-the-court brief in a state court proceeding, arguing for a ruling in favor of lenders. Spirited oral arguments were held back in October which I briefed here.

In January, when a decision was expected, the Court surprisingly asked the parties for additional briefing on whether a decision requiring unity of the promissory note and mortgage would cloud real estate titles. This was the apocalyptic scenario that the real estate bar and title community urged the Court to avoid. (The Court listened, as I’ll explained below).

 The Opinion: Unity Endorsed, A Foreclosing Lender Must “Hold” Both Note & Mortgage

The first issue considered by the court was the fundamental question of “unity” urged by the Eaton side: whether a foreclosing mortgagee must hold both the promissory note (underlying indebtedness) and the mortgage in order to foreclose. After reviewing Massachusetts common law going back to the 1800’s, the Court answered yes there must be unity, reasoning that a “naked” mortgagee (a holder of a mortgage without any rights to the underlying indebtedness) cannot foreclose because, essentially, there is nothing to foreclose. If the Court stopped there, lenders and MERS would have been in big trouble. But, as outlined below, the Court significantly limited the effect of this decision.

Disaster Averted: Ruling Given Prospective Effect

Swayed by the arguments from the Massachusetts Real Estate Bar Association that retroactive application of a new rule would wreak havoc with existing real estate titles in Massachusetts, the SJC took the rare step of applying its ruling prospectively only. As Professor Adam Levitin (who drafted an amicus brief) noted on his blog, this “means that past foreclosures cannot be reopened because of this case, so the financial services industry just dodged billions in liability for wrongful foreclosures and evictions, and the title insurance industry did as well.” So going forward, lenders must establish unity of both note and mortgage, but past foreclosures are immune from challenge.

MERS System Given Blessing?

Ms. Eaton’s mortgage was a MERS (Mortgage Electronic Registration System) mortgage. MERS is a private system created by the largest national lenders and title companies to track assignments and ownership of loans as they are bought and sold in the secondary mortgage market. MERS has come under fire from distressed homeowners and registrars of deeds (especially our own Essex County Registrar John O’Brien) for robo-signing and bungled foreclosures. Although the Court did not specifically rule on the validity of the MERS system, the decision cited several new MERS policies and said that lenders who follow these new policies will likely be in compliance with the court’s holding. So MERS will continue doing business in Massachusetts for the foreseeable future.

Make Way For the “Eaton” Affidavit

The most important aspects of the Eaton ruling, in my opinion, are what came after the two “headline” rulings above. First, the Court made the explicit point that lenders do not have to physically possess both note and mortgage to be deemed a “holder” able to foreclose. This is huge given the pandemic paperwork deficiencies common with securitized mortgage trusts.

Second, the court also stated in a very important footnote that it will “permit one who, although not the note holder himself, acts as the authorized agent of the note holder, to stand “in the shoes” of the “mortgagee” as the term is used in these [foreclosure statute] provisions.” This footnote opens the door wide open for servicers and MERS to establish that they are authorized to foreclose, and acting on behalf of, the securitized trusts who hold legal title to the mortgages.

Lastly, the court approved the use of a statutory affidavit filed at the county registry of deeds in which the note holder or mortgage servicer confirms that it either holds the promissory note or is acting on behalf of the note-holder. We will surely be seeing these “Eaton” affidavits being prepared and recorded in connection with foreclosures.

For guidance as to how title insurance companies are going to insure foreclosure titles after Eaton, please see this helpful bulletin by Chicago and Commonwealth Land Title Companies. 

Potential Bad News For U.S. Bank v. Ibanez Defect Victims

The Court’s ruling may be bad news for those property owners stuck with defective title issue stemming from a botched foreclosure under the seminal U.S. Bank v. Ibanez case. Last year, the Court, in Bevilacqua v. Rodriguez, suggested that owners could attempt to put their chains of title back together and conduct new foreclosure sales in their name to clear their titles. The legal reasoning behind this remedy is rather complex, but essentially it says that the current owner would be granted the right to foreclosure by virtue of holding an “equitable assignment” of the mortgage foreclosed upon. The Eaton v. Fannie Mae ruling, however, may have killed that remedy because the current owner now needs to hold both the promissory note and the mortgage. Ibanez titles remain toxic, and I am hearing that title insurers who are on the hook for them are not even willing to try to fix them until a legislative fix.

What’s Next?

As a real estate and title attorney, what I appreciate about this decision is that the SJC took into account the disastrous effect a retroactive rule would have on past titles (now held by innocent third party purchasers) and came up with new ground rules for foreclosing lenders to follow going forward. It’s like the court said “what’s done is done, now let’s move forward doing it the ‘right’ way.” We will definitely see foreclosures that were in a holding pattern resume again. On the closing side, when I am reviewing a title with a past foreclosure, my client and I can sleep better knowing that the risk of a defective title just got a reduced substantially. This is good for the housing market and it makes more properties marketable.

However, this is not the end of foreclosure litigation in Massachusetts. As with most landmark cases pronouncing a new rule of law, subsequent litigation to clarify what the court meant is likely to follow in this case. Some remaining unanswered questions include:

  • Is the produce the note defense truly dead for previously completed foreclosures–even where promissory notes are lost and not produced?
  • If challenged, what further documentation, if any, will suffice to establish agency for MERS and mortgage servicers of mortgages held in securitized trusts.
  • Will borrowers be able to challenge new “Eaton” affidavits which appear to be fraudulent or robo-signed?

All things considered, I will agree with Prof. Levitin who opined: “In the immediate term, I’d score the case as a major victory for the financial services industry, which avoided liability for its failure to comply with state law foreclosure requirements. Going forward, however, things are more complicated.”


Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. He can be reached by email at info@vetsteinlawgroup.com or 508-620-5352.

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  • Bob Marley

    Well, I must say that I for one am satisfied with the ruling
    in Eaton except to the extent that the criminals were let of the hook for their
    prior bad acts and we did not get a retroactive ruling. It would seem that the
    Court felt that those illegally foreclosed upon must suffer for the greater

    However, I must agree with the Court in the retroactive application,
    as this issue is not specifically on the books. I understand that sometimes the
    cure is worse than the disease and that we must reach a delicate balance not to
    further the destruction of our economy and our Nation. However, the Court could
    have gone either way. The court aired on the side of caution.

    With that said, as the Court pointed out, the Citizens of Massachusetts
    have recourse in the eviction process. The focus in that arena should be the
    fraud in the evidence submitted by the foreclosing entities. Whereas they
    falsely attempt to establish standing as the lawful party with the enforceable right
    to foreclose under the terms of the Mortgage Contract—which I might add are
    void as a matter of law— whereas all the
    Mortgages entered into since 1999 are fraught with fraud and are all fraud in
    the factum and execution.

    For many reasons, the Note irrevocably separated (bifurcated)
    from the Mortgage in a securitized mortgage. They can never be rejoined.

    More importantly, New York Law prohibits any entity other than
    the Trustee for the trust to hold in trust the Mortgage.

    As the Court correctly pointed out, when a mortgage assigned
    to a non-MERS member, MERS must file an assignment and deactivate the mortgage
    from its system. I raised this very
    issue in my case but it was completely ignored, as were many issues I raised.

    Trusts are not MERS members and under MERS own rules, once a
    mortgage is registered on MERS, the parties have 14-days to create an option 2 beneficial
    rights transfer to the Trust and then within 30-days the Trustee has to either
    except or deny the transfer. This rule coincides
    with the PSA (the governing trust document) § 2.01 and IRS 860A-G.

    MERS could never legally maintain the Right to assign
    anything pursuant to the Trust Instruments. After the mortgage securitized,
    MERS lost any right it might have had (which rights are still open for debate) and
    after the 30-day period the mortgage had to deactivate. This process never took
    place as all the late assignments make very clear.

    Moving forward, The Homeowners of Massachusetts are the
    winners here and the Court gave the Banksters a gift for prior dab acts. The Ruling by the High Court puts to bed all
    the erroneous rulings in the Federal Court as it relates to what a mortgagee is
    and who can foreclose. Now the litmus test must be in the evidence.

    The saddest aspect of our district court is that we only
    have two judges (Judge Young and Judge Saris) who have not forgotten that they
    have a duty to protect the week from the mighty and their abuses. Federal
    Judges must adhere to our State Law and State Court interpretation of those
    laws. We shall see what happens next. Perhaps now, the citizens of Massachusetts
    will be given discovery an afforded evidentiary hearings to determine standing
    when the Banksters have our cases removed to the federal forum for summary
    dismissal. Further, do not forget that in January of this year, the federal
    removal statute was amended and a federal judge must separate out all state
    court claims and remand them back to state court. Read the law.

    Again, I give praise to My High Court for protecting the
    citizens of our state and enforcing the rule of law. This ruling makes it clear
    that our Court is not corrupted by the influences of high finance and corporate
    and political corruption.

    I am a son of Massachusetts and synonymous with it, for better
    or worse; I was born here and will die here and I care about my state and the
    welfare of the people in it and more importantly, I care about the welfare and
    future of our children of which I have five.

    The equity stolen from the citizens of Massachusetts and of
    the United States must be returned or our economy will never recover and our
    children will suffer the effects of this criminal enterprise’ outrageous Ponzi
    scheme (asset securitization) for a lifetime.

    It is our duty to preserve our liberties for the next
    generation of American Citizens. Otherwise,
    history will look upon this bleak hour in our society and we all, as complete
    and utter failures as protectors of life, liberty and the pursuit of happiness
    and find us all derelict in our duty to protect our liberties for the next

    Lastly, now that the door has been open for affidavits to be
    filed in the Registry of Deeds, we all know what that means, I would flood the
    BBO with complaints against any attorney who knowingly files a false affidavit,
    and they all know they are fraudulent if it is a securitized mortgage. I would
    file a criminal complaint in state court under M.G.L. c. 266 §
    35A and G.L. c. 267 §§ 1 and 5 against the attorney and the criminal Banksters.
    You have the right to walk into the
    criminal clerk’s office and file a criminal complaint. If enough criminal
    complaints are file, the DA’s will not be able to ignore them for long. Make sure you seek the Milestones Report and
    the Min Summary Report from MERS which clearly evidences no assignment to the
    Trust ever took place as required by law.

    The Battle Rages on!

    Bob Marley

  • Uri

    You left out the UCC part of the analysis. The Court clearly confined its opinion and judgment to the foreclosure statute, MGL c. 244. It is the interpretation of that statute that is prospective only. In footnote 26, the Court signaled its view that an analysis under the UCC would turn out similar to its analysis of the foreclosure statute. There is no reason to expect that the UCC’s Article 3 enforcement provisions will be held to apply prospectively only: they are not ambiguous, and they are not real property law.

    What’s more, the UCC seems to place the burden of producing the instrument on a party bringing an action to enforce it. And Massachusetts law follows the hornbook rule “that where the facts with regard to an issue lie peculiarly in the
    knowledge of a party, that party has the burden of proving the issue.” Knowles v. Gilchrist, 362 Mass. 642, 651 (1972), quoting McCormick, Evidence (2d ed.) Section 337, p. 787. This puts the burden of proof on a party claiming to be the noteholder or an agent of the noteholder to prove the issue. Given the mortgage industry’s track record of producing phony affidavits, an affidavit will carry little evidentiary weight in a court proceeding. Foreclosers will have to produce the original notes in discovery in order to prevail.

    As an advocate for wrongfully foreclosed homeowners, I intend to continue bringing up the note issue and insisting on its production, including past foreclosures.

    • Uri, yes I should not have glossed over the UCC questions, but it remains murky and the Court clearly did not want to wade into that swamp per footnote 26. I’ve been speaking with some sophisticated commercial law attorneys who remain wary that the banks are still not going to get their paperwork in order after this decision. We’ll see. They may have to learn the hard way to produce a clear chain of title and legitimate copies or originals of notes, allonges and assignments.

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