Posted on Wednesday, January 12, 2011
NEW YORK (CNNMoney) -- The Massachusetts high court ruled on Friday that two foreclosures are invalid because the banks could not prove they had the proper paperwork to foreclose.
The banks "failed to make the required showing that they were the holders of the mortgages at the time of foreclosure," Justice Ralph Gants wrote for the Massachusetts Supreme Court.
This could be a harbinger of things to come because it is the first ruling by a state high court on the issue of whether banks can foreclose on homeowners if can't prove they hold the mortgages.
Numerous instances of this emerged last fall, as evidence appeared that banks were robo-signing foreclosure documents without actually reading them. As a result, there are dozens of similar cases in lower courts across the country, all waiting for the Massachusetts Supreme Court ruling.
"It's about the most extensive beat-down the banks have received over their shoddy practices," said Christopher Peterson, a real estate law professor at the University of Utah. "It could be a wake-up call for rubberstamping judges that they need to more carefully examine practices."
Confessions of a robo-signer
What's the issue? Mortgage loans are like real property and can only be transferred by physically signing over the paperwork -- like someone endorsing a check or the title to a car -- and delivering it to the next holder. Without that, the holder of record doesn't change.
Under mortgage securitization, loans get transferred many times after origination before landing in pools of mortgages that are sold to investors. But often times, the banks simply didn't endorse the paperwork between steps.
Massachusetts law on how to legally transfer mortgages goes back more than 200 years and is very clear, according to Paul Collier, the attorney who represented homeowner Antonio Ibanez in the case. "You've never been able to assign in blank in Massachusetts," he said.
The high court agreed with that assessment, but also clarified that when banks transfer mortgages into a pool they can establish ownership through proper recording or through a document that states all of the mortgages held in the pool, with addresses and owner names. Although, Justice Grants said, "recording is likely the better practice."
"The key in either case is that the foreclosing entity must hold the mortgage at the time of the notice and sale in order accurately to identify itself as the present holder in the notice and in order to have the authority to foreclose under the power of sale," he added.
What happened? Regardless of recording issues, there is little dispute that Antonio Ibanez, a special education teacher in Springfield, Mass., defaulted on his loan for $103,500. He did not even fight the foreclosure when it came in 2007.
The case only went to trial because the bank needed to establish clear title to the property after foreclosure so it could resell the house. The insurance companies would not issue title insurance on the home without a court ruling.
The case went before state Land Court Judge Keith Long, who found no evidence that the plaintiffs were the actual mortgage holders and asked them to prove it.
According to court papers, Ibanez's loan went through five different owners before winding up in a pool of mortgages that U.S. Bank was the trustee for. During that trip down the chain, the parties failed to legally assign the mortgage.
The bank produced documents that showed that the loan was one of the mortgages put into a pool, but that failed to satisfy the court, which cited "the utter carelessness with which the plaintiff banks documented the titles to their assets."
In the case of Mark and Tammy LaRaces, Wells Fargo, provided evidence that the loan had been assigned to a pool. The evidence, however, was merely a copy of the pooling and servicing agreement that had been downloaded from the SEC website and was unsigned.
The state's high court ruled that, in both the Ibanez and the LaRace cases, no valid assignments were made after the lender assigned it to the record holder, Option One Mortgage Corp. in both cases. Option One, therefore, was the mortgage holder at the time of the foreclosures and no one else had the right to foreclose.
The future: Bruce Allensworth, an attorney for the banks, said they have the records to prove ownership in both cases, but since they were not introduced in Land Court hearing, rules of evidence prevented them from being introduced into the appeal.
"I'm thinking if there's a way of going back and reintroducing these documents to the Land Court," he said.
So where does that leave Ibanez and the LaRaces?
According to Collier, his clients may now own the home free and clear. "I don't see how [the banks] can win if they challenge the decision," he said, "but maybe they'll take a shot."
By Les Christie, staff writer, CNNMoney