In a widely-covered slip opinion issued late last week, the Supreme Judicial Court of Massachusetts denied two securitization trustees’ requests to quiet title with respect to a pair of foreclosed homes. Press reaction was fast and perhaps a touch too furious - CNN Money hailed the Court giving “banks a ‘beat-down’ over foreclosures”, while Reuters used the word “catastrophe”. The Journal saw the decision as a “setback” - probably the more sober analysis (which isn’t meant to downplay the importance of the Ibanez decision – lots of uneasy servicers will be scrubbing mortgage loan files in the coming months). But the decision itself is not, from a Massachusetts’ lawyer’s perspective, terribly surprising and, in fact, could actually be read to ratify certain practices common in securitized lending.
The case arose with the trustees’ efforts to quiet title to two foreclosed residences in Springfield, Massachusetts (home to the Basketball Hall of Fame and (arguably) the fictionalized hometown of Homer Simpson). The homeowners had defaulted on their debt and the properties had been auctioned and acquired by the trustees at the resulting foreclosure sale. Because Massachusetts law permits for non-judicial foreclosure (ahem, for now), the trustees asked the Massachusetts Land Court to bless their ownership of the homes - an (unfortunately) all too-familiar story in the Commonwealth these days (upwards of 20,000 foreclosures in just the past two years).
The Land Court, however, denied the trustees’ request in March ’09, leading to appeal and the Ibanez ruling. The SJC’s opinion rests on the fact that the trustees were unable to document ownership of the mortgages at the time the foreclosure proceedings were commenced (which, in Massachusetts, begins with the publication of notices of foreclosure) or at the time the foreclosure sales occurred. The Court was somewhat harsh in its analysis of some of the paperwork presented for its review – noting assignments left in-blank (a common securitization practice but one that holds little water in Massachusetts), an (unsigned) pooling and servicing agreement missing critical schedules describing the pooled loans, and assignment chains omitting intervening note holders entirely. It’s important to note that this decision is, in large part, a recognition of a particular aspect of Massachusetts’ law. In many jurisdictions, the sale of a mortgage note necessarily results in the transfer of the related mortgage – whether or not a written assignment is executed (this commonly known as the mortgage “following” the note). Massachusetts, however, as a title theory state, views a mortgage grant as an interest in real property, the transfer of which requires written assignment. When the mortgages were not assigned along with the promissory notes, the mortgages, by law, remained vested in the assignor as trustee for the benefit of the note-buyer (a convenient legal fiction).
Some commentators have posited that this decision could cast doubt on the state of title for thousands of foreclosed homes in the Commonwealth, but it remains unclear the extent to which files will be re-opened (and, whether it would matter – any problems with the assignment chain could be rectified and foreclosure reinstated). It is interesting to note – as the ASF did in their statement on the case – that the Court, in fact, reinforced the view that the securitization documents (the PSA, in particular) would have been effective to show ownership of the mortgages had they not included certain critical omissions (the Court noted: “Where a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder.”)
This week - presumably emboldened by the Ibanez decision - Massachusetts legislators are introducing broad new rules aimed at making properties more difficult to foreclose. “Foreclosure Practices” has replaced “Wall Street Fat Cats” as the sound bite du jour for media outlets and talking heads intent on placing blame. The reality of the situation is that the system was never pressure-tested for the hundreds of thousands of foreclosures, a PSA with an incomplete schedule is not evidence of moral depravity, and institutional buyers didn’t snatch up MBS with an eye toward owning multiple homes in Springfield, Massachusetts.
By: Matt Clark and Bene Ness