Massachusetts Supreme Court rules against banks in foreclosure paperwork case

Jan. 4 (Bloomberg) -- The five largest loan servicers, including Bank of America Corp. and JPMorgan Chase & Co., may be the first to settle with the 50 state attorneys general probing foreclosure practices, Iowa Attorney General Tom Miller said. Bloomberg's Peggy Fisk reports. (Source: Bloomberg)
Washington Post Staff Writer
Friday, January 7, 2011; 10:26 PM

In a ruling that could escalate the mortgage problems facing banks, the Massachusetts Supreme Court on Friday voided two foreclosures because the banks failed to show the proper paperwork to prove they owned the loans.

The decision challenges the way mortgages were bundled and sold around the world and could lead to the invalidation of thousands of foreclosures across the state. The ruling comes in the wake of accusations last fall that lenders improperly handled thousands of foreclosures and possibly engaged in fraud, spurring federal and state investigations.

The Massachusetts court is the highest to rule on the issue, providing ammunition to borrowers in other states who will almost certainly use the decision as a precedent to seek similar rulings and perhaps bring a similar case before the Supreme Court.

Banking analyst Richard Bove, who initially thought that the financial sector's losses from the foreclosure uproar would be limited, said Friday that the court's decision raises the stakes.

"We don't know what might happen now. It might lead to bankruptcies," he said. "In theory it's trillions of dollars of mortgages that are affected."

Shares of Wells Fargo and U.S. Bancorp - the banks involved in the case - as well as those of other banking companies declined following the ruling. Wells Fargo fell 2 percent to $31.50, while U.S. Bancorp slipped 0.8 percent to $26.09.

The closely watched case involves those of Antonio Ibanez, and Mark and Tammy LaRace. At issue is whether the banks had legal standing to take back the homes after the borrowers missed their payments.

After examining the paperwork filed by the banks, a lower court judge, the Massachusetts Land Court's Keith C. Long, said he had determined that the mortgage "note" that proves who the owner is had not been properly transferred when the banks auctioned off houses.

Long's decision hit on one of the most sensitive issues related to how mortgages were securitized: "endorsements in blank." In the rush to aggregate and sell and then resell mortgages, many mortgages documents were transferred without explicitly naming to whom the note was being sold.

The financial services industry has argued that this practice is legal, but Long disagreed. "These blank mortgage assignments were never recorded and they were not legally recordable," he wrote in his ruling.

The banks had appealed Long's decision, arguing that this type of transfer was valid. But on Friday, Massachusetts Supreme Court Justice Ralph D. Gants wrote that the court agreed that the banks "failed to make the required showing that they were the holders of the mortgages at the time of foreclosure." In a concurring opinion, fellow Justice Robert J. Cordy took issue with what he called "the utter carelessness" with which the banks documented their own property rights.

U.S. Bancorp spokeswoman Teri Charest said that because the company was only acting as a trustee for a securitization trust in this case the judgment "has no financial impact" on it. Wells Fargo said in a statement that it believes the court's ruling "does not prevent foreclosures of loans in securitization."

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