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First, a huge h/t to Kossack emal, who noted this historical Massacusetts Supreme Court decision via their links to dday's post over at FDL (see farther down, below), out this morning, in the comments in my previous diary. This diary picks up where my last diary left off.
Has the tide started turning on decades of Wall Street transgressions against Main Street? Or, is this just wishful thinking?
(Sorry, but the previous diary's only 17 hours old, so no link; however, here's the link to Yves Smith's previous post on the matter: "Pending Massachusetts Supreme Court Ruling May Invalidate Securitization Mortgage Transfers.")
(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.
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And, here's FDL's David Dayen's coverage of this major story, from earlier this morning...
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.
IMHO, this could end up being a major development, of potentially historic proportions, that folks will be reading in history books for generations to come. Only time will tell...but, for now, score a HUGE one for the home team!