Massachusetts Court Voids Foreclosures, Citing Note Transfer Errors

The Massachusetts Supreme Court ruled Friday that U.S. Bank and Wells Fargo did not have the legal right to foreclose on two homes in the state, invalidating the lenders’ seizure of the properties and raising further questions about foreclosure documentation – this time related to the proper transfer of ownership on mortgages packaged as securities

 

Analysts warn that the decision could have far-reaching implications on loans that have already been liquidated, those in the process of foreclosure, and sales of foreclosed bank-owned homes.

In a unanimous 6-0 ruling, the Massachusetts Supreme Court upheld a lower court’s decision that U.S. Bank and Wells Fargo did not have the proper documentation to prove that they owned the mortgages at the time of foreclosure.

U.S. Bank and Wells Fargo were not the originators of the mortgages, but served as trustees of the two separate securitization trusts holding the loans. Interestingly enough, both foreclosures – U.S Bank’s on the mortgage of Antonio Ibanez, and Wells Fargo’s on the mortgage of Mark and Tammy LaRace – occurred on the same day, July 5, 2007. The lenders then turned around and bought each of the respective homes themselves at the foreclosure auction.

At the core of the issue is that the lenders both failed to ensure the assignment of the mortgage notes were executed and recorded in the registry of deeds before the dates of the foreclosure sales.

Justice Robert J. Cordy wrote in a court opinion, “…what is surprising about these cases is not the statement of principles…regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets.”

He went on to say, “There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order.”

The Supreme Court rejected the two banks’ requests to apply the ruling only to future cases, which could have implications for thousands of foreclosures in the state that have already been completed.

Wells Fargo said in a statement, “Wells Fargo believes the court’s ruling does not prevent foreclosures on loans in securitizations. The court simply set forth a standard legal process that mortgage servicers must follow in Massachusetts.”

The analysts at Barclays Capital described the case as “problematic for banks and non-agency investors, since it overturns completed foreclosure sales.”

They say the ruling could raise title issues in the minds of the potential buyers of REO properties, could further reduce prices on distressed sales, and slow foreclosure to REO rolls and liquidations.