Ibanez decision, round two
Welcome back to Attorney Richard D. Vetstein. Today, a look at yesterday's decision in U.S. National Bank v. Ibanez. If you bought a foreclosed property, or you are thinking of buying one, you need to know about this.
Yesterday, Massachusetts Land Court Judge Keith Long reaffirmed his controversial ruling made back in March 2009 that invalidated foreclosure proceedings involving two Springfield homes because the lenders did not hold clear titles to the properties at the time of sale. A copy of the decision can be found here. As I outlined in my prior post on this case, the problem the Land Court dealt with in this case is what happens when modern securitized mortgage lending practices meets outdated foreclosure laws. When mortgages are packaged to Wall Street investors, the ownership of a mortgage loan may be divided and freely transferred numerous times on the lenders’ books. But the documentation (i.e., the assignments) actually on file at the Registry of Deeds often lags far behind.The Ruling:
Judge Long ruled that foreclosures were invalid when the lender failed to bring the ownership documentation (known as an assignment) up-to-date until after the foreclosure sale had already taken place. An assignment is a legal document confirming that a mortgage loan has been transferred from one lender to another. Assignments must be recorded with a registry of deeds so anyone researching a property’s title can track the loan’s origin and ownership. Oftentimes, as in the Ibanez case, lenders will sell bundles of loan and record backdated assignments with an effective date before the first foreclosure notice. Judge Long effectively prohibited this practice.
Despite the lender’s attempt to convince him otherwise, Judge Long came out (again) in favor of consumers:
The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.
Judge Long also had some choice words for lenders:
[T]he problem the [lenders] face (the present title defect) is entirely of their own making as a result of their failure to comply with the statute and the directives in their own securitization documents… What the plaintiffs truly seek is a change in the foreclosure sale statute (G.L. c. 244, § 14), which can only come from the legislature.
What Now? That’s a good question and one not readily answerable. To be sure, the current state of flux and confusion surrounding foreclosure titles affected by an Ibanez issue will remain intact until an appellate court considers the case or some action by the Legislature (which may be unlikely). Given the importance of the decision, I predict that the Massachusetts Supreme Judicial Court will take the unusual step of taking the case directly from the Land Court.
As for what happens in the year or so the case may be in appellate limbo, I asked an in-house counsel for a leading title insurance company, and his response was essentially that it’s going to take a fair amount of time and research to figure this one out. If there’s an existing title insurance policy on the property, some but not all of the title companies may be willing to insure over the problem. If there’s no title policy in place, affected parties are going to have to ride this one out for awhile.
And here’s my 2 cents: The decision is troubling to me because Judge Long gave short shrift to the fundamental legal principle that the mortgage follows the note. A valid mortgage is security for some type of underlying obligation, whether it’s a loan or the promise to do something in the future. There’s no question that the millions (or billions) of dollars in loans secured by all these mortgages were validly transferred from one bank/lender to securitized lenders. The money was lent and it didn’t just evaporate into the ether. If the lenders can ultimately demonstrate ownership of the underlying loan which follows the mortgage and produce a valid assignment (albeit late), why isn’t this enough?
The borrowers owe the money, and now after this ruling they are immunized from foreclosure by what many folks in the real estate industry view as elevating form over substance. Now that doesn’t mean lenders don’t need to get their act together. They do. The net effect of this decision will be that lenders must get loan documentation up to date and recorded promptly.
But the question remains, what about all the foreclosures that have already been conducted and the new homeowners who own these properties and are now saddled with an unresolvable title defect? What do consumer activists say about these “innocent victims”?
Round two in this court battle goes to the defaulting homeowners. Thousands of foreclosure sales could be invalid. Some of those are insured, some are not. Does this change your mind about trying to buy a foreclosed property?
Also, can I hear a shout-out for Attorney Vetstein? I appreciate him being on top of the legal issues here at Boston.com, do you? What topics do you want to see him covering?
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