Court Says Foreclosure Sales Were Invalid As Banks Didn't Acquire Interest In Delinquent Loans Until After Legal Action Was Completed

In a recent ruling by the Massachusetts Land Court, two foreclosure sales were held to be invalid because, at the time of the publication of the notices of foreclosure sale, neither foreclosing lender owned an interest in the mortgage (either recorded or unrecorded) each was attempting to foreclose.

The facts of the cases in a nutshell are as follows:

• Wells Fargo and U.S. Bank each foreclosed on mortgages it purportedly held and acquired title to the homes securing said loans at foreclosure sales.

• When each lender attempted to unload the homes onto a subsequent purchaser, they were unable to obtain title insurance policies on the homes until a couple of legal issues affecting the property were resolved in the lenders' favor.(1) One of the issues was whether the lenders were the holders of their respective mortgages at the time the notices of foreclosure sale were published.

• The lenders then each commenced legal actions to "remove a cloud from the title" to the homes.

• The court found that the applicable law for this case is found in G.L. c. 244, § 14, Bottomly v. Kabachnick, 13 Mass. App. Ct. 480, 484 (1982), and the cases cited therein which, among other things, appear to require that notice of a foreclosure sale identify "the holder of the mortgage," (See Bottomly, at 483) and that failure to do so renders the "sale void as a matter of law." (Id. at 484.)

• According to the court, the evidence showed that, while Wells Fargo and U.S. Bank were each identified in the published notice of foreclosure sale as "the holder of the mortgage," each acquired its interest in their respective mortgages after the foreclosure sale (in Wells Fargo's case, it acquired its mortgage by assignment ten months after the sale, with the assignment declaring an effective date prior to foreclosure; in U.S. Bank's case, it acquired its interest in the mortgage by assignment nearly fourteen months after the auction took place). Additionally, the court's ruling pointed out that there also was nothing to indicate that each was acting (or purporting to act) as someone else's agent, much less the agent of the principal.

• Because they were incorrectly identified as the mortgage holders in the notice of foreclosure sale when, in fact, each did not acquire its interest until after the foreclosure sale, the court found a lack of compliance with G.L. c. 244, § 14, and therefore, ruled that the foreclosure sales were invalid.(2)(3)

Go here for the consolidated court ruling (U.S. Bank v. Ibanez; LaSalle Bank v. Rosario; and Wells Fargo v. Larace).

In a related story, see Thousands Of Foreclosures Are Void, Says Massachusetts Class Action Demanding Lenders & Their Lawyers Prove Note Ownership.

For posts that reference the failure of mortgage lenders and their attorneys to file the proper paperwork when bringing foreclosure actions, Go Here, Go Here, Go Here, Go Here, Go Here, Go Here, and Go Here.

Thanks to Glenn F. Russell, Jr. of the Law Office of Glenn F. Russell, Jr., Fall River, Massachusetts for the heads up on this case, and for providing a copy of the court ruling.

(1) For the kinds of title problems one can encounter in buying real estate in a transaction, see:

• Buyers Cautioned To Address Title Issues When Buying Foreclosed Homes, and
• Title Insurance: What Risks Does It Protect A Property Owner Against?

(2) In a third case, the court found in favor of a foreclosing lender, ruling that possession of an unrecorded assignment of mortgage at the time of the publication of the notice of sale was sufficient to establish its status as a holder of the mortgage. Failure to record the assignment of mortgage was not fatal to its position as holder in this case.

(3) In the following excerpt from the court ruling, the trial judge makes an observation that may be of some interest to those in the title insurance industry who are asked to insure the potentially crappy titles to foreclosed homes that may contain title defects as a result of errors made by assembly-line, foreclosure mill lawyers bringing lawsuits on behalf of lenders who lack standing to foreclose. Real estate purchasers buying foreclosed homes, either at a foreclosure auction, or from the bank directly after it acquires title to the foreclosed home, may also have some interest in the following (footnotes omitted):

• As even a cursory glance at the current caseload of this court reveals, titles arising from mortgage foreclosures can have many problems. These include the most fundamental: Did the party conducting the foreclosure have the authority to do so and, if challenged, can it prove that it had such authority? In short, will a purchaser at the foreclosure sale get good title and will get it in prompt fashion? These are increasingly important questions in the current deteriorating real estate market and are not small concerns. It is increasingly rare for a mortgage to remain with its originating lender. Often, as here, mortgages are assigned to other entities, and then assigned yet again into large securitized pools. Often, as here, the paperwork lags far behind. Sometimes mistakes are made. Mistakes can only be corrected, if at all, through confirmatory documents (which the borrower may not so easily agree to) or litigation. With so many foreclosed properties available for purchase, why bid on a property with even the possibility for such trouble? Why bid on a property when the foreclosing party cannot produce all the documents (including proper mortgage assignments in recordable form) that would give good title? Why take the risk that the foreclosing party will be able to produce the documents promptly after the auction takes place, that those documents will be complete and in proper form, or even (in this era of failed and failing institutions) that the foreclosing party will still be in existence, with intact files and knowledgeable employees able to find those files so that the proper paperwork can be completed? Since these concerns affect the ability to obtain clear, marketable title, why bid a reasonable market value instead of a discount price to account for that risk?

• None of this is the fault of the mortgagor [Editor's note: "mortgagor" = the foreclosed homeowner], yet the mortgagor suffers due to fewer (or no) bids in competition with the foreclosing institution. Only the foreclosing party is advantaged by the clouded title at the time of auction. It can bid a lower price, hold the property in inventory, and put together the proper documents at any time it chooses. And who can say that problems won't be encountered during this process? It is interesting that it took the plaintiff (the foreclosing party and successful bidder) almost fourteen months after the auction to obtain its assignment in Ibanez and ten months after the auction in Larace. Would any reasonable third-party bidder have been willing to wait that long, trusting that no other issues would arise? Only in Rosario was the assignment (showing that the foreclosing party held the mortgage and could convey title as a result of the sale) in hand and ready for recording at the time of the auction sale. EpsilonMissingDocsMtg title insurance legal issues