CrunchedCredit : Capital Markets Finance and Real Estate Attorneys

Ironically, just last month the Supreme Judicial Court of Massachusetts  had a decidedly different reaction to one homeowner’s occupation of Massachusetts real estate – and in the process cast doubt on the state of title for thousands of owners of foreclosed homes.  In late October, the SJC decided Bevilacqua v. Rodriguez, 955 N.E.2d 884 (Mass. 2011), extending its holding in Ibanez to a (former) homeowner that had purchased REO from a securitization trust [See here for our prior thoughts on the Ibanez case].  

The facts of Bevilacqua are, by now, too-familiar: a securitization trustee executes a foreclosure deed in June, 2006 but doesn’t take assignment of the mortgage from MERS until three weeks later (an assignment that, importantly, is actually placed of record).  Under Massachusetts statute, only a mortgagee or its executors, administrators, successors or assigns can execute foreclosure – the late assignment meant the trust had foreclosed before it owned the mortgage, invalidating the resulting transfer.  And, in Massachusetts, you (usually) can’t sell what you don’t own. 

On appeal, Bevilacqua argued, among other things, that he should be entitled to the protections against adverse claims afforded a bona fide purchaser purchasing for value – a legal theory protecting unwitting purchasers who take title without notice or knowledge of a defect in the power of vendor to sell.  The Court rejected this argument – a scrub of the Registry’s records would have shown the trustee to be, at various times during the summer of 2006, either a complete stranger to title, a mere assignee of a mortgage, or a party that had foreclosed in error.  (It’s interesting to note that at least part of the Court’s analysis here rests on the fact the assignment from MERS to the trustee was placed of record – something the Ibanez court found that, while good practice, was unnecessary as a matter of Massachusetts law.)  

Like Ibanez, the Bevilacqua decision seems exactly right on the merits and exactly wrong in practice, and will almost certainly result in corrective legislative action to prevent the divesture of thousands of innocent – albeit decidedly not bona fide – purchasers of foreclosed Bay State homes. 

As an aside, in divesting Bevilacqua, the SJC made a point of relaying the Land Court’s observation that accepting Bevilacqua’s theory that his deed was sufficient to establish record title would render the “Brooklyn Bridge” problem insoluble.  As the Land Court wrote: “in the classic example, a litigant could go to the registry, record a deed to the Brooklyn Bridge, commence suit, hope that the true owners ignored the suit or ... could not be readily located and [would thus] be defaulted, and secure a judgment.”  Of course, last Thursday, that same crafty litigant would have found his bridge teeming with thousands of displaced Occupy Wall Street Occupants – a scenario the legal ramifications of which confound the mind.

As one Occupant wrote:  “Dude, where’s my title policy?” 

By Matthew Clark and David Pildis

Last month we discussed the Ibanez opinion – the SJC’s decision upholding the Massachusetts’ Land Court’s refusal to quiet title with respect to two foreclosed homes because the mortgages, in the Court’s eyes, were not properly assigned by written instrument. The fallout of Ibanez is already being felt throughout the Commonwealth, and the SJC has just agreed to affirm – strike that – has just agreed to hear - Bevilacqua v. Rodriguez – a lower court decision extending the mechanic of Ibanez to bona fide purchasers that bought homes from foreclosing lenders. Judge Keith Long (you’ll remember him as the author of the lower-court Ibanez opinion) denied Mr. Bevilacqua’s request to clear title to a house purchased from a securitization trustee that had acquired the property via foreclosure. Judge Long determined that the documentation assigning the mortgage to the trustee was defective and, as a result, the trustee never acquired clear title to the property (and if the trustee didn’t own the home, it could not have passed title to Mr. Bevilacqua).

Let’s make no mistake: the story of these cases extends well past a scholarly interpretation of “title theory”, and the defeasance of Mr. Bevilacqua was deemed by the Court to be acceptable collateral damage. These are populist decisions intended to punish a mortgage industry that has been roundly demonized by politicians and media-types. As Massachusetts’ Attorney General Martha Coakley (you’ll remember her as the heir apparent that lost “Ted Kennedy’s seat” to Scott Brown) wrote in a her press release on the Ibanez decision:

“In their careless and hasty stampede to securitize loans, the banks moved at their own peril. Whether by robo-signing or failing to properly transfer title, these financial institutions created this real estate chaos. They should bear the brunt and the cost of the remedy.”

Not what I would call a measured response, especially in light of the fact that the “chaos” in question amounted to a missing pooling agreement schedule and an incomplete assignment-in-blank (as an aside, Ms. Coakley seems to take a particularly extreme view of scriveners' errors). But never let the facts (or common sense) get in the way of a good press-op. The SJC’s decision in the Bevilacqua case won’t be handed down for months. In the meantime, banks will double-check their paperwork, title insurers will wring their hands, politicians will expound vitriol, and my friend’s search for a new home will continue.

By Matt Clark and Krystyna Blakeslee

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