The Ibanez case ruled against the lender in a lender-borrower dispute over the validity of a foreclosure proceeding is not just a highly political homeowners’ protection issue. It sets a precedent expected to greatly affect the mortgage industry in the future.
The Massachusetts Supreme Court ruling on the Ibanez case—which states that U.S. Bancorp and Wells Fargo did not have standing to foreclose on a borrower because they failed to follow proper legal procedure in the mortgage transfer and securitization process—is about to turn into the cornerstone of future foreclosure proceedings not only in Massachusetts.
Sean O'Toole, CEO and founder of ForeclosureRadar.com, is one of many mortgage market insiders who expect servicers to “have their hands full” when processing and managing foreclosures.
It may be a while before foreclosure activity stabilizes “and some clarity” comes to the foreclosure process, he said, not only at the federal but also at the state level.
In his view the recent example of the Massachusetts Supreme Court decision made it clear that lenders must follow the letter of the law in each state rather than simply continue industry practices. Such compliance requirements that have the power to turn into sizable legal responsibility for lenders “could certainly slow one type of activity while accelerating another.”
In times when the life of a loan entails multiple mortgage assignments and securitization agreements, lawyers Patricia Antonelli and Thomas J. Enright wrote in a recent white paper on the Ibanez ruling that dotting the "i's" and crossing the "t's" in mortgage transfers is “the Achilles heel for some lenders.”
They consider the Supreme Court's review of the Massachusetts Land Court's 2009 a “landmark decision” that is significant because it rejects securitization and pooling agreements and other forms of evidence ruling that “only fully executed assignments in recordable form are sufficient to prove mortgage ownership.”
And as everyone in the legal profession knows, these rulings are important because they create a precedent.
The State Supreme Court decision is the first to weigh in on such evidence as its opinion in the Ibanez case “makes clear that the foreclosing lender must be able to document ownership of the mortgage to be foreclosed before issuing notices of foreclosure.”
As importantly, Antonelli and Enright wrote, the Supreme Court “did not restrict evidence of mortgage ownership to fully executed assignments in "recordable form," as the Land Court had found, but noted that a foreclosing lender may document its ownership in many ways, including securitization agreements.
They explain that the underlying cases leading to the Supreme Court decision arose when U.S. Bank and Wells Fargo Bank, trustees of securitized trusts, filed complaints in the Massachusetts Land Court seeking to validate sales of foreclosed mortgages as part of a pool. The Land Court found that the lenders could not prove that they held valid assignments of the mortgages prior to foreclosing under the Massachusetts state law.
Going forward, they wrote, “It is clear that lenders seeking to foreclose in Massachusetts must make certain that they can document ownership of the mortgage at issue, with no gaps in the chain of ownership, before sending out a notice of sale.”
It means lenders with Massachusetts foreclosures will be better off if they consider auditing their internal foreclosure procedures and mortgage ownership documentation so they are prepared to comply with “demands from third parties, such as buyers and title insurers, seeking confirmation that foreclosures are valid under Ibanez.”
Antonelli and Enright list a number of takeaways from the Ibanez case.
Those takeaways include foreclosure by a party that has not been assigned the mortgage has no standing, and the foreclosure is void; where the mortgage is assigned after origination, the foreclosing party must have validly been assigned the mortgage prior to noticing the foreclosure sale; a valid mortgage assignment is not limited to an assignment of mortgage in recordable form; a mortgage is a conveyance of an interest in real property, and it must contain the name of an assignee to be valid (assignments of mortgage in blank are void); the mortgage does not “follow the note” in Massachusetts; the mortgage holder holds the mortgage in trust for the purchaser of note; and the note purchaser has equitable right to obtain an assignment of mortgage.
They also note that the Ibanez ruling is not prospective because the Ibanez decision is not a change in common law (holding not limited to future foreclosures).
Among others, Rep. Maxine Waters, D-Calif., a long-time advocate of the Ibanez case, applauded the Supreme Court ruling as a victory for homeowners because it upheld a judge’s decision to invalidate two U.S. Bancorp and Wells Fargo foreclosures as these banks “failed to prove that they followed the appropriate legal process documenting their ownership of the mortgages.
“The failure to properly transfer loans through the appropriate legal ‘chain of title’ is no technicality,” she said, “but rather part of a long pattern of predatory and negligent behavior by Wall Street.”
Waters compared it with the sale of tricky exotic products that resulted in the subprime mortgage meltdown that devastated America’s entire economy and the illegality of the servicers’ practice of rubberstamping thousands of foreclosures a week without examining the accuracy of the paperwork.
The banks’ failure “to follow the rules of the road when documenting ownership of these borrowers’ mortgages and therefore the right to foreclose…creates uncertainty for mortgage investors,” she said, and produces more wrongful foreclosures.
The congresswoman’s hope is that the influence of this ruling extends to other states.
“I will continue to advocate for servicing reform and in favor of the due process rights of homeowners.”
