Massachusetts Supreme Court rules against banks in foreclosure paperwork case

By Ariana Eunjung Cha
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."

The American Securitization Forum, which represents more than 330 financial firms, said in a statement Friday that it remains "confident securitization transfers are valid and fully enforceable."

The ASF said that critical deal documents and loan schedules were not introduced in the Massachussets case. "If these documents had been introduced, it appears that the ruling would have been substantially different," the group said.

Legal experts said the Massachusetts court rejected the most often-cited legal arguments the securitization industry has been making to reassure investors and the public that everything is okay.

The banking industry has "dismissed problems such as missing notes and the use of "robo-signers" as mere "paperwork problems" that they should be able easily to fix," said Kurt Eggert, a professor at Chapman University who has testified before Congress on securitization issues. But the Massachusetts case shows "they may not be able to fix their mistakes easily."

Housing industry experts said that if mortgages were not transferred correctly during securitization, millions of homeowners may lack clear title to their houses and therefore may not own them. While the ruling may help homeowners who are in foreclosure, analysts said, it now pulls another party into the mess: the buyers of foreclosed homes.

Adam Levitin√, associate professor of law at Georgetown University, said the decision is "enough to put serious cloud on title through the whole system and that's a problem." And Christopher Peterson√, a University of Utah law professor who researches the mortgage industry, said the decision was a "game changer" for the fight between homeowners and the industry.

Across Massachusetts on Friday, real estate agents and attorneys were fielding phone calls from frantic families who had purchased foreclosed properties and overjoyed homeowners who are fighting foreclosures. From the second quarter of 2009 to the third quarter of 2010, nearly 6000 foreclosure sales were completed in the state, according to research firm RealtyTrac.

"This is going to cause a lot of problems," said Gene Clements, a real estate agent in Lynn, Mass., one of the state's hardest-hit markets. He said he is telling clients that he's hopeful that the government will step in with a solution, perhaps a promise of compensation for those who bought foreclosed homes in good faith and ended up losing them as a result of the decision.

John O'Brien, register of deeds in Essex County, Mass., who has been critical of the mortgage industry's practices, said the ruling makes it clear that big banks "must follow the same laws as everyone else and that assignments are not optional in Massachusetts."

Given the potential impact of the ruling on not only delinquent borrowers but current ones, the ruling is likely to put additional pressure on lawmakers at the state and federal level to step in.

Rep. Maxine Waters (D-Calif.), former chairman of the House subcommittee on housing, said the ruling makes it clear that "the failure to properly transfer loans through the appropriate legal 'chain of title' is no technicality, but rather part of a long pattern of predatory and negligent behavior by Wall Street."

The foreclosure uproar began in late September when Ally Financial said that it had found "technical" errors in its foreclosure documents and that it would stop foreclosure sales in 23 states to fix them. Numerous other banks, including Bank of America, J.P. Morgan Chase and Wells Fargo, subsequently froze some foreclosures after admitting to similar problems.

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