I recently came across a very provocative and interesting idea to address the foreclosure and bankruptcy crisis: a new Chapter M for Mortgage bankruptcy. As described on FireDogLake:
“Prof. Adam Levitin has proposed this with his Chapter M for Mortgage bankruptcy. It would remove foreclosure actions from state court to federal bankruptcy court. Successful petitions can be offered a standardized pre-packaged bankruptcy plan. The plan would be based on HAMP modification guidelines (interest rate reduction to achieve 31% DTI goal, but without federal funding) plus cramdown to address negative equity.
We can make this fair on the backend. If the homeowner redefaults we can speed up the foreclosure process. It wouldn’t affect non-mortgage lenders. It is fast-tracked relative to traditional Chapter 13. It can have clawback mechanisms to address potential future appreciation.
And going through the process can give the lender clean title. Because there’s this whole issue of who owns what in the securitization chain which is a few court cases away from putting our financial system over a cliff. And the best feature is that it has no cost to the federal government. Like other smart policy, it builds off already existing infrastructure, so it can be started immediately using existing courts and Chapter 7 panel trustees for sales.”
Any solution which can simultaneously address banks’ unwillingness to offer loan modifications to otherwise qualified distressed homeowners and the litany of title problems created in the wake of cases like U.S. Bank v. Ibanez should be seriously considered. The recent foreclosure legislation proposed by Secretary of State Bill Galvin and Attorney General Martha Coakley contains mandates following these ideas. Galvin’s would create a special court to deal with Ibanez issues, and Coakley’s requires loan modifications for certain sub-prime loans before foreclosure.
We certainly need out of the box thinking to deal with these problems. What are your thoughts?
Harold Clarke, Esq., Senior Underwriter for Westcor Title Insurance Company–New England say the U.S. Bank v. Ibanez decision could be one of the most important real estate decisions in recent memory. He explains how it will impact the Massachusetts real estate market, and what may happen in the future. Also check out Westcor New England’s new YouTube channel.
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.
On January 7, 2011, the Supreme Judicial Court (SJC) rendered its decision in the U.S. Bank v. Ibanez case. Before discussing the Court’s decision, here is a brief review of the procedural history of the case.
The Land Court’s decision in the Ibanez case and its two consolidated cases had created a conflict with the Massachusetts Real Estate Bar Association’s Title Standard #58 and its underlying rationale. Pursuant to the title standard, a title is not defective by reason of “The recording of an assignment of Mortgage executed either prior, or subsequent, to foreclosure where said Mortgage has been foreclosed, of record, by the Assignee.” In a nutshell, this means that if B forecloses a mortgage originally held by A, it is immaterial whether A’s assignment predates or postdates the foreclosure sale.
In Ibanez and in the other two companion cases-Rosario and Larace-the Land Court ruled on the validity of three different scenarios relating to the date of the assignment vis- a- vis the date of the first publication of the mortgagee’s sale of real estate/foreclose sale. In Rosario, the assignment was in existence and in recordable form (although not recorded) at the time of the first publication. In Larace, the assignment was dated after the date of first publication but had an “effective date” which predated the first publication. In Ibanez, the assignment was executed after the date of first publication.
At first blush, based on the Title Standard, it would appear that all three foreclosures were valid. Unfortunately, the Land Court disagreed. In fact, the Land Court found that only the Rosario foreclosure was valid. The Land Court held that G.L. c. 244, Section 14 must be given by the “holder of the mortgage.” Failure to do so renders the “sale void as a matter of law.” As a result, the foreclosures in Ibanez and Larace were invalidated since they did not comply with the statute. The Land Court held that it is not necessary to record the assignment prior to publishing but only that it be in existence and in recordable form at such time.
The plaintiffs filed a motion to vacate the judgment. On October 14, 2009, Judge Long rendered his decision which denied the plaintiff’s motion to vacate the judgment.
The Land Court noted that in each case the bank was the only bidder and bought back at a discount from appraised value which wiped out the defendants’ equity and created a deficiency. The foreclosing mortgagees could not get title insurance. The plaintiffs suggested that there were documents that would demonstrate that pre-notice and pre-foreclosure assignments existed. The Land Court granted the plaintiffs leave to produce such documents provided they were in the form they were in at the time the foreclosure sale was noticed and conducted. The plaintiffs produced the notes and assignments in blank which are not suitable for recording since there is no assignee listed. The Land Court found that the plaintiffs’ own securitization documents showed that such assignments were required. With all available files, it took 10 months in one of the cases and 14 in the other to obtain the assignments in recordable form. Such a burden should not fall on the high bidder at the foreclosure sale. “A bidder does not expect to purchase the right to a potential lawsuit, which only entitle him or her to actually obtain the property if such lawsuit is successful.”
The plaintiffs argued that they followed “industry standards and practice.” The Land Court said that if this is true, they should seek a change in the law.
The SJC granted direct appellate review and affirmed the Land Court’s judgment. The SJC held that “We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure. As a result, they did not demonstrate that the foreclosure sales were valid to convey title to the subject properties, and their requests for a declaration of clear title were properly denied.”
The plaintiffs had the burden of proving the validity of their foreclosures. Since Massachusetts is a non-judicial foreclosure state, there must be strict compliance with the terms of the statutory power of sale. The Court noted that only “the mortgagee or his executors, administrators, successors or assigns” can exercise the statutory power of sale.
Unlike the Land Court, however, the Court continued:
“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.”
The Court ruled that possession of the note does not allow the holder to foreclose.
“In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage. Rather, the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment.”
The Court stated that “the mortgages securing these notes are still legal title to someone’s home or farm and must be treated as such.”
The Court was not persuaded that post-foreclosure assignments were valid pursuant to REBA Title Standard No. 58 and industry practice. The Court found that such “reliance is misplaced because this proposition is contrary to…G.L. c.244, Section 14.”
The Court rejected the warning in REBA’s amicus brief that “If the rule as announced in these decisions is not limited to prospective application, inequitable results that will cause hardship and injustice are inevitable, and will likely be widespread.”
The Court noted that its rulings are prospective only if they make a “significant change in the common law.” Such was not the case here where the law was well settled. “All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.” In a concurring opinion, this was referred to as “the utter carelessness with which the plaintiff banks documented the titles of their assets.”
As Judge Long had suggested in his decision, perhaps it is time to change the law. Since the SJC began its discussion by noting that “Massachusetts does not require a mortgage holder to obtain judicial authorization to foreclose on a mortgaged property,” and reading between the lines, one solution would be for Massachusetts to adopt judicial foreclosures. Another possibility would be to return to the earlier practice in which the Land Court/Superior Court would review and approve in writing the foreclosure documents prior to recording. Perhaps the easiest solution would be to require the plaintiff in its Complaint to Foreclose Mortgage to cite the recording information for the assignment(s) by which it became the holder rather than simply to state “Your plaintiff is the assignee and holder of a mortgage.” If the assignments did not exist, the complaint could not be filed.
I think that the problem in Ibanez is that US Bank laid out the chain of title to the mortgages on the record but then could not document the supposed assignments into it. Justice Cordy referred to this as utter carelessness. Therefore, I don’t think that reforeclosure is possible since US Bank can’t show that it was either then or now the holder.
In general, I believe that you can reforeclose under the theory that since the original foreclosure was invalid, the power of sale was never exercised.
The case stands for the proposition that the foreclosing lender must be the holder of the mortgage at the time of foreclosure. The SJC said that this is well established law and that reliance on REBA Title Standard No. 58 is misplaced as it is contrary to the law.
It will be interesting to see how “widespread” the SJC’s decision becomes.
If you would like to discuss this or any other issue, please contact me directly via email.
Harold Clarke, Esq.
New England Regional Counsel, Westcor Land Title Insurance Co.
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.
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.
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.
“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?
“[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
Today, 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 ofthe 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.
Today, the Massachusetts Supreme Judicial Court heard arguments in the closely watched case of The Real Estate Bar Association of Massachusetts, Inc. (REBA) v. National Real Estate Information Services, Inc. (NREIS). This case pits Massachusetts real estate closing attorneys versus out of state non-attorney settlement service providers which are attempting to perform “witness or notary” closings here in Massachusetts. At stake is the billion dollar Massachusetts real estate closing industry.
Unauthorized Practice of Law?
I wrote previously about the case in this post. Massachusetts’ long standing practice is for licensed attorneys to oversee and conduct the residential real estate closing process. NREIS’s business model is to outsource the vast majority of those functions to back office workers who aren’t trained attorneys. REBA argues that this practice violates Massachusetts common law and consumer protection statutes requiring that attorneys perform the most vital functions of a real estate closing transaction, such as certifying and analyzing title, preparing the deed, handling the transfer of good funds, where necessary, and conducting the closing.
The case was originally brought in federal court, where NREIS won and obtained a $1Million attorney fee award. But the federal appeals court overturned that ruling, and asked the Massachusetts Supreme Judicial Court to answer the question of whether and to what extent a residential real estate transaction and closing is the “practice of law” required to be performed only by a licensed attorney.
Questions From the Bench & Analysis
A favorable decision also upholds the notion that attorneys are vital to the conveyancing system, protect consumers, and cannot simply be outsourced to a non-trained drone. We’ve seen disastrous results when untrained folks try to perform legal tasks with the foreclosure robo-signing scandal. And the SJC may be sensitive to this having just heard the Ibanez foreclosure case.
Several of the justices weren’t buying NREIS’s argument that its non-attorney back office processors never make legal judgments, but instead simply “flag issues.” Justice Cowen raised several examples of situations requiring an attorney’s trained eye, such as analyzing a title examination, analyzing title defects, and ensuring that loan documents, the deed and mortgage are in the correct form.
Justice Cowen said that NREIS couldn’t delegate everything to a paralegal. At some point an attorney had to make the final call. And I think that is where the Court will end up on this case–hopefully!
Justice Gants and Spina both showed their studying of the conveyancing process in asking whether NREIS needed to have attorneys certify title (they do under state statute) and analyze a title rundown (yes, again).
Don’t bet against the SJC ruling against real estate attorneys in this case. After all, the justices are attorneys themselves. And they are humans. Whether they admit it or not, they are naturally inclined to favor their brethren of the bar.
Why This Case Is Important To Mass. Consumers
The purchase of a home is usually the most important investment most families will ever make. Home buyers and sellers, as well as lenders, rely on the training, professionalism, and integrity of attorneys to ensure that their property rights are protected. The reason that only lawyers can give legal advice is to protect the public. It gives the buyer and lender someone to hold accountable if there are mistakes. These multiple levels of protection permit buyers, sellers and lenders to confidently and reliably close loans worth hundreds of thousands of dollars every day. Non-attorney closings only hurt the consumer. In recent years, the real estate closing process has become as more complicated than ever. In “witness only” or “notary” closings, the non-attorneys who conduct the closings do nothing more than witness the execution of the closing documents, and cannot provide any legal guidance. What happens if an issue arises at closing requiring legal analysis? The closing attorney has the training to resolve it. The non-attorney closer will just sit there and can do nothing. Lastly, due to increased competition, there is no difference in cost between non-attorney closing companies and real estate attorneys.
In addition to the parties’ briefs, the SJC has received nearly 20 friend of the court briefs, virtually all of which support REBA’s position that NREIS is engaged in the unauthorized practice of law. SJC briefs can be found here. The webcast is found at the Suffolk Law School website.
The SJC should issue a final ruling in several months.
She said it’s really not my habit to intrude
Furthermore, I hope my meaning won’t be lost or misconstrued
But I’ll repeat myself, at the risk of being crude
There must be fifty ways to leave your lover
Fifty ways to leave your lover
“50 Ways To Leave Your Lover” (c) Paul Simon
50 Ways To Lose Your Home
As Massachusetts real estate closing attorneys, we are often asked by buyers-borrowers, “Why should we get an owner’s title insurance policy if you are already doing a title examination?” This is a really good question, and the perfect lead in to a conversation about of the coverages and cost of a Massachusetts owner’s title insurance policy. Do you know the Paul Simon tune, “50 Ways to Leave Your Lover”? Well, there are more than 50 ways to lose your home without an owner’s title policy. Simply put, don’t take the risk of foregoing title insurance. It’s not worth it.
Title Insurance Basics
Title insurance protects homeowners from financial loss in the event that certain covered problems develop regarding the rights to ownership of their property. While all borrowers of conventional mortgages will receive a certification of title by a Massachusetts real estate closing attorney that their title is “good, clear and marketable,” there can be a host of hidden, off-record title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.
50 Ways to Lose Your Home
Like the Paul Simon song, there are at least 50 ways you can lose title to your home if you don’t get an owner’s title insurance policy. The vast majority of these situations will not be ascertained in a typical title examination.
Deeds executed by a mentally incompetent or insane person
Deed from a minor subject to avoidance
Unauthorized deed from partnership or trustee
Deed by foreign person vulnerable to challenge
Deed from a corporation unauthorized by by-laws or resolution
Undisclosed divorce of person who conveys as sole heir of a deceased former spouse
Deed signed by mistake or under financial duress
Deed signed under defective power of attorney
Foreclosure deed where underlying foreclosure was defective
Ineffective release/discharge of prior mortgage
Deed of deceased not joining all heirs
Missing heirs claiming interest in property
Transfer void under contract law
Deed includes protected public trust wetlands
Ineffective release of mortgage subject to bankruptcy avoidance powers
Ineffective mortgage subordination
Mistakenly indexed deed/release
Undisclosed federal/state tax lien
Undisclosed spousal/child support lien
Undisclosed lawsuit affecting property
Undisclosed restrictions/covenants
Incorrect legal description
Errors in tax records
Erroneous tax release
Misinterpretation of wills
Deed without right of access to public way
Access eliminated by foreclosure
Defective notarization
Forged notarization
Improperly recorded or indexed deed/mortgage
Deed acquired through creditor fraud
Mechanic’s lien claims
Incorrect property boundaries
Encroachments of buildings
Federal or state estate tax liens
Preexisting violation of subdivision laws
Preexisting violation of zoning laws
Deed from joint owner without joint tenant joining
Undisclosed right of first refusal
Undisclosed easement affecting property
Undisclosed party wall agreement
Special assessment liens
Adverse claim of vendor’s lien
Discovery of un-probated will
Claims for prescriptive rights, not of record
Easement does not conform to recorded instrument
Incorrect survey
Deed following lawsuit where all parties of interest not joined
Deed executed under falsified power of attorney
Getting an owner’s title insurance policy is simply a “no brainer.” I did the title to my own home in Sudbury, and I got an owner’s policy. It’s a one time premium paid at closing, and stays in effect as long as you own your home, through refinances and even the death of a spouse. Please contact us about carriers, rates and coverages.
Today’s strict lending and underwriting environment has resulted in quite a few delays and even losses of buyers’ financing for home purchases. Loan commitment deadlines are being pushed back due to underwriting delays, regulatory compliance and appraisal issues, among other delays. The worst case scenario for any borrower is the wholesale rejection of financing in the middle of a transaction.
What Is The Typical Mortgage Contingency Clause?
The Massachusetts “standard” form purchase and sale agreement contains a mortgage contingency clause which protects the buyer (and his deposit) for the period of time until he can obtain a firm loan commitment. The date is negotiated by the buyer and seller, and is usually around 30 days from the execution of the purchase and sale agreement, depending on the closing date. If the buyer cannot get a firm loan commitment by the deadline, he can opt out of agreement with a full refund of his deposit. Here is how a typical Massachusetts mortgage financing contingency clause operates:
In order to help finance the acquisition of said premises, the BUYER shall apply for a conventional bank or other institutional mortgage loan of $300,500.00 at prevailing rates, terms and conditions. If despite the BUYER’S diligent efforts, a commitment for such a loan cannot be obtained on or before October 15, 2010, the BUYER may terminate this agreement by written notice to the SELLER in accordance with the term of the rider, prior to the expiration of such time, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreements shall be void without recourse to the parties hereto. In no event will the BUYER be deemed to have used diligent efforts to obtain such commitment unless the BUYER submits a complete mortgage loan application conforming to the foregoing provisions on or before 3 days from the execution of this Agreement.
What If There Are Delays In Obtaining My Loan Commitment?
The buyer really has only two choices if the lender cannot deliver a firm loan commitment by the mortgage contingency deadline: (1) ask the seller for an extension of the loan commitment deadline, or (b) terminate the transaction. There is, however, a smart way to handle this situation.
I always couple a request for a loan commitment extension with notice that if the seller does not agree, then the buyer will exercise his right to terminate the agreement. That way, the seller has to make a tough choice: grant an extension or lose the deal. If the seller does not want to grant an extension, the buyer really has no other choice but to move on to the next home for sale.
Parties need to make mortgage contingency deadlines workable and don’t wait until the last minute to ask for extensions. See this post about a recent case for what happens when you don’t do this.
What If There Are Conditions In My Loan Commitment That I Cannot Control or Meet?
Loan commitments are often riddled with conditions which must be reviewed carefully with counsel. Sometimes, there are conditions that a buyer simply cannot meet or control. To account for this I always insert this clause in my Massachusetts purchase and sale agreement rider:
Application to one such bank or mortgage lender by such date shall constitute “diligent efforts.” If the written loan commitment contains terms and conditions that are beyond BUYER’S reasonable ability to control or achieve, or if the commitment requires BUYER to encumber property other than the subject property, BUYER may terminate this agreement, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto.
This protects the buyer in case there are those uncontrollable conditions, and also limits the buyer’s efforts in applying for a mortgage to 1 application.
What If There Are Title Defects Which Delay The Transaction And My Rate Lock Expires?
Under paragraph 10 of the Massachusetts standard form purchase and sale agreement, the seller has the option (or the requirement, depending on the negotiation of the agreement) to cure any title defects, and has up to 30 days to do so. Sometimes, during this 30 day cure period, the buyer’s rate lock will expire. In this situation, I insert the following clause into the purchase and sale agreement:
MODIFICATION TO PARAGRAPH 10: Notwithstanding anything to the contrary contained in this Agreement, if SELLER extends this Agreement to perfect title or make the Premises conform as provided in Paragraph 10, and if BUYER’S mortgage commitment or rate lock would expire prior to the expiration of said extension, then such extension shall continue, at BUYER’S option, only until the date of expiration of BUYER’S mortgage commitment or rate lock. BUYER may elect, at its sole option, to obtain an extension of its mortgage commitment or rate lock.
This gives the buyer an “out” of the transaction if his rate lock expires.
As always, feel free to contact me, Richard Vetstein, for any questions about the Massachusetts purchase and sale agreement process.
Robert Frost ‘s famous poem The Mending Wall says “good fences make good neighbors.” When that fence encroaches over a neighbor’s property line, however, that good neighbor can turn nasty very quickly.
When boundary or encroachments disputes arise, a little known legal doctrine often comes into play: adverse possession. Adverse possession is a common law concept in Massachusetts under which homeowners may lose title to their land by sleeping on their property rights for 20 consecutive years against a neighbor who has taken actions contrary to their property interests. Yes, a neighbor can effectively take over ownership of your land if you sleep on your rights. Massachusetts adverse possession law reflects a public policy aimed at inducing landowners to actively protect their land.
The classic example of adverse possession is a neighbor who puts up a fence or paves a driveway several feet over their neighbor’s property line, without permission, and this “adverse possession” continues without objection for 20 consecutive years. Despite the fact that the neighbor’s fence or driveway encroaches the property line, under the adverse possession doctrine, the property owner may lose title to the disputed strip of land by not doing, saying or even knowing anything about it.
Requirements For Adverse Possession
A landowner can obtain adverse possession only by filing a lawsuit and establishing several elements of the claim. (My property law professor used a handy acronym called OCEAN to help students remember them). The use of another’s land must be Open, Continuous (for 20 years), Exclusive, Adverse and Notorious. Each element has its own specific requirements, and all adverse possession cases are very fact-specific. The law does not favor adverse possession, so the burden of proof on the claimant is relatively high.
Adverse possession can also occur through multiple prior owners during the 20 year period under a theory called “tacking.” Adverse possession can also be in the form of an easement, or merely a right to use property, called a “prescriptive easement.” This could apply to the gamut of utility, pathway, or access easements.
Surveys and Stakes
Surveys typically form the genesis, and play an important role in, adverse possession cases. The parties must know where the true lot lines are on the property. Sometimes, there are disputes as to the survey in cases of old, poorly laid out lots. Remember that even if you believe the neighbor is wrong about the lot line, it is against the law in Massachusetts to remove survey stakes. (Mass. General Laws Chapter 266, Section 94). Also under Massachusetts law, a surveyor is allowed to enter upon your land, with reasonable notice, for purposes of completing a survey.
Tips To Prevent Adverse Possession
The key to preventing adverse possession is to be proactive regarding your boundary lines and property rights. If you suspect an encroachment, obtain a full instrument survey, not a mortgage plot plan which can be inaccurate. If an encroachment is found, consult an attorney for further advice.
Generally, the most effective methods to prevent adverse possession are to:
Posting “No trespassing” signs (can be helpful, but is not fail-safe)
Physically demarcate lot lines with a fence, gate or the like (survey stakes alone may not be enough)
Document giving permission to an encroaching neighbor by written document or agreement
For prescriptive easements, record a statutory Notice to Prevent Acquisition of Easement. Note: this notice will not prevent a claim of adverse possession to the entire land.
Bring a lawsuit to “quiet title”
Submit your land to the Land Court registration system
The more land you own (especially raw woodlands) the more proactive you need to be.
Lastly, when buying new property, consider getting an enhanced title insurance policy which has coverage for encroachments and boundary issues, at a small premium over standard rates.
Adverse Possession Lawsuits
Given the high cost and low supply of land in Massachusetts, adverse possession disputes often wind up in litigation. Adverse possession litigation can be expensive because these cases are very fact-specific and require a fair amount of witnesses, factual investigation, title research, and even expert testimony. Adverse possession cases are generally difficult to win, but they can be successful with the right facts and good preparation.
The Massachusetts Land Court hears adverse possession cases along with the Superior Court. Depending on the facts of the case, the plaintiff can do a bit of “forum shopping” between the two courts.
Update (July 27, 2010): Oral argument is scheduled for October 7, 2010.
Good news for those eagerly following the controversial U.S. Bank v. Ibanez case, which invalidated thousands of foreclosures across the state. On March 22, the Massachusetts Supreme Judicial Court (the highest appellate court in the state) agreed to take the case on direct appellate review (as I originally predicted). This sets the stage for one of the most important real estate decisions in recent years.
The SJC’s acceptance of the case now expedites what will be the final word in this case, good news for everyone affected by this ruling. A final decision, however, is still many months away. Both sides still have to file briefs, and the case will be scheduled for oral argument probably within 4-5 months, with a decision coming several months later. (Appeals take time).
Click here and here for my prior posts on this case. Here is Globe reporter Jenifer McKim’s story on the development.
I’ve been asked several times recently for an update on the status of Land Court judge Keith Long’s controversial ruling in U.S. Bank v. Ibanez, which invalidated thousands of foreclosures across Massachusetts. Click here for my prior post on the case.
Unfortunately for those affected by the decision, not much is going on. Lenders have reportedly appealed the decision. Word has it that the lenders have hired mega-firm K&L Gates to handle the appeal. (Interestingly, K&L Gates is the same firm which secured a major ruling against the Massachusetts Real Estate Bar Association over non-attorneys handling real estate closings in Massachusetts).
The record in the Land Court is currently being assembled. The Massachusetts Appellate Court database doesn’t even list the case as yet up on appeal. Accordingly, this appeal is many, many months away from being decided.
Also, watch for the lenders to ask the Massachusetts Supreme Judicial Court to take the case on direct appeal. While this will delay the appeal some in the short term, the SJC is the final stop on the appellate railway, and its decision is the final word on the matter. Given the pro-consumer decisions recently issued by the high court and its current makeup of somewhat liberal justices, my money is still on an unfavorable decision for lenders in this case.
In the meantime, I’m hearing that lenders are simply re-doing their foreclosures with the correct loan paperwork (i.e., the mortgage assignments) brought up to date. For buyers who had an agreement to purchase a foreclosed home, this most likely means you will have to wait in line again and re-bid on the second foreclosure.
Today, Massachusetts Land Court Judge Keith Long reaffirmed his controversial ruling made back in March 2009 that invalidated foreclosure proceedings involving two Springfield homes because the lenders did not hold clear titles to the properties at the time of sale. A copy of the decision can be found here.
As I outlined in my prior post on this case, the problem the Land Court dealt with in this case is what happens when modern securitized mortgage lending practices meets outdated foreclosure laws. When mortgages are packaged to Wall Street investors, the ownership of a mortgage loan may be divided and freely transferred numerous times on the lenders’ books. But the mortgage loan documentation actually on file at the Registry of Deeds often lags far behind.
Here is a diagram of the securitized mortgage process (click to enlarge):
The Ruling
Judge Long ruled that foreclosures were invalid when the lender failed to bring the ownership documentation (known as an assignment) up-to-date until after the foreclosure sale had already taken place. An assignment is a legal document confirming that a mortgage loan has been transferred from one lender to another. Assignments must be recorded with a registry of deeds so anyone researching a property’s title can track the loan’s origin and ownership. Oftentimes, as in the Ibanez case, lenders will sell bundles of loan and record backdated assignments with an effective date before the first foreclosure notice. Judge Long effectively prohibited this practice.
Despite the lender’s attempt to convince him otherwise, Judge Long came out (again) in favor of consumers:
The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.
Judge Long also had some choice words for lenders:
[T]he problem the [lenders] face (the present title defect) is entirely of their own making as a result of their failure to comply with the statute and the directives in their own securitization documents… What the plaintiffs truly seek is a change in the foreclosure sale statute (G.L. c. 244, § 14), which can only come from the legislature.
What Now?
That’s a good question and one not readily answerable. To be sure, the current state of flux and confusion surrounding foreclosure titles affected by an Ibanez issue will remain intact until an appellate court considers the case or some action by the Legislature (which may be unlikely). Given the importance of the decision, I predict that the Massachusetts Supreme Judicial Court will take the unusual step of taking the case directly from the Land Court.
As for what happens in the year or so the case may be in appellate limbo, I asked an in house counsel for a leading title insurance company, and his response was essentially that it’s going to take a fair amount of time and research to figure this one out. If there’s an existing title insurance policy on the property, some but not all of the title companies may be willing to insure over the problem. If there’s no title policy in place, affected parties are going to have to ride this one out for awhile.
Once title insurance companies offer some further guidance, I will post it here.
My Two Cents
While I see both sides of the argument, the decision is troubling to me because Judge Long gave short shrift to the fundamental legal principle that the mortgage follows the note. A valid mortgage is security for some type of underlying obligation, whether it’s a loan or the promise to do something in the future. There’s no question that the millions (or billions) of dollars in loans secured by all these mortgages were validly transferred from one bank/lender to securitized lenders. The money was lent and it didn’t just evaporate into the ether. If the lenders can ultimately demonstrate ownership of the underlying loan which follows the mortgage and produce a valid assignment (albeit late), why isn’t this enough? The borrowers owe the money, and now after this ruling they are immunized from foreclosure by what many folks in the real estate industry view as elevating form over substance.
“For many years, real estate attorneys in Massachusetts have understood that the assignment of a mortgage can be recorded at any time and be effective,” Christopher S. Pitt, chairman of the Title Standards Committee of the Real Estate Bar Association tells Massachusetts Lawyers Weekly.
Now that doesn’t mean lenders don’t need to get their act together. They do. The net effect of this decision will be that lenders must get loan documentation up to date and recorded promptly. Indeed, the Ibanez loan changed ownership at least four times prior to foreclosure — without any of this appearing on the public record. Two of those entities (Lehman Brothers and its subsidiary) are currently in bankruptcy and a third (Option One) has ceased operations. This is a huge wake up call to the securitized lending industry.
But the question remains, what about all the foreclosures that have already been conducted? And the new homeowners who own these properties and are now saddled with unresolvable title defects? What about these “innocent victims” and the neighborhoods blighted by foreclosed properties which cannot be sold? I guess we can all blame Wall Street once again…
This case has the potential to do a lot of damage (or rather reveal the damage that foreclosing lenders did over the past few years), but I think Judge Long was completely right about the law. Both the statute and all of the securitization documents were clear, and these foreclosures violated both of them. These banks had sophisticated lawyers who knew real estate law when they planned to securitize these loans, but they never bothered to consult their own agreements when the time came to actually securitize, or foreclose, on the loans. As a result, mortgages were never properly transferred, and the foreclosing lenders never had the right to foreclose.
As with any controversial legal decision, there’s always compelling arguments for both points of view.
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.
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.
In late March of this year in the case of U.S. Bank v. Ibanez, Massachusetts Land Court Judge Keith C. Long issued one of the most controversial rulings in recent years which has called into question hundreds if not thousands of foreclosure titles across Massachusetts. The Ibanez decision is what happens when you mix equal parts of a deteriorating real estate market with Wall Street’s insatiable demand for mortgage back securities with sloppy lending practices and outdated state foreclosure statutes.
The Facts
In the Ibanez case, the Land Court invalidated two foreclosure sales because the lenders failed to show proof they held titles to the properties through valid assignments. In modern securitized mortgage lending practices, the ownership of a mortgage loan may be divided and freely transferred numerous times on the lenders’ books, but the documentation (i.e., the assignments) actually on file at the Registry of Deeds often lags far behind. The Land Court ruled that foreclosures were invalid when the lender failed to bring the ownership documentation (the assignments) up-to-date until after the foreclosure sale had already taken place. This was true even if the lender possessed an assignment with an effective date (i.e., backdated) before the first foreclosure notice.
The net effect of the Ibanez decision is to call into serious question the validity of any foreclosure where the lender did not physically hold the proper paperwork at the time it conducted its auction. This has already caused significant uncertainty in the ownership of many properties that have already been foreclosed and are awaiting foreclosure.
In deciding the case, Judge Long took a very pro-consumer approach to the foreclosure law, persuaded that the apparent title defect would chill a foreclosure sale and harm debtors:
None of this is the fault of the [debtor], yet the [debtor] suffers due to fewer (or no) bids in competition with the foreclosing institution. Only the foreclosing party is advantaged by the clouded title at the time of auction. It can bid a lower price, hold the property in inventory, and put together the proper documents any time it chooses. And who can say that problems won’t be encountered during this process?
Also of significance was that Judge Long rejected a customary Massachusetts conveyancing standard which provides that recording out of order assignment documents does not create a title defect. I think Judge Long got it wrong as he elevated form over substance and didn’t give enough credence to the legal principle that the note follows the mortgage, but hey, I’m just a lowly attorney.
What now?
The Ibanez ruling is not final as the lenders have filed a motion to reconsider with the Land Court. And now the heavy hitters have gotten involved. The Real Estate Bar Association of Massachusetts has taken the unusual step of filing a friend of the court brief, urging the Land Court to reconsider its decision.
On the consumer side, the National Consumer Law Center and well known consumer class action attorney Gary Klein have joined the fray and filed a brief. Attorney Klein has also filed a class action in federal court to challenge completed foreclosures and future foreclosures on the same facts as the two foreclosures voided in Ibanez.
As of now, Judge Long of the Land Court has not made a final decision which should come in a matter of weeks. I will update you when the ruling comes down. Either way, in my opinion, given the widespread impact of this case, it is destined for the Massachusetts Supreme Judicial Court. It’s hard to say how the SJC will come down on this.
What can you if you are affected by the Ibanez ruling?
Well, if you are a homeowner facing foreclosure, consider Ibanez an early Christmas present. You now have a powerful tool to argue for the invalidation of the foreclosure sale. (I won’t comment on the fact that you still owe the lender money).
If you are contemplating purchasing a property out of foreclosure or are selling a previously foreclosed property, pray that there’s an existing title insurance policy on the property, and ask the title company to insure over the issue. Some are willing to do this. Others are not. The other option (albeit expensive) is to hire an attorney to file a Land Court “quiet title” action to validate the proper assignment of the mortgage loan, assuming you can track the documents down and they were not backdated. In Ibanez, the lender couldn’t produce the assignment until 14 months after the auction. The last option, and unfortunately probably the safest bet, is to sit, wait and see how the Land Court and appellate courts will rule ultimately. Not the answer you probably want to hear, but it’s reality.
The Massachusetts Purchase and Sale Agreement Is Anything But “Standard”
Home buyers sign a never ending pile of legal documents to purchase a home. But arguably the most important document in the entire transaction is the Massachusetts purchase and sale agreement. The purchase and sale agreement is signed after the Offer to Purchase is executed, and spells out the parties’ responsibilities during the interim period when the property is taken off the market and the closing.
In Massachusetts, the form most often used is the so-called standard form agreement supplied by the Greater Boston Real Estate Board or one modeled very closely to this form. (Due to copyright laws, we cannot embed the standard form agreement — contact my office if you need assistance with drafting a purchase and sale agreement). The “standard” form purchase and sale agreement is, however, far from standard, especially for buyers. In fact, the standard form is very much slanted in favor of the seller, and the playing field must be “leveled” to protect the buyer’s interests.
This is why it’s imperative that home buyers and sellers alike retain a Massachusetts real estate attorney to modify the “standard” form purchase and sale agreement in order to best protect all parties’ rights and remedies, and customize the agreement to the particular aspects of the transaction. This is typically done through a “rider” to the purchase and sales agreement. Often, the buyers’ attorney and the sellers’ attorney will attached two different riders to the agreement.
I’ll outline a few common issues not addressed adequately in the “standard” purchase and sale agreement. (Most of these are from the buyer’s perspective).
Mortgage Contingency
The “standard” purchase and sale agreement does provide a basic mortgage contingency which gives the buyer the option of terminating the agreement if mortgage financing falls through. However, for a buyer, the more specific you are in terms of interest rate, points, name of lending institution and definition of “diligent efforts,” the better. Buyers’ counsel should specify that the buyer will not be required to apply to more than one institutional lender currently making mortgage loans of the type sought by the buyer and that the buyer may terminate the purchase and sale agreement unless the buyer obtains a firm, written commitment for a mortgage loan. Here is a sample rider provision:
MODIFICATION TO PARAGRAPH 26: Application to one such bank or mortgage lender by such date shall constitute “diligent efforts.” If the written loan commitment contains terms and conditions that are beyond BUYER’S reasonable ability to control or achieve, or if the commitment requires BUYER to encumber property other than the subject property, BUYER may terminate this agreement, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto.
Home Inspection/Repairs
Typically, buyers complete the home inspection process prior to the signing of the purchase and sale agreement, and any inspection contingency provision is deleted from the purchase and sale agreement. What happens if the inspection results are not ready before the P&S signing deadline or if the seller has agreed to perform repairs prior to the closing or give a credit at closing? In this case, a home inspection contingency clause should be added back to the agreement, and any seller repairs or closing credits should be meticulously detailed in the rider.
Septic Systems/Title V
If the home is serviced by an on-site sewage disposal system otherwise known as a septic system, the Massachusetts Septic System Regulations known as Title V requires the inspection of the system within 2 years of the sale of the home. Failed septic systems can cost many thousands of dollars to repair or replace. Thus, buyers would look to be released from the agreement if the septic system fails inspection. Alternatively, buyers could be given the option to close if the seller can repair the septic system during an agreed upon time period, provided that the buyers do not lose their mortgage rate lock.
Radon Gas
Radon is a naturally occurring radioactive gas. The ground produces the gas through the normal decay of uranium and radium. As it decays, radon produces new radioactive elements called radon daughters or decay products which scientists have proven to cause lung cancer. Radon testing should be performed by buyers during the home inspection process. Elevated levels of radon (above 4.0 picoCuries per liter (pCi/l) can be treated through radon remediation systems. The purchase and sale agreement should provide for a radon testing contingency and the buyers’ ability to terminate the agreement if elevated radon levels are found, or the option of having the sellers pay for a radon remediation system.
Lead Paint
Under the Massachusetts Lead Paint Law, buyers of property are entitled to have the property inspected for the presence of lead paint. (Sellers are not required to remove lead paint in a sale situation). Because the abatement of lead paint can be costly, buyers typically look for a right to terminate the purchase and sale agreement if lead paint exists and the abatement/removal of it exceeds a certain dollar threshold. Here is an example of a provision added to the standard form:
LEAD PAINT. Seller acknowledges that the Buyers have a child under six (6) years of age who will live in the premises. In accordance with Massachusetts General Laws, Chapter 111, section 197A, as the premises was constructed prior to 1978, Buyer may have the premises inspected for the presence of lead paint which inspection shall be completed within ten (10) days after the execution of this Agreement, unless extended in writing by the parties. If the inspection reveals the presence of lead paint, the abatement and/or removal of which will cost $2,000 or more, then Buyer may terminate this agreement, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto. Any lead paint removal or abatement shall be Buyers’ responsibility.
Access
When my wife and I signed the Offer to Purchase on our house, she couldn’t wait to get in there with her tape measure, paint chips and fabric swatches. Oftentimes overlooked, but a cause of friction is buyers’ ability to access the house prior to the closing. To avoid such friction, an access clause should be added to the purchase and sale agreement giving the buyer reasonable access at reasonable time with advance notice to the sellers–it’s still their house after all.
These are just a few of the issues not adequately addressed by the “standard” form purchase and sale agreement. There are many more.
_________________________________________ Richard D. Vetstein, Esq. is a nationally recognized real estate attorney, and has handled thousands of Massachusetts real estate transactions. He can be reached via email at [email protected].
In my opinion, title insurance is an absolute necessity in every real estate conveyance transaction. Even though I’m an experienced real estate attorney, when I purchased my own house, I obtained owner’s title insurance. With the instances of title and bank paperwork problems on the rise, I prefer not having to worry about hidden title defects which could affect my ability to refinance and sell my house down the road.
The problem is that most home buyers don’t know what title insurance is or what it covers, and only see it for the first time on the closing settlement statement. Closing attorneys and title insurance companies need to do a better job explaining the excellent benefits and value of title insurance, so consumers don’t have the perception that it is just another junk fee.
What Is Title Insurance?
Title insurance is policy of insurance (technically an indemnification policy) protecting homeowners and lenders from actual financial loss in the event that certain covered problems develop regarding the rights to ownership of property. While Massachusetts closing attorneys search and certify each title to real estate before a closing, there are often hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.
There are two types of title insurance, lender’s and owner’s policies. Lender’s policies are required by most every public mortgage lender in the U.S., and are typically paid as part of closing costs. Owner’s policies are optional and paid for by home buyers. I will discuss owner’s policies in this post.
Title Defects: What Does An Owner’s Policy Of Title Insurance Cover?
The recent foreclosure paperwork mess and the Massachusetts high court ruling in U.S. Bank v. Ibanez are perfect examples of the importance of title insurance. Thousands titles in Massachusetts coming out of faulty foreclosures were rendered defective because of the Ibanez ruling. Those without owner’s title insurance were left to fix the title problems on their own at great expense. Those with title insurance, by contrast, were able to sell their property with the title insurer issuing “clean” policies over the defects.
Here are some other real world examples of how title insurance protects you. I recently represented a condominium seller who was shocked to learn a day before the closing that there were several un-discharged mortgages and liens on her unit left over from the original developer. Fortunately, she had an owner’s title insurance policy which allowed her closing to go forward as scheduled. I represented a young family who was dismayed to learn that the property they were about to buy was subject to the claim of a long-lost heir of a prior owner. The title insurance company agreed to file litigation against the “missing” heir, and clear the title. If title insurance was not available in these transactions, the deals would have been canceled altogether, or the closings would have been delayed by months if not years until the issues were resolved, if at all.
In addition to undischarged mortgages and the sudden appearance of unknown or missing heirs claiming an interest in the property, an owner’s policy of title insurance also covers a myriad of other types of title defects, including:
Faulty foreclosures
Forged deeds or impersonations
Incorrect legal or boundary descriptions
Recording errors
There is also a new extended or enhanced coverage policy available from all major title insurance companies which covers:
Building permit violations
Adverse possession or prescriptive easements
Building encroachments
Incorrect surveys
Pre-existing violations of subdivision, zoning laws, restrictive covenants.
For a full list of just about every conceivable situation covered by title insurance, please read my article: 50 Ways To Lose Your Home.
How Much Does Title Insurance Cost?
Title insurance is a one-time premium paid at closing and is calculated based on the purchase price of your home. The cost is for standard coverage is $3.65 per $1,000 in home value. Enhanced coverage policies run $4.00/thousand, and provide better coverages (i.e., for boundary disputes) and inflationary protection. These days, we are always recommending enhanced coverage as it’s a better value. When you purchase both lender’s coverage (always required by mortgage lenders) and owner’s coverage at the same time, there is a substantial discount.
Title insurance is a good deal because you pay once and it continues to provide complete coverage for as long as you or your heirs own the property. Those who decline title insurance rationalize that the risk of a title defect is minimal and not worth the premium. That is false. As a former claims counsel for a national title company, I could write a treatise on the different types of title problems I have seen derail closings and drag on for years.
The Role Of The Closing Attorney
The closing attorney ensures that the title examination is done on the property, certifies that the title is “marketable,” and issues the title insurance policy. While all U.S. public lenders require lender’s policies of title insurance, closings attorneys should always recommend owner’s policies for buyers. Attorneys do share in the title premiums generated. However, as I said before, even the most careful title search cannot reveal a hidden title defect that can wreck havoc on any subsequent sale or refinancing of the property.
To borrow from Nike’s old slogan, Title Insurance: Just Get It.
Please contact me at [email protected] if you have any further questions about title insurance.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
