Monday, October 11, 2010

Massachusetts High Court Hears Arguments In 'Ibanez' Case That Threatens To Open The Door To Voiding Thousands Of State Foreclosures

In Boston, Massachusetts, the Boston Herald reports:
  • Banks went nuts during the housing boom, so the state’s top court should uphold a ruling that potentially undoes the wave of foreclosures that followed, a pro-consumer lawyer says. “This industry was insane in its underwriting practices and its foreclosure practices,” attorney Paul Collier told the Supreme Judicial Court [last week]. “There are (liability) costs to that (behavior).”

  • The SJC is debating whether to uphold a 2009 Massachusetts Land Court decision(1) that voided two foreclosures - and opens the door to invalidating thousands more. The lower court ruled that Wells Fargo and U.S. Bank each seized a Bay State home without paperwork proving they really owned the properties’ mortgages.

  • The decision, known as the Ibanez ruling, centers on the way that banks trade mortgages back and forth like stocks these days. Under Massachusetts law, lenders must generate specific transfer documents every time a loan changes hands. Failure to do so can call into question who really owns the mortgage - and who has the right to foreclose.

  • Bank lawyer Robert Allensworth told the SJC that, while his clients used blank documents to transfer ownership of the mortgages in question, later paperwork proved they legally owned the loans. But Collier said the “ludicrous” paperwork that Allensworth cited included marketing sheets used to attract investors to a block of mortgages that included one of the Massachusetts loans.

  • SJC members, who are expected to take months to rule in the case, wondered how upholding the lower court’s decision would affect consumers who’ve bought foreclosed homes from banks. Experts say such homeowners would have to go to court to “cure” title problems before they could sell or refinance properties. “Given the extraordinary sloppiness that accompanied (the industry’s trading) of mortgages, there could be hundreds of thousands or maybe more of (problem) mortgages,” Justice Ralph Gants said.(2)(3)(4)

Source: Lawyer: ‘Insane’ foreclosures should be undone.

Go here to view oral argument (with Windows Media Player) and go here for the Case Docket.

(1) There were actually two rulings issued by Massachusetts Land Court Judge Keith C. Long:

(2) For earlier posts on this case, see:

(3) For the legal briefs filed in this case, see:

(4) It should be noted that, as far back as a year and a half ago in the Massachusetts Land Court decision in Ibanez #1, Judge Long foreshadowed the "crappy title" problem related to faulty foreclosures that has only recently garnered much attention, in the following excerpt (footnotes contained in the original text have been omitted here for ease of reading; bold text is my emphasis, not in the original text):

  • 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, 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.