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.
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.
“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.
Claims of wrongdoing by banks and loan servicers triggered a 50-state investigation last year into whether hundreds of thousands of foreclosures were properly documented as the housing market collapsed. The probe came after JPMorgan Chase & Co. and Ally Financial Inc. said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America Corp. froze U.S. foreclosures. Massachusetts is one of 27 states where court supervision of foreclosures generally isn’t required.
Took Their Homes
The Massachusetts homeowners argued that the banks that took their homes didn’t follow their own rules for transferring mortgages into mortgage-backed trusts that issued bonds. The banks and the mortgage-bundling industry counter that the securitization documents themselves assign the mortgages.
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.
While real-estate law varies by state, litigants may point to decisions from other jurisdictions as being persuasive.
“It ties into a theme nationally,” said Professor Kurt Eggert of the Chapman University School of Law in Orange, California. “The broader theme is the argument that efficiency of transfer is more important than real-property law.”
The Massachusetts cases started in 2005 when Rose Mortgage Inc. lent Antonio Ibanez $103,500 and Option One Mortgage Corp. lent Mark and Tammy LaRace $129,000, according to court papers. Ibanez and the LaRaces stopped paying on their adjustable-rate subprime mortgage loans and were foreclosed on in 2007.
By that time, US Bancorp and Wells Fargo & Co. said they controlled the loans, which had been subsumed in mortgage-backed trusts. The banks bought the homes in foreclosure auctions in July 2007.
They were the only bidders, buying “at a substantial discount” from the appraised values and “wiping out all of the defendants’ equity,” according to a lower-court ruling.
The banks had initially filed the state-court lawsuits to obtain judicial approval of the use of the Boston Globe to announce auctions in Springfield, Massachusetts.
Massachusetts Land Court Judge Keith C. Long in Boston ordered the banks to prove they had the right to foreclose in the first place.
In March 2009, he ruled they didn’t. Published notices listed U.S. Bancorp unit U.S. Bank and Wells Fargo as the foreclosing parties when they weren’t the actual mortgage holders at the time of the 2007 auction, a violation of state law, the judge said.
The Ibanez mortgage had been transferred to U.S. Bancorp 14 months after the auction, and the LaRace mortgage was transferred to Wells Fargo 10 months after, the judge said.
Long voided the two foreclosures, saying U.S. Bancorp and Wells Fargo didn’t own the mortgages.
“It was not only common, it was the standard practice” to foreclose before doing the mortgage transfer, said Richard D. Vetstein, a real estate lawyer in Framingham, Massachusetts, who isn’t involved in the case. “Judge Long kind of changed the rules in the middle of the game.”
In October 2009, Long denied the banks’ request to change his decision because of new evidence purportedly showing that the mortgages were effectively transferred to their control by the documents establishing the mortgage-backed trusts.
The judge found that even if the documents could assign the mortgages, fatal missteps occurred in transferring them to the loan pool. Long said it was important to address the new facts and arguments “since they are alleged to be common to many securitized loans.”
Rose Mortgage, the original lender to Ibanez, endorsed the promissory note and assigned the mortgage to Option One Mortgage, which was also the LaRace couple’s original lender.
Option One endorsed both notes and assigned both mortgages “in blank,” meaning no assignee was identified. The loan passed eventually into the trusts overseen by U.S. Bank and Wells Fargo.
Long said the banks couldn’t foreclose without a mortgage assignment that could be recorded in a local land office. The assignments they had didn’t pass muster, he said, because they didn’t name the assignee.
“These blank mortgage assignments were never recorded and they were not legally recordable,” he said.
At the time of the foreclosures, Option One, not U.S. Bank and Wells Fargo, held the mortgages because the blank assignments “transferred nothing,” according to Long. Option One was then owned by H&R Block Inc. and is now owned by American Home Mortgage.
Stephen F.J. Ornstein, a Washington partner of the Chicago-based law firm SNR Denton LLP, said there’s nothing wrong with making blank mortgage assignments.
“It’s quite common,” said Ornstein, who has co-written an article on mortgage loan transfers to securitization trusts. “The fact that the mortgages were assigned in blank doesn’t invalidate the foreclosures. The trial-court judge was terribly misguided there.”
The judge also rejected the banks’ contention that having the note, the blank mortgage assignment and a contractual right to obtain the mortgage gave them the “indicia of ownership” of the mortgage.
“Even a valid transfer of the note does not automatically transfer the mortgage,” Long wrote. In this case, U.S. Bank and Wells Fargo owned the notes while Option One owned the mortgages, he said. The banks’ title-defect problem “is entirely of their own making as a result of their own failure to comply with the statute and the directions in their own securitization documents,” Long wrote.
The American Securitization Forum, an industry lobbying group, said in a Nov. 16 white paper that Long “cast doubt on the ‘mortgage-follows-the-note’ rule.”
The Supreme Judicial Court heard the banks’ appeals of Long’s rulings on Oct. 7. They argued that the documents they received that bundled the loans into pools legally transferred them the mortgages.
‘New Business Model’
“The record in this case reflects how mortgage lending changed in recent years and how the industry failed to ensure that its new business model conformed to state law,” Massachusetts Attorney General Martha Coakley wrote in a brief supporting the borrowers.
Teri Charest, a spokeswoman for Minneapolis-based US Bancorp, the fifth-largest U.S. bank by deposits, referred questions to American Home Mortgage Servicing Inc., the servicer of the mortgages. Philippa Brown, a spokeswoman for Coppell, Texas-based American Home Mortgage, said in an e-mail that agreements to pool mortgages that formed the basis for issuing bonds were sufficient to make transfers effective.
The agreements “assigned and transferred the borrowers’ mortgages and notes to the two securitization trustees at issue,” giving them the authority to foreclose, Brown said.
Jason Menke, a spokesman for San Francisco-based Wells Fargo, the fourth-largest U.S. lender by assets, said American Home Mortgage filed the appeal brief on the trusts’ behalf.
The banks, acting as trustees on behalf of the owners of debt issued based on bundled home loans, argued in their brief that borrowers can’t challenge their compliance with securitization agreements because they aren’t parties to them.
The Securities Industry and Financial Markets Association, Wall Street’s largest lobbying group, said in a statement Oct. 20 that customary securitization methods, which it described in terms similar to the Ibanez and LaRace assignments, “are sound and in accordance with generally applicable legal principles.”
Katrina Cavalli, a spokeswoman for the organization, declined to comment.
The banks said that if the Supreme Judicial Court upholds Long, the ruling should apply only to future foreclosures. Some people who bought from other homeowners -- possibly as long as 15 years ago -- would lose their property because of the bad chain of title, the Real Estate Bar Association for Massachusetts said in a brief to the high court.
Vetstein, the Framingham lawyer, said Long’s rulings have wreaked havoc, putting hundreds or thousands of Massachusetts foreclosures in limbo.
The home-loan-bundling industry bears the responsibility and should bear the cost of such title disputes, Coakley, the state attorney general, told the state high court.
“Having profited greatly from practices regarding the assignment and securitization of mortgages not grounded in the law, it is reasonable for them to bear the cost of failing to ensure that such practices conformed to Massachusetts law,” she wrote.
Glenn F. Russell Jr., a lawyer in Fall River, Massachusetts, who represented the LaRaces before the state high court, said the mortgages were illegally transferred because the banks and servicers were interested in maximizing their business volume.
“The most insidious part of this is, it’s the roof over someone’s head you were playing around with,” said Russell, who added: “And then they said, ‘Who’s going to challenge us?’”
The case is U.S. Bank v. Ibanez, 10694, Supreme Judicial Court of Massachusetts (Boston). The lower-court cases are U.S. Bank National Association v. Ibanez, 08-Misc-384283, and Wells Fargo Bank NA v. LaRace, 08-Misc-386755, Commonwealth of Massachusetts, Trial Court, Land Court Department (Boston).