Massachusetts foreclosure court rulings

Foreclosure2.jpgRuling Enables Foreclosed Owner to Live in Premises For Over 6 Years, Leaving New Owner with Defective Title

In a decision which could affect how title examiners and title insurance companies underwrite title to foreclosed properties, the Supreme Judicial Court has ruled that a lender’s defective notice of default is grounds to void and nullify a foreclosure sale — even after the property was purchased at auction by a third party without knowledge of the problem. The decision is Pinti v. Emigrant Mortgage Co. Inc. (SJC-July 17, 2015).

The defective aspect of the default notice was relatively minor. The notice was required to say that the borrower had the right to bring “a court action” to challenge the default or foreclosure. The actual notice instead referenced a “lawsuit for foreclosure and sale.” The problem is that in Massachusetts there is really no such thing as a lawsuit for foreclosure, because we are a non-judicial foreclosure state. In order to challenge a foreclosure, a borrower must bring an injunction proceeding in Superior Court. Over this minor discrepancy, the Court throw out a 3 year old foreclosure, leaving the subsequent buyer with defective title.

“This ruling is yet another reason why it’s absolutely critical to obtain owner’s title insurance for any home purchase–especially a foreclosure property.”

This ruling had a disastrous impact on the foreclosing lender and the buyer of the property at foreclosure (and his title insurance company, presumably). The borrower, who was represented by Greater Boston Legal Services, stopped paying her mortgage six years ago in 2009, and the lender foreclosed in 2012. A third party purchased the property (with the borrower in occupancy) shortly thereafter, then commenced eviction proceedings. It appears that the borrower has been able to live in the premises for the entirety of the litigation, presumably mortgage payment free. After this ruling, the lender will need to re-start foreclosure proceedings from square one.

Change In Title Exam Practices?

In a typical title examination involving a previously foreclosed property, the examiner and attorney will only look at the foreclosure notices and “green cards” — the certified mail foreclosure notices. In light of this ruling, the examiner may be required to look back even further to the default notices sent by the lender (which are not recorded with the registry of deeds) and ensure compliance with the mortgage and loan documents. Attorneys should consult their title companies for guidance on this ruling. (The ruling’s effect is prospective only; a title insurance company that I work with has already stated that they will not be changing their underwriting standards after Pinti).

Effect On Foreclosures

The SJC’s reasoning for requiring strict compliance with the default notice provisions in the mortgage was based on the fact that Massachusetts uses a non-judicial foreclosure process. That is, lenders do not need a judge’s approval to start foreclosure (with the except that they need Land Court approval that the borrower is not in the armed services). Accordingly, even the most hyper-technical defect in a default notice by the lender could render a foreclosure void.

Following a long series of pro-borrower rulings starting with the historic U.S. v. Ibanez decision, the SJC’s decision in this case is yet another cautionary tale to lenders that they must dot their “i’s” and cross their “t’s” before conducting a valid foreclosure sale.

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Impact: Foreclosure Will Be Harder to Challenge

The Massachusetts Supreme Judicial Court’s (SJC) ruling in Federal National Mortgage Ass’n v. Hendricks just came down, and it’s good news for the foreclosure industry and bad news for distressed homeowners.

This case had the potential to change Massachusetts foreclosure practice, but the SJC rejected the challenge. The borrower, Oliver Hendricks, challenged the validity of the long-standing Massachusetts statutory form foreclosure affidavit which provided that the foreclosing lender has complied with the foreclosure laws. Rejecting the borrower’s claim that the affidavit was essentially robo-signed, the Court upheld the statutory form affidavit.

The case arose when Fannie Mae was attempting to evict Hendricks after the foreclosure. The court’s ruling provides that foreclosing lenders need only submit a valid foreclosure deed and statutory form affidavit during an eviction proceeding; the burden of proof then shifts to the borrower to come up with evidence of foreclosure irregularities. This has proven very difficult for distressed homeowners and their attorneys.

After this decision (and a recent Appeals Court ruling taking away a common eviction defense for post-eviction squatters), foreclosures and post-foreclosure evictions will be much harder to challenge. Also, we’ll likely see an acceleration of the pace of foreclosures, evictions of holdover borrowers, and a shrinking inventory of foreclosed and REO properties. Although distressed homeowners may be worse off, the overall real estate market stands to improve due to this ruling.

I’ll have more analysis later. The decision is embedded below. Also below is a video of the defendant, Olive Hendricks, speaking about his predicament produced by CityLife.

FNMA v. Hendricks

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Mass. AG Martha Coakley Credit: Reuters

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” — Charles Dickens, A Tale of Two Cities

AG Martha Coakley Files Major Civil Action Against Big Banks

First, the big news. Attorney General Martha Coakley has filed a huge consumer protection lawsuit over wrongful foreclosures against the top 5 U.S. lenders, Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial. Coakley also names Mortgage Electronic Registration System, or MERS, the electronic mortgage registration system which proliferated during the securitization boom of the last decade. The lawsuit said it sought “to hold multiple banks accountable for their rampant violations of Massachusetts law and associated unfair and deceptive conduct amidst the foreclosure crisis that has gripped Massachusetts and the nation since 2007.” Specifically, Coakley blames the banks for not complying with the U.S. Bank v. Ibanez decision in foreclosing mortgages without evidence of legal ownership of the underlying debt, improper statutory foreclosure notices and illegal “robo-signing.”

I’m sure Coakley will be able to extract a sizable settlement from the banks, but the question remains, what about the foreclosure mess and toxic titles left in its wake? I hope Coakley seriously considers setting up a toxic title monetary fund to assist homeowners who lack title insurance with clearing their titles due to bungled foreclosures in their chain of title.

Here is a link to the AG’s Complaint.

Culhane v. Aurora Loan Servicers: Federal Judge William Young Grapples With Legality Of MERS System

While AG Coakley was putting the finishing touches on her lawsuit, across the way at the Moakley Courthouse at Fan Pier, U.S. District Judge William G. Young and his cadre of law clerks were attempting to work their way through the legal maze which is the MERS (Mortgage Electronic Registration System) system. The case is Culhane v. Aurora Loan Services of Nebraska. We’ve written about MERS quite a bit here on the blog.

I can say with confidence that Judge Young is one of the smartest jurists on the federal bench and in the Commonwealth. I know this first-hand because I clerked for him in law school.

It took him 59 pages to sort though the myriad of legal issues implicated by the complex MERS system, and he had some very choice (and funny) remarks about the system:

“MERS is the Wikipedia of Land Registration Systems.” . . . “A MERS certifying officer is more akin to an Admiral in the Georgia navy or a Kentucky Colonel with benefits than he is to any genuine financial officer.”

Judge William G. Young

But ultimately, Judge Young concluded that MERS did not run afoul of Massachusetts law, by the “thinnest of venires.” So there you have it. MERS is kosher in Massachusetts, at least according to Judge Young.

However, Judge Young’s ruling came with some important caveats. First, he held that MERS does not have the power to foreclose in its own name. This is no longer an issue as MERS new policy is not to foreclosure in its name. But what about prior foreclosures in MERS’ name? Are those still considered valid?

Second, in accordance with Mass. Gen. Laws ch. 183, sec. 54B, he ruled that assignments from MERS’ vice presidents to loan servicers or holders are valid despite the signer’s lack of personal knowledge or proof of actual authority. This is a direct contradiction with AG Coakley’s claim that the MERS assignments are invalid.

Lastly, the most important aspect of Judge Young’s ruling was his agreement that foreclosing lenders must hold both the loan (promissory note) and the mortgage together in unity, to foreclose, following the controversial Superior Court opinion in Eaton v. FNMA which is now on appeal with the Supreme Judicial Court. However, Judge Young added an important distinction to this rule, saying that that loan servicers could foreclose in their names where the loan is held in a pooled securitized trust, provided they otherwise comply with Massachusetts foreclosure law. This is a very important distinction as a fair amount of foreclosures are brought in the name of the loan servicer. I’m not so sure Judge Young got this one right as a loan servicer rarely if ever holds the note as assignee, as Professor Adam Levitin notes, but the ruling certainly assists the industry.

So all eyes are back on the SJC awaiting its ruling in the Eaton case which could have even far more impact than the Ibanez decision. Of course, these two events underscore that foreclosures are still a mess crying out for legislative help (which hasn’t come at all), and the crucial importance of title insurance, which all buyers should elect at their closings.

I’ve done a quick video analysis and embedded Judge Young’s opinion below.

Culhane v. Aurora Loan Services

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