Ibanez MERS

HomeForeclosure-main_Full.jpgBreaking News (10/19/11): SJC Rules Purchaser Of Ibanez Property Left Without Valid Title in Bevilacqua Case (click for more info)

Barely 24 hours old — the Massachusetts Supreme Judicial Court’s U.S. Bank v. Ibanez decision is already a huge national story. The high court ruled that two foreclosures of sub-prime mortgages were null and void where the lenders could not establish the chain of ownership within the securitized mortgage back securitized pools. CNN-Money calls it a “beat down” of the big banks. Reuters says it’s a “catastrophe risk” for banks. TheHuffington Post claims there’s some Obama Administration-Bank of America conspiracy in play. The ruling has spooked investors, as bank stocks were down in reaction to the ruling. In reaction to the ruling, a coalition of seven major public pension systems called on the boards of directors of Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo to immediately undertake independent examinations of the banks’ mortgage and foreclosure practices.

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.

Securitized Pooling and Servicing Agreements

Almost all sub-prime mortgages and millions of conventional mortgages originated before the mortgage meltdown in 2008 were packaged in securitized mortgage securities and sold off to Wall Street investors. Securitized mortgages currently comprise over half, or $8.9 trillion, of the $14.2 trillion in total U.S. mortgage debt outstanding.

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.

Here is a sample Pooling and Servicing Agreement. Quite complex, as you can see. Most PSA’s are supposed to be filed with the SEC by law. Here’s a guide to find your loan in a securitized PSA using the SEC system.

The Ibanez Ruling

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.

Mr. Rosner’s theory has been born out in court testimony. In a New Jersey bankruptcy case, a senior Bank of America manager admitted that Countrywide Loans routinely failed to transfer promissory notes as part of the securitization process. Countrywide, of course, went under but not after originating billions in loans.

But no one — except the banks themselves — really has a handle on how widespread these irregularities are.

Apocalypse Now?

If, in fact, there exists widespread legal failure of securitized mortgage pools, as Mr. Rosner, theorizes, then we are possibly facing the Apocalypse Scenario, calling into question the legal and financial soundness of a large portion of the U.S. securitized mortgage market. Securitized mortgages comprise over half, or $8.9 trillion, of the $14.2 trillion in total U.S. mortgage debt outstanding.

“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?

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“[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

Foreclosure2-300x225.jpgToday, 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 of the 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.

More more extensive analysis, please read my new post: Apocalypse Now? Will The Massachusetts Ibanez Case Unravel Widespread Irregularities In The Residential Securitized Mortgage Market?

Additional Press Coverage

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