On January 7, 2011, the Massachusetts Supreme Judicial Court issued an important ruling regarding foreclosures in U.S. Bank National Association vs. Antonio Ibanez
(pdf). The court ruled that foreclosing lenders must strictly follow
the statutory requirements when conducting a foreclosure under a
non-judicial "power of sale" in Massachusetts, and that failure to
document assignments of the mortgage from the originating lender to the
foreclosing lender will void the entire foreclosure. This is a widely
watched case nationally, and other states with similar processes may
reach similar conclusions.
The decision was really two cases combined into one.
After separate foreclosures, the trustees of the mortgage pools (the
loans had been pooled and securitized, making the foreclosing trustees
the assignees from the originating lenders) conducted non-judicial
foreclosures, and then later brought suit in Land Court to confirm that
the title they received from the foreclosure was good (namely, that
they had "clear" title that could be sold to new buyers and insured by
title insurance companies).
The Land Court denied the trustees their requested
relief (for the reasons noted below). After the trustees appealed, the
SJC on its own ordered a review of the Land Court decisions rather
than waiting for the cases to go through the intermediate appellate
courts. The SJC agreed with the Land Court, finding that the
foreclosures were void because at the time they started the
non-judicial foreclosure process, the lenders could not demonstrate they
held the mortgages being foreclosed.
To support their claims that they held the mortgages
they foreclosed on, the trustees produced hundreds of pages of
documents regarding the pools into which the loans at issue were
purportedly transferred. Unfortunately, the trustees could not show
that the securitization documents had schedules which actually
transferred the loans at issue into the pools. Thus, the trustees could
not show any documentation that at the time they foreclosed, they were
the actual holders of the underlying mortgages.1
The actual assignments of the underlying loans to the foreclosing
lenders were executed (and recorded at the registry of deeds) after the
foreclosures were completed.
The Land Court found that absent proof of ownership by
assignment of the mortgages at the time of the foreclosure, the
foreclosures were defective under the rules for the power of sale in
the Massachusetts statues. The SJC agreed, noting that while recorded
assignments to the foreclosing lender (at the appropriate Registry of
Deeds) are not required, at a minimum there needs to be clear written
assignments from the originating lender through to the foreclosing
lender so that the foreclosing lender holds the mortgage at the time of
the notice and sale to have the authority to foreclose under the power
Rejecting the lenders' claims, the SJC noted that
assignments in blank in Massachusetts do not satisfy this requirement
as "assignments in blank did not constitute a lawful assignment…" of
interests in real property and are void. Further, holding the note
itself is not sufficient in Massachusetts, as an assignment of the
note does not carry with it the assignment of the underlying mortgage.
Finally, post-foreclosure assignments, even though customary in the
industry, do not satisfy the Massachusetts rules for exercising a
statutory power of sale. "If the [lenders] did not have their
assignments to the…mortgages at the time of the publication of the
notices and the sales, they lacked authority to foreclose… and their
published claims to be the present holders of the mortgages were false."
Attempting to date a post-foreclosure assignment "as of" a date
before the foreclosure was rejected.3
The Ibanez ruling applies to all Massachusetts
foreclosures, including those done before the date of the decision. The
SJC refused to limit its decision only to future foreclosures, stating
that the legal principals addressed are well-settled. "All that has
changed is the [lenders'] apparent failure to abide by those principles
and requirements in the rush to sell mortgage-backed securities."
On the one hand, this decision does not change the fact
that borrowers under defaulted mortgages still are subject to
foreclosure. Also, this decision may be limited to states like
Massachusetts that operate under a non-judicial foreclosure and "title
theory" laws for mortgages. On the other hand, this decision is bad
news for lenders. It throws into doubt many properties now held by
lenders where there were gaps in assignments as of the notice and
foreclosure date. This is likely to chill the ability of lenders to
sell properties they now hold and is expected to slow the pace of
foreclosures. Unless there is a legislative fix, lenders may have to
re-do foreclosures that they had considered final. Of great concern is
the impact for banks that have lost paperwork or cannot cure gaps in
their assignments (for example, due to intermediate owners who are no
longer in business). At a minimum, this ruling is expected to cause
longer foreclosure timelines, with higher legal costs for foreclosures
(as well as in the securitization process).
The following are a few important take-aways:
For Foreclosing Lenders. Lenders seeking to
foreclose in Massachusetts will need to confirm that they have written
assignments to them of a mortgage to be foreclosed as of the date they
start a non-judicial foreclosure. The chain or ownership needs to
extend back from the original lender to them, and assignments in blank
are not acceptable.
For Borrowers. Borrowers who were foreclosed
on now have a powerful tool to challenge their foreclosures and perhaps
seek settlements with the lenders who now find themselves with a
For Investors. Individuals who purchased
foreclosed homes without title insurance now face tremendous uncertainty
over their title and are at real risk. Potential buyers of
foreclosed properties should analyze title issues carefully before
bidding, and are well advised to seek title insurance as a condition of
purchase to flush out any defects before going to sale.
For further information contact Michael Radin, Esq. (617-218-2035) or John Blake, Esq. (617-218-2061).
As was common with loans intended to be securitized, the originating
"lender" at the time it transferred the loans did not name the
assignee, instead leaving the assignee name blank for filling in at a
later date (generally after the loans were finally transferred into the
pool created in the securitization). This was done because loans are
generally transferred many times before finally residing in a pool from
which securities are sold. By finding that the securitization
documents failed to list the loans at issue, the Ibanez court
undermined any claims that the loans were ever actually transferred into
the pools, as had been represented to pool investors. This gap in the
securitization paperwork represents a fundamental breakdown in the
process and casts a pall not just on what the investors in the pools
received, but on foreclosures on loans supposedly in those pools.
The SJC stated that assignments do not need to be in recordable form
at the time of the notice of sale or the later sale, but it added that
recording is "likely the better practice."
The SJC rejected use of the Massachusetts Real Estate Bar Association
Title Standard 58 to satisfy the ownership requirement of the statute.
That title standard says that title is not defective where an
assignment of mortgage is recorded either before or after the
foreclosure by the assignee. The SJC found that the title standard
applies to confirmatory assignments of an earlier valid assignments
made prior to the publication of notice and the sale: In the Ibanez
case, there was no such prior assignment.
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