MA Supreme Court Deals Banks a Major Blow on Foreclosure Fraud, in the Ibanez Case
By: David Dayen Friday January 7, 2011 8:08 am
In a major ruling in the Massachusetts Supreme Court today, US Bank and Wells Fargo lost the "Ibanez case," meaning that they don't have standing to foreclose due to improper mortgage assignment. The ruling is likely to send shock waves through the entire judicial system, and seriously raise the stakes on foreclosure fraud. Bank stocks are plummeting at this hour.
Tracy Alloway of the Financial Times has a very good explainer of the case...
...The notice requirements are a bit of a sideshow. The point here is that the mortgage assignment and the securitization process was improper. US Bank and Wells Fargo did not have possession of the mortgage note, and thus did not have the standing to foreclose. In addition, they put the endorsement in blank, without naming the entity to which they were assigning the mortgage. This violated Massachusetts law, according to the original judge in the case, and now the MA Supreme Court agreed.
And as we know, this is more the norm than otherwise. But this is one of the first major cases, decided by a state Supreme Court, that affirms that a lack of securitization standards means that the bank who thinks they have the power to foreclose on a delinquent borrower actually does not.
If this ruling gets applied far and wide, you're basically going to have a situation where most securitized mortgages in the country cannot be foreclosed upon. It depends on state law and the associated rulings, but you can see the Ibanez case being used as precedent.
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From Yves Smith, her update via Naked Capitalism, early this afternoon...
(Diarist's Note: Diarist has received formal authorization from Naked Capitalism Publisher Yves Smith to reprint her blog's posts in their entirety for the benefit of the Daily Kos Community.)
Mass Supreme Court Rules Against Wells Fargo, Deutsche Case on Validity of Mortgage Transfers in Securitizations
Friday, January 7, 2011 12:59PM
Bottom line: even thought the Supreme Court ruling in this Massachusetts case, Ibanez, was narrow, it still represents a major blow to the securitization industry, specifically, the argument made by the American Securitzation Forum and securitization law firms that have liability on opinions they provided on residential mortgage securitizations. It is also certain to fuel more challenges in court based on failures of the parties to securitizations to adhere to the requirements of their contracts.
The judges based their ruling strictly on Massachusetts law issues, and did not opine on the New York trust law issues we have highlighted. The ruling emphasized the horrible job the banks did in protecting and documenting their ownership interest and the overall carelessness of the securitization process. Massachusetts. law is somewhat unique in requiring that not only the note (the borrower IOU) be assigned correctly, but also that the lien (the so-called mortgage, or deed of trust) also be conveyed properly.
Effectively this shows the shortcomings of the fundamental design of the securitization process, of developing a one-size-fits-all process when some states have long-standing law (real estate is very well settled) that is idiosyncratic. How, in this case, could you design a securitiztion process that did NOT account for the need to handle the assignment of the mortgage, as Massachusetts requires?
As the ruling describes, one of the issues raised in the lower court case was "whether the plaintiffs were legally entitled to foreclose on the properties where the assignments of the mortgages to the plaintiffs were neither executed nor recorded in the registry of deeds until after the foreclosure sales." Note that "out of time" assignments are common, often coming well after the timeframe required in the securitization documents, and even, as this case demonstrates, after foreclosure proceedings have commenced. At a hearing, the plaintiffs agreed that the documents they presented showed the transfer took place too late, but claimed they had other documents that would confirm that the transfer took place earlier. These documents, for the most part, were the original pooling and servicing related documents. In effect the argument was that there was an intent to transfer, and money had changed hands, which is a position the ASF and bank lobbyists have made repeatedly.
If you read the decision, you will see the judges recite the history of the two mortgages at issue and how they describe the language of the PSA and its requirements, how the banks did not adhere to its requirements, and how the documents the banks provided fail to link the properties in question specifically to the securitizations (meaning you can't look at the closing documents and see clear evidence that the loans in question were even intended to be in these pools).
This is the key sentence from the decision, that the use of a securitization does not alter or reduce the requirements that apply to transfers and ownership of the loans and the related property:
Where, as here, mortgage loans are pooled together in a trust and converted into mortgage-backed securities, the underlying promissory notes serve as financial instruments generating a potential income stream for investors, but the mortgages securing these notes are still legal title to someone's home or farm and must be treated as such.
Here is the decision: Ibanez Decision
Further commentary from Bloomberg. Note the market reaction. This ruling increases the odds that more borrowers will sue bank servicers and trustees for wrongful foreclosures.
US Bancorp and Wells Fargo & Co. lost a foreclosure case in Massachusetts's highest court that will guide lower courts in that state and may influence others in the clash between bank practices and state real estate law. The ruling drove down bank stocks.
The state Supreme Judicial Court today upheld a judge's decision saying two foreclosures were invalid because the banks didn't prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts....
The 24-company KBW Bank Index fell as much as 2.2 percent after the decision was handed down.
end of update
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Original Diary Headline: Yves Smith: Today's MA Mortgage "Bombshell" Via Bloomberg
According to an article running over at Bloomberg Media, today, a pending Massachusetts Supreme Court ruling [U.S. Bank v. Ibanez, 10694, Supreme Judicial Court of Massachusetts (Boston)] may significantly aid investors in their efforts to put-back (obtain a 100% refund from the originating banks) trillions of dollars in mortgage securitizations, nationally, and void many recent foreclosures in the state, as well. Numerous observers, including Naked Capitalism Publisher Yves Smith, who's referring to it as a "bombshell," are noting that the implications of this upcoming, landmark Massachusetts State Supreme Court decision could reverberate throughout the country.
Foreclosures May Be Undone by State Ruling on Mortgage Transfer
By Thom Weidlich
Thu Jan 06 05:01:00 GMT 2011
...A victory for the homeowners may invalidate some foreclosures and force loan originators to buy back mortgages wrongly transferred into loan pools. Such a ruling may also be cited in other state courts handling litigation related to the foreclosure crisis...
Then again, based upon my post from early Wednesday, concerning the very possible reality that U.S. taxpayers may end up footing the bill for most of the foreclosure fraud crisis, this may be a moot point, regardless of how one views the outcome of any state court decision.
Nonetheless, IMHO, this could get quite interesting...
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(Diarist's Note: Naked Capitalism Publisher Yves Smith has authorized diarist to republish her blog's posts in their entirety for the benefit of the Daily Kos community.)
Pending Massachusetts Supreme Court Ruling May Invalidate Securitization Mortgage Transfers
Thursday, January 6, 2011 12:51PM
Bloomberg has a bombshell today, that a case before the Massachusetts Supreme Court may invalidate certain types of mortgage transfers, a central process in mortgage securitizations. A ruling for the plaintiffs would render some past foreclosures invalid, raising the possibility that the borrowers could sue for damages. It would also have far reaching implications, since it would also be a significant setback to the argument made by the American Securitization Forum and the major securitization law firms who have issued opinion letters in support of securitization industry procedures.
One procedure under question is so-called "endorsement in blank". Recall that what we call a mortgage consists of two parts: the promissory note (the borrower IOU) and the lien (confusingly called the mortgage or in some states, a deed of trust). The note is a negotiable instrument, which means, just like a check, it is payable only to the party in whose name it is made out, or it can be endorsed in blank (think of when you sign the back of a check but don't deposit it, in theory anyone can then make it payable to themselves).
The securitization agreements called for the notes to go through a specific number of parties, usually at least two between the originator and its final home, a trust. They required the note have a specific chain of endorsements (as in in theory each party could still endorse in blank, meaning not sign it over specifically to the next required party, as long as each party in the chain did sign it in blank and it bore evidence of indeed having passed through all the required parties). It appears Massachusetts may have problems with the endorsement in blank process, which was allegedly pervasive (indirect evidence comes from the ASF's efforts to defend the practice).
Massachusetts's highest court is poised to rule on whether foreclosures in the state should be undone because securitization-industry practices violate real- estate law governing how mortgages may be transferred.
The fight between homeowners and banks before the Supreme Judicial Court in Boston turns on whether a mortgage can be transferred without naming the recipient, a common securitization practice. Also at issue is whether the right to a mortgage follows the promissory note it secures when the note is sold, as the industry argues...
"This is the first time the securitization paradigm is squarely before a high court," said Marie McDonnell, a mortgage-fraud analyst in Orleans, Massachusetts, who wrote a friend-of-the-court brief in favor of borrowers. The state court, under its practices, is likely to rule by next month...
If loans weren't transferred properly, the banks that sponsored such trusts may have to repurchase them, Adam J. Levitin, an associate professor at Georgetown University Law Center in Washington, said in prepared testimony in the U.S. House of Representatives in November.
If the problem is widespread enough, it may cost the banks trillions of dollars and make them insolvent, Levitin said.
There is "a surprising lack of consensus" as to "what method of transferring notes and mortgages is actually supposed to be used in securitization and whether that method is legally sufficient," he said.
The case in question is referred to as Ibanez. The local court ruled against the banks trying to foreclose on a house because the note was transferred after the servicer initiated foreclosure proceedings, a clear no-no (provided the judge is awake and not reflexively pro-bank). The plaintiffs then tried arguing that the governing agreement, the pooling and servicing agreement, effectuated the transfer (we've called this the "intent works" claim, which actually is a valid notion in other areas, but looks to be quite a stretch here given the very specific stipulations of the PSA and the fact that enforcement of a mortgage requires in most states that the party be a "holder", meaning have possession of the instrument, in this case the borrower note, and be the legally proper party to have it, which means that it be signed over to that party OR be endorsed in blank). The lower court judge nixed that notion too because the assignment of the mortgage (the lien) had not been recorded in the local jurisdiction, nor had the mortgage assignment named a specific assignee (in other words, the assignment was also in blank).
Even though state law, both statutory and case law, varies to some degree on these matters, state supreme courts have also cited rulings of other state courts in decisions against MERS when it has tried foreclosing in its own name (the party foreclosing should be the note holder, which MERS acknowledges that it is not). So a Mass. decision would potentially influence rulings in other states.
The stakes are very high for the securitization industry in this case. Stay tuned.
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