Massachusetts Ibanez case

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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“[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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Breaking News (1.7.11). Mass. High Court Affirms Ibanez Ruling

Boston Globe reporter Jenifer McKim today is reporting that Massachusetts Land Court Judge Keith Long’s much anticipated ruling in the Ibanez v. U.S. Bank case, which invalidated thousands of foreclosures across the state, could come as early as today.HomeForeclosure-main_Full

Previously, in late March of this year Judge Long issued one of the most controversial rulings in recent years which has called into question hundreds if not thousands of foreclosure titles because lenders failed to show proof they held titles to the properties through valid assignments. Click here for my prior post on the case. A copy of the case can be found here.

The Globe reports that the decision is “imminent” and could come as early as today. The Globe also has interesting commentary from a number of affected sources:

Among those watching the case are Boston city officials, who say they hope Long will clarify title issues for homes that have already gone into foreclosure. In the meantime, the judge’s actions have stymied the city’s effort to buy as many as 20 bank-owned properties, hurting much-needed redevelopment efforts in neighborhoods plagued by foreclosure, officials said.

“There are thousands and thousands of titles that have gone through foreclosures with these late filed’’ ownership records, said Lawrence Scofield, an attorney with Ablitt Law Offices in Woburn, who represented plaintiffs in three consolidated Springfield cases ruled on by Long. “Judge Long is saying you don’t really own it. That is the real, overwhelming, economic effect.’’

Locally, the Massachusetts decision has pitted advocates trying to revive neighborhoods against others trying to help homeowners stave off foreclosures. Gary Klein, a consumer law attorney who filed a friend of the court brief in the case, said the real estate system placed “expedience and convenience’’ before the law. Providing home buyers with a “full set of procedural protections,’’ he said, is more important than comforting lenders who ignored the law.

Indeed, since March, the number of foreclosure deeds has slowed, according to Warren Group, a Boston company that provides real estate data. “There are probably at least a thousand families who are getting at least some period of temporary delay while lenders go back and get a proper paper trail,’’ said Klein, an attorney with the Boston-based law firm Roddy, Klein and Ryan. “Slowing foreclosures down allows people to get loan modifications and other relief.’’

Once the decision is released I will post it here with my analysis and commentary.

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