Although a recent Massachusetts court ruling on foreclosures initially appeared to be bad news for mortgage firms trying to seize properties, it appears that it may actually help the industry.
Mortgage attorneys analyzing the case believe the Massachusetts Supreme Judicial Court ruling actually makes it relatively easy for MBS trustees to foreclose on defaulted loans in the Bay State. The justices are not requiring a timely and complete record of assignments from the originator-to-buyer-to-securitizer and to trustee of the mortgage-backed securities.
The state SJC ruled that securitization documents can serve as an effective assignment of the mortgage to the trustee. However, these documents have to be in hand before a servicer initiates the foreclosure process.
In a ruling involving the 2007 foreclosures of two Option One mortgages, the high court said the trustees can use the pooling and servicing agreements as proof that they are the holder of the note with the right to foreclose.
However, the PSA must include a schedule of mortgages that specifically identifies the mortgage that is subject to the foreclosure action.
Surprisingly, the trustees—Wells Fargo Bank, N.A, and U.S Bank—fell short of this standard of proof. And the justices upheld the lower court's decision to invalidate the two foreclosure actions.
"A plaintiff that cannot make this modest showing cannot justly proclaim that it was unfairly denied a declaration of clear title," according to associate justice Ralph Gants. Gants wrote the opinion in U.S. Bank vs. Antonio Ibanez and Wells Fargo vs. Mark LaRace.
Initial reports of the SJC's decision painted it as setback for the securitization market, highlighting the belief that the ruling would make it difficult to foreclosure on securitized mortgages in Massachusetts and other states.
But industry attorneys don't see it that way. "The SJC's ruling is the first reported ruling from a state's highest court that recognizes that securitization documents may serve, as a matter of law, to effectuate assignment of mortgages from the originator to the securitization trustee," according to a report by K&L Gates attorneys.
"Wells Fargo believes the court's ruling does not prevent foreclosures on loans in securitizations. The court simply set forth a standard legal process that mortgage servicers must follow in Massachusetts," the giant bank said. As the trustee, Wells Fargo noted that it didn't originate, own, service or foreclose on the Option One loan.
Jeffrey Naimon, a partner at BuckleySandler LLP, noted that servicers in Massachusetts began to take corrective actions shortly after the trial court invalidated the Ibanez and LaRace foreclosures. It is now common practice to make sure the necessary securities documents and assignments are assembled before a foreclosure action is started.
In cases where the schedule of mortgages is not attached to the PSA, "that's a fixable problem," Naimon said. (The BuckleySandler attorney specializes in financial services law dealing with consumer lending and servicing issues.)
New York-based real estate attorney Ed Mermelstein said he believes the case is going to have "some financial repercussions over the next six months to a year" related to checking documentation and legal fees. Ultimately, "Banks have to understand they can't play games with documents," Mermelstein said.
In the Ibanez case, U.S. Bank's attorneys told the trial court that the assigned mortgage in the trust agreement is described in a private placement memorandum (PPM), but it did not submit a copy of the actual trust agreement. The trustee did not produce a schedule of the mortgages either.
"The PPM, however, described the trust agreement as an agreement to be executed in the future, so it only furnished evidence of an extent to assign mortgages to U.S. Bank, not proof of actual assignment," the SJC said.
In the LaRace case, Wells Fargo produced a schedule of mortgages. "But the mortgage loan schedule submitted failed to identify with adequate specificity the LaRace mortgage as one of the mortgages assigned by the PSA," the SJC said.
The justices said they could not undo what was presented to the trial court and upheld the lower court's decision.
"In this case, the plaintiffs failed to prove they had obtained valid written assignments of the Ibanez and LaRace mortgages before their foreclosures, so the post-foreclosure assignments were not confirmatory of earlier valid assignments," Gant said.
Analysts at Amherst Securities Group pointed out that the Ibanez and LaRace mortgages were not in the MERS system. If they were, "the chain of ownership would have been easier to prove."
Nevertheless, the SJC stated that "if the proper documents had been available at the time of the foreclosure auction but not recorded until the auction that would have been acceptable," ASG said.
Scott Buchta, head of investment strategy at Braver Stern Securities LLC, told this publication that the bond market showed little reaction to the news of the Massachusetts Supreme Court's decision on Jan. 14. He said equities, rather than bonds, reacted upon the release of the judge's decision because the market's perception of "who was at risk" focused on the banks that service the loans.
The Massachusetts ruling also reminded stock investors of foreclosure and buy back problems facing major servicers like Bank of America, Wells Fargo, JPMorgan Chase and others.
State attorneys general are in negotiations with several large servicers to settle the robo-signing scandals. While it may take several months to reach a deal, the AGs want the servicers to adopt best practices with respect to foreclosures and loan modifications.
Keefe Bruyette & Woods mortgage analyst Bose George noted that it will take banks several years to wade through the foreclosure crisis and related legal issues. "Our view is that the settlements are not going to be huge punitive settlements," George said. "If the banks have to put up some money," he said, it will be to help modify more loans, provide principal reductions and compensation borrowers who were unfairly thrown out of the homes.
Meanwhile, federal banking regulators and the Department of Housing and Urban Development are conducting their own reviews and examinations of major servicing shops. Their findings may be released in a few weeks. The Department of Justice also is engaged in this interagency review.
