Massachusetts foreclosure defense

Fifteen Minute Foreclosure Counseling Session at Gillette Stadium Deflated Borrower’s Rights

by Rich Vetstein on May 26, 2015

in FHA, Foreclosure, Housing Court, HUD, Landlord Tenant Law, Massachusetts Real Estate Law

gill08900Court Halts Eviction For Distressed Homeowner, Validity of Foreclosure In Question (Wells Fargo v. Cook, Mass. Appeals Court May 19, 2015)

In response to the foreclosure crisis, HUD enacted regulations requiring lenders to provide distressed borrowers with a meaningful opportunity to settle their FHA-insured mortgages and obtain a loan modification during a face-to-face interview. In an effort to accommodate the hundreds of Wells Fargo clients facing foreclosure in Massachusetts, the San Francisco based lender held a mass “homeowner’s workshop” at Gillette Stadium in August 2008.

Three months behind on their Mattapan mortgage, Nancy Cook and her daughter showed up to the stadium with a little over $10,000 in cash, in anticipation of signing a repayment plan. After waiting in a long line, Cook received a ticket and sat down with a bank representative. Despite HUD guidelines requiring that loan representative have actual authority to settle accounts and enter repayment plans, the Wells Fargo representative said that he was unable to accept any payments at the event. The counseling session lasted only 15 minutes, but the reprepresentative promised that Ms. Cook would receive a loan modification package in the mail.

Ms. Cook did receive a Special Forbearance Agreement in the mail, which she accepted, and made the first three payments under the agreement. When she went to make the fourth payment, Wells Fargo rejected it, claiming that Cook owed it $2000 more than the scheduled payment. Wells Fargo then issued a default notice, accelerated Cook’s debt, and foreclosed her home.

Several years after completing the foreclosure sale, Wells Fargo brought an eviction case against Cook and her daughter, who at this time were represented by lawyers from Harvard University Legal Aid. (The reason for the long delay is unclear). Boston Housing Court judge Marylou Muirhead ruled against Cook, clearing the way for her eviction.

On appeal, Appeals Court Justice Scott Kafker halted Cook’s eviction, ruling that the Housing Court judge should reconsider whether the Gillette Stadium mass counseling event complied with HUD guidelines. Justice Kafker noted that a reoccurring theme of the HUD rules is to provide personalized consideration for each homeowner. That apparently was not done, said the justice, or at least there is a dispute as to whether the mass Gillette Stadium event could satisfy that guideline.

Of particularly interest to the real estate conveyancing community, the Court held that if the lower court ultimately rules that the counseling session was insufficient, the lender could be found in noncompliance with the mortgage terms and foreclosure power of sale, and its foreclosure could be deemed defective and invalid. A court holding to this effect could potentially invalidate completed foreclosures of FHA insured mortgages over whether the lenders complied with the face-to-face meeting requirements of the HUD guidelines. Ensuring a lender’s compliance with HUD rules is not typically part of a title examiner’s scope of examination. Lenders would need to provide an affidavit certifying that all pre-foreclosure counseling requirements were complied with. Accordingly, this is yet another reason why obtaining an owner’s title insurance policy is a prudent choice for all buyers of foreclosed properties.

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Defective 150 Day Cure Notice No Defense To Foreclosure

by Rich Vetstein on November 12, 2014

in Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

HomeForeclosure-main_Full.jpg

Distressed Homeowners Take Another Hit

In another court ruling against embattled homeowners facing foreclosure, the Massachusetts Appeals Court has ruled that a defective 150 day cure notice is not a valid defense to a foreclosure sale. The case is Haskins v. Deutsche Bank (click for link to case). The ruling will make it more difficult for distressed homeowners to challenge foreclosure and could accelerate the pace of pending foreclosures.

150 Day Cure Notice

The 2010 Foreclosure Prevention Act requires that foreclosing lenders provide a borrower with a 150 day right to cure prior to starting a foreclosure proceeding. The notice must identify the current “holder” of the mortgage. Before this ruling, some trial courts had ruled that a bank’s failure to strictly comply with those requirements was sufficient grounds to halt a foreclosure sale.

In the Haskins case, the borrower challenged his foreclosure on technical grounds because the cure notice incorrectly identified the holder of the mortgage as IndyMac Mortgage Services. IndyMac was the mortgage servicer and mortgage was legally held in a securitized trust operated by Deutsche Bank.

Justice Mark Green, a former Land Court judge and former banking general counsel, recognized that today the vast majority of residential mortgages are serviced by large mortgage servicers while owned and held in securitized trusts. Rejecting the borrower’s form-over-substance argument, Justice Green ruled that as long as the borrower receives an accurate cure notice with the correct loan balance information and payment address so the borrower can pay up and cure, an erroneous identification of the actual mortgage holder should not affect the validity of the pending foreclosure.

Massachusetts foreclosure defense attorney Adam Sherwin, who represented the borrower, put up a valiant fight in this case. However, with this ruling and several recent decisions before it, foreclosure defense attorneys have suffered several setbacks in the courts, making it more difficult for distressed homeowners to challenge and stop foreclosures.

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Backdated Mortgage Assignment Comes Back To Haunt Foreclosure Lender in Juarez v. Select Portfolio

by Rich Vetstein on February 13, 2013

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

Massachusetts foreclosure defenseFederal Appeals Court Reinstates Borrower’s Wrongful Foreclosure Claim 

Noted Massachusetts foreclosure defense attorney Glenn Russell is on a roll of a lifetime, yesterday winning a rare victory on behalf of a borrower at the U.S. Court of Appeals for the First Circuit in Boston. The case is Juarez v. Select Portfolio Servicing, Inc. (11-2431) (click for opinion). It is, I believe, the first federal appellate ruling in favor of a wrongful foreclosure claimant in the First Circuit which covers the New England area, and one of the first rulings to delve into the problem of back-dated mortgage assignments.

Alleged Backdated Mortgage Assignment Proves Fatal

Melissa Juárez purchased a home in Dorchester, Massachusetts on August 5, 2005, financing it with reputed sub-prime lender New Century Mortgage. The mortgage was packaged and bundled into a real estate mortgage investment conduit (“REMIC”), a special type of trust that receives favorable tax treatment, ultimately being held by U.S. Bank, as trustee. Juárez could not afford the payments on the mortgage and defaulted. Foreclosure proceedings began in the summer of 2008, culminating in the sale of her home at an auction in October 22,2008. She claims, however, that lender did not hold the note and the mortgage at the time they began the foreclosure proceedings against her, and that the foreclosure was therefore illegal under Massachusetts mortgage law.

The problem in the case centered around the mortgage assignment into U.S. Bank, as trustee — the same problem the same bank faced in the landmark U.S. Bank v. Ibanez case. The “Corporate Assignment of Mortgage,” appears to have been back-dated. It was dated October 16, 2008 and recorded in the corresponding registry of deeds on October 29, 2008, after the foreclosure had been completed. However, at the top of the document, it stated: “Date of Assignment: June 13, 2007,” in an obvious attempt to date it back prior to the foreclosure.

First Circuit Reinstates Borrower’s Wrongful Foreclosure Claims

After federal judge Denise Casper dismissed Juarez’s claims entirely on a motion to dismiss, the First Circuit reinstated the majority of Juarez’s claims. U.S. Bank claimed that the back-dated mortgage assignment was merely a confirmatory assignment in compliance with the Ibanez ruling, but the appeals court concluded otherwise:

Nothing in the document indicates that it is confirmatory of an assignment executed in 2007. Nowhere does the document even mention the phrase “confirmatory assignment.” Neither does it establish that it confirms a previous assignment or, for that matter, even make any reference to a previous assignment in its body.

Lacking a valid mortgage assignment in place as of the foreclosure, U.S. Bank lacked the authority to foreclose, the court ruled, following the Ibanez decision. Ms. Juarez and Glenn Russell will now get the opportunity to litigate their claims in the lower court.

Will Lenders Ever Learn Their Lesson?

The take-away from this case is that courts are finally beginning to scrutinize the problematic mortgage assignments in wrongful foreclosure cases. This ruling may also affect how title examiners and title insurance companies analyze the risk of back titles with potential back-dated mortgage assignments. If a lender records a true confirmatory assignment, it must do much better than simply state an effective date.

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is a Massachusetts real estate attorney who writes frequently about new foreclosure issues concerning the real estate industry. He can be reached at [email protected].

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Breaking: Massachusetts SJC Issues Another Important Foreclosure Ruling In HSBC Bank v. Matt

by Rich Vetstein on January 14, 2013

in Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

ForeclosureLegal Standing For Mortgage Lender/Servicer Must Be Established To Start Foreclosure

Today the Massachusetts Supreme Judicial Court has issued what I believe to be another very important ruling involving foreclosures in the case of HSBC Bank v. Matt (embedded below). This case is the latest piece in the trilogy of recent landmark foreclosure opinions, starting with U.S. Bank v. Ibanez then Eaton v. Fannie Mae  — which has now come full circle from very limited judicial oversight of foreclosures to a much stricter legal environment for lenders.

In my opinion, the net effect of the HSBC v. Matt ruling is to make Massachusetts somewhat closer to a judicial foreclosure state than a non-judicial foreclosure state, as the ruling requires a foreclosing lender or mortgage servicer to submit actual evidence of legal standing to foreclose when they start a Servicemembers Act proceeding, a requirement that has never existed under Massachusetts law. This new requirement could prove to be potentially problematic to mortgages which are held in complex mortgage backed securitized trusts. However, a portion of the Court’s ruling — that only military members can raise a challenge — could turn out to blunt its impact. In the short-term, the Land Court will have to determine what evidence and documentation is legally sufficient for lenders to establish proper legal standing to foreclose.

Servicemembers (f/k/a Soldiers & Sailors) Civil Relief Act

The case involves the Servicemember’s Act proceeding which protects active military members from foreclosure. In Massachusetts, after a lender issues default notices, it will commence a Soldiers and Sailors Civil Relief Act in the Land Court to ensure that the borrower is not on active military duty and to cut off any rights to challenge the foreclosure based on military status. Although a Soldiers and Sailors Act proceeding is not mandatory in order to legally foreclosure, the customary practice in Massachusetts is for lenders to go through the proceeding in order to ensure clear title to the foreclosed property. A Soldiers and Sailors Act proceeding has historically been perfunctory, but in recent years with the mortgage meltdown, borrowers have increasingly tried to challenge foreclosure in the Soldiers and Sailors Act proceeding.

Jodi Matt, represented by noted foreclosure defense attorney, Glenn Russell, Esq. (who also brought the Ibanez case), challenged HSBC Bank’s ability to foreclose in the Soldier’s and Sailors proceeding, arguing that HSBC could not establish that it held the right to foreclose as the trustee of the securitized trust which purported to hold Matt’s mortgage. The Land Court rejected Matt’s challenge on the grounds that Ms. Matt was not in military service. The SJC took the case on direct appellate review.

SJC Changes The Foreclosure Landscape Yet Again

Although it recognized that Ms. Matt was not in the military service — and ruled that borrowers not in the military cannot bring challenges under the Soldiers & Sailors Act  —  the SJC reached the question whether HSBC Bank had legal standing to start the foreclosure process in the Soldiers & Sailors Act proceeding. Following its prior landmark rulings in Ibanez and Eaton, the Court held that HSBC Bank lacked standing under the Act because it merely claimed to have the contractual option to become the holder of the mortgage. The SJC said that wasn’t good enough, and going forward a foreclosing lender must provide actual evidence to the Land Court that it is the actual holder of the mortgage or a duly authorized agent on behalf of the mortgagee.

When this decision is read together with the Court’s opinion in Eaton, which held that foreclosing lenders must hold both the promissory note and the mortgage, and in the context of securitized mortgages, the Matt ruling starts looking like a very BIG decision. Because of the extremely complex manner in which securitized mortgage trusts were organized by Wall Street (outside the scope of this post), there is an inherent problem in ascertaining which entity within the trust framework actually holds the mortgage and the underlying indebtedness, and therefore, the power to foreclose. As a result of this ruling, foreclosing lenders and mortgage services may have a much more difficult time in foreclosing.

What type and the quality of evidence that lenders need to submit will be left to the Land Court justices, as gate-keepers, to decide in future cases. That is a huge unknown question. The Land Court is presently overwhelmed with pending foreclosure petitions, quiet title actions and other matters given recent court budget cuts. Rest assured, this may play a factor in how they handle foreclosures post-Matt.

I will continue to monitor this ever-changing area of the law.

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Breaking: SJC Rules For Lenders and MERS In Eaton v. Fannie Mae Case

by Rich Vetstein on June 22, 2012

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law

Huge Sigh of Relief For Mortgage and Foreclosure Industry

The much awaited opinion by the SJC in Eaton v. Fannie Mae has just been released, and it is a huge Maalox for the banking and real estate community. Case embedded below. I have written a more detailed analysis here but here are the highlights:

  • Although the Court adopted some of the Eaton side’s arguments, I believe that lenders and MERS ultimately came out as the winners, as initial reports indicate. The Court basically gave lenders a pass on prior defective foreclosures and created new “rules of the road” for foreclosures going forward. There will definitely be more litigation after this case to sort out what foreclosing lenders and servicers need to prove in order to foreclose.
  • Agreeing with the Eaton/homeowner side, the Court ruled that going forward, lenders will have establish that they “hold” both the mortgage and promissory note, in order to foreclose. However, the court endorsed several methods in which lenders will be able to satisfy this requirement, thereby potentially creating several exceptions which will swallow the general rule.
  • Agreeing with lenders and Fannie Mae, the Court took the rare step of declining to apply the the key holding retroactively. The ruling will apply prospectively and will have no impact on previously completed or in process foreclosures. Those foreclosures will likely be immune from challenge along the lines Eaton asserted. This saved the lender and title insurance industry millions of dollars in claims.
  • Critically for the lending and title community, the Court ruled that lenders do not need to physically hold both note and mortgage at time of foreclosure, striking a huge blow to the “produce the note” defense:  The court acknowledged that the Massachusetts foreclosure statute, enacted well before the proliferation of securitization and MERS, was unclear in the modern era of securitizing mortgages.
  • The court essentially blesses the current MERS and current servicer system where mortgage servicers can show that they have legal authority to act on behalf of mortgage holder/lender to foreclose. The SJC overturned the injunction against the lender and the case was remanded below where the servicer, Green Tree, will have the opportunity to establish they have the legal authority and agency to foreclose on behalf of the mortgage holder.
  • We will see new attorney and custodian of records affidavits being filed and used to establish the chain of ownership the court said would comply with the foreclosure laws.
  • More Coverage:  Banker & Tradesman, BusinessWeek, Wall St. Journal, Credit Slips (Prof. Adam Levitin)

Eaton v. Fannie Mae SJC Ruling

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Massachusetts Legislature Set To Make Loan Modifications Part Of Foreclosure Process

by Rich Vetstein on May 24, 2012

in Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis

More Help On The Way For Struggling Homeowners

Additional foreclosure relief is one step closer to becoming law as the Massachusetts House of Representatives recently passed House Bill 4087, “An Act to Prevent Unlawful and Unnecessary Foreclosures.” The bill, sponsored by AG Martha Coakley, mandates that banks and foreclosing lenders enter into mandatory loan modification discussions with borrowers before they can start foreclosure proceedings on residential homeowners.

Lenders May Have To Consider Loan Modifications

The key provision of the bill is the requirement that lenders give borrowers a fair shot at a loan modification. Among the factors that banks must consider before foreclosing is the “borrower’s ability to pay,” a provision that will likely be addressed in future drafts of the legislation, or through regulations developed by the Massachusetts Division of Banks. Under the proposed law, if a modified loan is worth more than the amount the bank expects to recover through foreclosure, the lender must offer that modified loan to the borrower. If it doesn’t, then the lender can continue the foreclosure process.

This bill builds on previous legislation, “An Act Relative to Mortgage Foreclosures,” signed into law in August 2010, which made sweeping changes to Massachusetts foreclosure law. That Act extended the 90-day right-to -cure on foreclosures to 150 days, created new requirements for lenders offering reverse mortgages, established mortgage fraud as a crime, and provided additional protections for tenants living in foreclosed properties.

The bill now moves to the Senate, where it is expected that it will be finalized by the completion of the formal legislative session on July 31, 2012. As always, we’ll keep tabs on these developments.

 

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A Tale Of Two Opinions: Mass. AG Sues Major Banks and MERS Over Foreclosure Mess While Federal Judge Upholds MERS System

by Rich Vetstein on December 1, 2011

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

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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Massachusetts Superior Court Again Endorses “Produce The Note” Foreclosure Defense

by Rich Vetstein on November 8, 2011

in Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

Final Say Will Come Soon At SJC In Eaton v. FNMA

In Adamson v. MERS (embedded below), Superior Court Judge Raymond Brassard became the second Massachusetts trial judge to endorse the so-called “produce the note” defense in a foreclosure defense case. The question of whether a foreclosing lender must hold both the promissory note and the mortgage at the same time is now before the Supreme Judicial Court in the eagerly awaited case of Eaton v. Fannie Mae.

In Adamson, Mortgage Electronic Registration System (MERS) claimed to be the holder of the mortgage at the behest of Deutsche Bank. America’s Servicing acted as the servicer. This was a classic sub-prime mortgage with $440,000 in principal at 8.5% interest, with a balloon payment of $370,000 at the end of 30 years. (No wonder the borrower couldn’t keep up with the payments).

The kicker in this case was when America’s Servicing sent the borrower a denial letter for a loan modification stating that it would not foreclose in the next 30 days under the federal HAMP program to give the borrower a chance to explore other modification option. It foreclosed the next day. Ouch.

Unification Theory

Relying on the Judge McIntyre’s earlier decision in the Eaton case, Judge Brassard was persuaded that Massachusetts still holds on to the unification theory where a foreclosing lender must hold both the note and the mortgage at the time of foreclosure. Judge Brassard expressed concern that separating the mortgage from the note could lead to double liability for the borrower (first, a foreclosure, then an attempt to collect the note).

In a ruling which will make foreclosure defense attorneys salivate, Judge Brassard found merit to the borrower’s claim that the lender and the servicer violated the Massachusetts Consumer Protection Act, Chapter 93A, for foreclosing the day after the denial letter was issued, in violation of the 30 day safe harbor period.

Impact & What’s Next?

With two Superior Court judges endorsing this theory and several bankruptcy court judges rejecting it, all eyes are now on the Supreme Judicial Court’s decision in the Eaton v. Fannie Mae case which will be the final say in the matter. If the SJC accepts the unification theory, it will be a bigger bombshell than the U.S. Bank v. Ibanez case last year.

Until the SJC decides the Eaton case, this ruling will continue to slow down the pace of foreclosures in Massachusetts. This will, in turn, keep the inventory of REO properties high, causing further drag on the troubled housing market.

Thank you to the blogging attorneys at the Massachusetts Land Use Monitor for bringing this case to my attention.

Adamson v. MERS Decision

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Mass. Bankruptcy Judge Voids Foreclosure Of MERS Mortgage

by Rich Vetstein on August 23, 2011

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

Judge Tells Lenders You Can’t Have Your MERS Cake & Eat It Too

“The sophisticated financial minds who wrought the MERS regime sought to simplify the process of repeatedly transferring mortgage loans by obviating the need and expense of recording mortgage assignments with each transfer. No doubt they failed to consider the possibility of a collapse of the residential real estate market, the ensuing flood of foreclosures and the intervention of state and federal courts.”

–Judge Melvin S. Hoffman, U.S. Bankruptcy Court Judge for Massachusetts, In Re. Schwartz, Aug. 22, 2011

Coming off a ruling (In re. Marron) that the MERS mortgage registration system does not run afoul of Massachusetts law, the same jurist, Bankruptcy Court Judge Melvin Hoffman, on Monday issued a ruling voiding a MERS-held mortgage which fell victim to sloppy paperwork. As Banker & Tradesman reports, the case is potentially troubling for any MERS held mortgage in default. The case is In Re. Schwartz and is embedded below.

Debtor Challenges Foreclosure Of Securitized Mortgage

During her bankruptcy proceeding, the debtor, Sima Schwartz, challenged the May 24, 2006 foreclosure of her Worcester home by Deutsche Bank. She asserted that under the U.S. Bank v. Ibanez decision issued by the Massachusetts Supreme Judicial Court earlier in the year, Deutsche did not own the mortgage on the property when it first started the foreclosure process.

The “lender” on her original mortgage was Mortgage Electronic Registration System (MERS), as nominee for First NLC. Many housing advocates have criticized MERS’ role in the foreclosure crisis, with the New York Times weighing in most recently. The mortgage loan was securitized and subsequently transferred at least 3 times, ultimately winding up held by Deutsche Bank. No assignments of mortgage were recorded with the registry of deeds until a day before the foreclosure sale on May 23, 2006. That assignment was executed by Liquenda Allotey, one of the hundreds of deputized vice presidents of MERS, and an alleged “robo-signer” for Lender Processing Service (LPS) which has come under fire for document irregularities. The assignment ran to Deutsche Bank, which completed the foreclosure sale on May 24, bid its mortgage debt and purchased the property.

There was no dispute that under the U.S. Bank v. Ibanez case, the late-filed mortgage assignment rendered the foreclosure defective unless Deutsche could establish its ownership of the mortgage loan when the foreclosure process started. During the trial, Deutsche submitted all the various agreements documenting the securitization process including the pooling and servicing agreement (PSA), loan purchase agreement, bill of sale and custodial log.

Judge: Lenders Can’t Have Their MERS Cake And Eat It Too

Critically, as the judge noted, the PSA provided that for a MERS mortgage such as this, assignments of mortgages did not have to be prepared or delivered to the buyer of the loans. As is endemic with most securitized mortgages, the participants in the securitization did not deliver and record any assignments documenting such transfers, instead, relying on the internal MERS registration system, which is out of the public records view. Throwing this provision back in the lenders’ faces, the judge basically said “you can’t have your cake and eat it too” — rendering his ruling that the mortgage itself (as opposed to the underlying loan) was never transferred through the securitization system from entity A, B, C, to Deutsche Bank, and that MERS had always held, and never relinquished, “legal title” to the mortgage. Accordingly, the judge held, Deutsche Bank was never the owner of the mortgage in the first place, could not foreclose in its name, and its foreclosure sale was null and void.

Impact: Are Foreclosures Of MERS Mortgages Now Open To Challenge?

I’m not sure what’s going to happen with Ms. Schwartz’s home. She’s been living in it since 2006 probably mortgage/rent free! Certainly, MERS could (and should have) started a second foreclosure and done it the right way. I’m perplexed why Deutsche and MERS kept fighting this case in court. As for the broader implications, it’s still unclear as to the effect on past and current foreclosures. One this is for certain, the ruling is yet another example of the legal fallout from the deficiencies in the MERS system.

Lastly, while I don’t claim to be a mortgage securitization expert, if the mortgage was not assigned/transferred properly and if it is MERS that holds legal title, then there is a mortgage backed security investor somewhere who THINKS he owns this mortgage but, in fact, does not. Even if MERS wanted to transfer the mortgage to the relevant trust or foreclose, sell the property and transfer cash, they may not be able to for legal and tax reasons. Now multiply by a million. So how many mortgage backed securities are missing how many mortgages? Are there mortgage backed securities out there that don’t actually own ANY mortgages? If someone sells a “mortgage backed” security that doesn’t legally own the mortgages in question, hasn’t that someone committed fraud? And furthermore, how the hell do we clean this up?

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure defense and title defect cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure and title dispute.

 

In Re Schwartz

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Dealing With The Mess U.S. Bank v. Ibanez Left Behind: SJC To Consider Sale After Invalid Foreclosure

by Rich Vetstein on January 22, 2011

in Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Title Defects

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.

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