Wednesday, February 22, 2012

Bay State High Court Ruling Expected Soon On Need To Hold Note In Order To Foreclose Mortgage

Bloomberg reports:
  • The highest court in Massachusetts is poised to rule as soon as this month on a foreclosure case that could lead to a surge in claims from home owners seeking to overturn seizures.

  • The justices are deciding whether to uphold a lower court ruling that gave a Boston home back to Henrietta Eaton after Sam Levine, a 25-year-old Harvard Law School student, argued in front of the nation’s oldest appellate court that the loan servicer made mistakes when it foreclosed because it didn’t hold the note proving she was obliged to pay the mortgage.


  • A ruling in favor of Eaton would show how a $25 billion settlement reached this month with state and federal officials still leaves banks exposed to liabilities tied to home repossessions. It also underscores the challenge of resolving a foreclosure process that Federal Reserve Chairman Ben S. Bernanke said in a study last month is plaguing the housing recovery.

  • At issue in Eaton v. Federal National Mortgage Association,(1) also known as Fannie Mae, are two documents borrowers sign to get a home loan. The first is the mortgage establishing the right to seize a property. The second is the promissory note that creates an obligation to pay the debt. While the servicer had the mortgage when it foreclosed, it didn’t have the note. One without the other is known as a naked mortgage.


  • The Massachusetts Supreme Judicial Court justices signaled last month they may rule in favor of Eaton when they asked parties in the case to submit briefs arguing whether such a decision should be applied retroactively or only to future lending. If retroactive, it would cloud the titles of the 40,000 Massachusetts properties seized in the last five years and while the ruling only applies to the state, it could serve as a model for homeowners trying to overturn foreclosures in other states.


  • Copies of promissory notes aren’t enough to establish rights, just as copies of dollar bills wouldn’t be honored by a bank, said Kathleen Engel, a professor at Suffolk University Law School in Boston. If an original note can’t be found, attorneys must file a lost-note affidavit and provide evidence to establish a claim.

  • In last year’s decision, the lower Massachusetts court said it wasn’t troubled by the separation of the two documents after homeowners signed them. The problem was the failure to rejoin them before foreclosing on a property.

  • Massachusetts courts have historically held that one must hold both the mortgage and the mortgage note before initiating foreclosure,” Superior Court Justice Frances McIntyre in Boston wrote in a June 17 decision. “This rule flows from the fact that a mortgage, by definition, is simply a security for the note.”


  • The Massachusetts Supreme Judicial Court last year ruled on two other foreclosure cases. Both handed properties back to owners because of botched foreclosures. In each case, the servicers didn’t hold the mortgages when they seized the properties.

  • In an October decision on Bevilacqua v. Rodriguez, the Massachusetts Supreme Judicial Court handed a foreclosed apartment building back to a prior owner five years after its sale to an investor who turned it into condominiums. The high court’s ruling meant people who bought the condo units lost their homes with no compensation. The brick building now stands vacant, its front door blocked with piles of old mail.

  • In a January 2011 case, U.S. Bank v. Ibanez, the high court handed back two other properties to former owners.

For more, see Seizures Threatened in Massachusetts With Naked Loans Challenge: Mortgages.

(1) Go here for links to the briefs filed in this case.