The Ibanez case itself is actually very simple. The issue before the court was whether the two securitization trusts could prove a chain of title for the mortgages they were attempting to foreclose on.
There's broad agreement that absent such a chain of title, they don't have the right to foreclose--they'd have as much standing as I do relative to the homeowners. The trusts claimed three alternative bases for chain of title:
(1) that the mortgages were transferred via the pooling and servicing agreement (PSA)--basically a contract of sale of the mortgages
(2) that the mortgages were transferred via assignments in blank.
(3) that the mortgages follow the note and transferred via the transfers of the notes.
The Supreme Judicial Court (SJC) held that arguments #2 and #3 simply don't work in Massachusetts.The reasoning here was heavily derived from Massachusetts being a title theory state, but I think a court in a lien theory state could easily reach the same result. It's hard to predict if other states will adopt the SJC's reasoning, but it is a unanimous verdict (with an even sharper concurrence) by one of the most highly regarded state courts in the country.The opinion is quite lucid and persuasive, particularly the point that if the wrong plaintiff is named is the foreclosure notice, the homeowner hasn't received proper notice of the foreclosure.
Regarding #1, the SJC held that a PSA might suffice as a valid assignment of the mortgages, if the PSA is executed and contains a schedule that sufficiently identifies the mortgage in question, and if there is proof that the assignor in the PSA itself held the mortgage. (This last point is nothing more than the old rule of nemo dat--you can't give what you don't have. It shows that there has to be a complete chain of title going back to origination.)
On the facts, both mortgages in Ibanez failed these requirements. In one case, the PSA couldn't even be located(!) and in the other, there was a non-executed copy and the purported loan schedule (not the actual schedule--see Marie McDonnell's amicus brief to the SJC) didn't sufficiently identify the loan. Moreover, there was no proof that the mortgage chain of title even got to the depositor (the assignor), without which the PSA is meaningless:Even if there were an executed trust agreement with the required schedule, US Bank failed to furnish any evidence that the entity assigning the mortgage – Structured Asset Securities Corporation [the depositor] — ever held the mortgage to be assigned. The last assignment of the mortgage on record was from Rose Mortgage to Option One; nothing was submitted to the judge indicating that Option One ever assigned the mortgage to anyone before the foreclosure sale.So Ibanez means that to foreclosure in Massachusetts, a securitization trust needs to prove:
(1) a complete and unbroken chain of title from origination to securitization trust
(2) an executed PSA
(3) a PSA loan schedule that unambiguously indicates that association of the defaulted mortgage loan with the PSA. Just having the ZIP code or city for the loan won't suffice. (Lawyers: remember Raffles v. Wichelhaus, the Two Ships Peerless? This is also a Statute of Frauds issue--the banks lost on 1L contract issues!)
So what does this mean? There's still a valid mortgage and valid note. So in theory someone can enforce the mortgage and note. But no one can figure out who owns them. There were problems farther upstream in the chain of title in Ibanez (3 non-identical "true original copies" of the mortgage!) that the SJC declined to address because it wasn't necessary for the outcome of the case. But even without those problems, I'm doubtful that these mortgages will ever be enforced. Actually going back and correcting the paperwork would be hard, neither the trustee nor the servicer has any incentive to do so, and it's not clear that they can do so legally. Ibanez did not address any of the trust law issues revolving around securitization, but there might be problems assigning defaulted mortgages into REMIC trusts that specifically prohibit the acceptance of defaulted mortgages. Probably not worthwhile risking the REMIC status to try and fix bad paperwork (or at least that's what I'd advise a trustee). I'm very curious to see how the trusts involved in this case account for the mortgages now.Q-Law blog:
There are several things that distinguish thus case. First, Ibanez does not arise out of a bankruptcy court ruling, as so many previous opinions have. Second, it is not a case of a homeowner/borrower contesting the initial foreclosure action. Lastly, this consolidated case arose out of the Oregon equivalent of a quiet title action, initiated by the banks well after the foreclosures had been completed. Both lenders sought a judicial declaration that once they had acquired title following the foreclosures, they actually had the legal right to convey marketable title to another purchaser. The banks both failed...Christopher Whalen:
The facts of the consolidated cases are substantially similar, so I will summarize them as if a single case. Essentially, the borrowers closed their loans directly with the lenders that loaned them the money (the “Originating Banks”). The mortgages were duly recorded on the public record. Through successive assignments, both loans were pooled and securitized into REMIC trusts. In one case, the REMIC Trustee was Wells Fargo, and in the other case, it was U. S. Bank. Both of these lenders, acting in the capacity as Trustees for the REMICs, initiated foreclosure proceedings against the borrowers, seeking to either sell the properties at auction, or recover them back to re-sell.
However, as it turns out, at the time of both sales, neither bank had the power to foreclose on the properties. In the U. S. Bank case, the foreclosure sale occurred on July 5, 2007, but the Assignment of Trust Deed from the Originating Bank to U. S. Bank (giving it the legal power of sale) did not occur until September 11, 2008 – well after the actual foreclosure sale date. In the Wells Fargo case, the loan was also closed on July 5, 2007. But the Originating Bank’s conveyance of the mortgage containing the power of sale was not recorded until May 12, 2008. In short, at the time both lenders advertised and conducted their foreclosure sales, they had no legal power to do so, since the mortgages granting them that power had not yet been transferred to them.
Essentially, the banks rely upon a sort of fait accompli rationale: Their predecessors, the Originating Banks, had the right of foreclosure; the Big Banks were going to get it sooner or later, and the borrowers were in default anyway, so there is no foul, since there was no harm. The Court rejected these arguments out of hand. Relying upon precedent dating back to 1871, 1905, and 1936, it held that the statutory power of sale given to lenders in foreclosure – where there is “no immediate judicial oversight”- must be strictly followed.
What is most interesting about this case, besides the holding itself, was the banks’ consistent unwillingness or inability to provide evidence supporting their legal position that they had a right to conduct the foreclosures without owning the actual mortgages that gave them the right to do so. The gist of the banks’ arguments revolved around the claim that, although they did not hold the mortgages, they nevertheless had the ability to foreclose based upon the documents generated by the securitization process itself.
In a last ditch effort, the banks relied upon the “everybody is doing it” argument. In the rarified atmosphere of appellate argument, this defense is given the more dignified title of “custom and usage.” Loosely translated, the rationale is that even though the banks’ actions fly in the face of 140 years of Massachusetts’s precedent, since the lending industry had been ignoring the law already, it should be permitted to continue doing so. The Court would hear nothing of it. With perhaps a note of exasperation coupled with whiff of disgust, the Court concluded that “(t)he legal principles and requirements we set forth are well established in our case law and our statutes. All that has changed is the (banks’) apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.”
Wall Street lawyers have taken the view that the sale of a mortgage note to another party is governed by the UCC [Uniform Commercial Code] and therefore does not require that the documentation down at the court house be up to date. Some financial counsel even went so far as to say that the mortgage document was incidental to the note and thus that the mere possession of the note was sufficient to obtain all of the rights under the mortgage as well. And in a narrow sense, under the UCC, this view is correct, as the banks argued in Ibanez.Felix Salmon:
But the MA Court decision raises some interesting questions that neither the banks, the several states, nor the Congress have addressed. First, Ibanez illustrates just how sloppy banks have become with respect to changing the lien on the property when a note is sold. In the decision, the Court shows how one mortgage was originated and then sold half a dozen times before it was eventually deposited in a trust created by Lehman Brothers. This last corporate vehicle then sold securities to investors using the mortgaged property as collateral.
The trouble is, the final “assignment” of the mortgage note to the trust was never properly completed by the seller, again relying upon the Wall Street view that the UCC protected such shoddy or non-existent legal work. The Ibanez case raises questions as to whether the investors who own the RMBS issued by the trust have any recourse to the underlying collateral, namely the house owned by Ibanez, as well as the work of lawyers and other professionals. It will come as no surprise that the trustee for the securitization trust also is a party to the Ibanez lawsuit.
It needs to be said that the transfers of a note under the UCC must comport with state law. The UCC specifically requires the note be delivered to the assignee in good order. Thus the Wall Street view of property title, where the assignment of the note is never actually completed or is merely done generically, is clearly a violation of the UCC and does not provide a legal safe harbor for defective RMBS. Indeed, the Ibanez case now drives another nail into the coffin of the private RMBS market — as if that were needed.
Second, the Ibanez decision makes clear that in Massachusetts at least, the note holder cannot commence foreclosure proceedings unless the chain of title is perfected and in good order with the state courts. The banks in the Ibanez case proceeded to foreclosure based upon the Wall Street world view that says that the UCC protects the assignment of notes in the creation of RMBS. The MA Supreme Court, however, has stated emphatically that the note holder must follow state law with respect to the transfer of property titles, including upon foreclosure.
The MA Court decision illustrates that when it comes to the ownership and transfer of real property, state loan still prevails despite all of the clever subterfuges used by the banking industry to subvert our federalist system.
Perhaps the most striking aspect of the Ibanez decision is the light it sheds on the huge liability facing large banks from the investors who purchased hundreds of billions of dollars in private label RMBS.
The 16-page decision in the case of US Bank vs Ibanez does not make for easy reading. But it’s a very important case: it’s a solid precedent saying that if a bank doesn’t own a mortgage, then it can’t foreclose on a home. That was the decision of the lower court in Massachusetts, back in March 2009, and it has now been unanimously upheld on appeal to the Massachusetts supreme court.
The immediate effect of the ruling, which covers two separate cases, is that Mark and Tammy LaRace get to stay in their home, despite being foreclosed on in 2007. And Antonio Ibanez gets title to his home back, which means that the bank will either have to let him retake possession or else pay him for his deed.
Essentially, these homeowners bought their homes, defaulted on their mortgages, and then — after a long legal struggle — get to stay in their homes. It’s unclear whether they still owe money to any lender, and Massachusetts is a recourse state, which means that the bank could try to go after them personally, as it might had it lent them money on an unsecured basis.
The legal craziness that this decision sets in motion is going to be huge, I’m sure. Anybody who was foreclosed on in Massachusetts should now be phoning up their lawyer and trying to find out if the foreclosure was illegal. If it was — if there was a break in the chain of title somewhere which meant that the bank didn’t own the mortgage in question — then the borrower should be able to get their deed, and their home, back from the bank. This decision is retroactive, and no one has a clue how many thousands of foreclosures it might cover.
Similarly, if you bought a Massachusetts home out of foreclosure, you should be very worried. You might not have proper title to your home, and you risk losing it to the original owner. It might be worth dusting off your title insurance: you could need it. And if you ever need to sell your home, well, good luck with that.
This decision won’t be appealed: the state law seems pretty cut-and-dried, every judge who’s looked at it has come to the same decision, and there’s no conceivable grounds for the US Supreme Court to take on the case.
What’s more, courts in the other 49 states are likely to lean heavily on this decision when similar cases come before them. The precedent applies only in Massachusetts for now, but it’s likely to spread, like some kind of bank-eating cancer.
No one knows how it’s all going to play out: there’s certainly going to be a lot of litigation in every US state, and there’s a good chance that the federal government is going to feel the need to get involved as well. Not every jurist and legislator is going to see things the same way as the judges of Massachusetts, and there’s a case to be made that banks should have the ability to go back and cure their mistakes once they’re pointed out, rather than just losing the house altogether, as they did in this case.
But of course the problem is that the banks can’t cure their mistakes: in many cases the original mortgage is lost, at this point, if it ever properly existed in the first place.
The ruling drove down the stock prices of a number of big banks when it was handed down. As I posted back in October, that's revealing. Moreover, as mentioned in the following post, the direct effect on homeowners and their mortgages is dwarfed by the effect on the mortgage backed securities market.
Best advice I can repeat is that if you've bought a foreclosed property or are in foreclosure yourself, you should definitely find a sharp real estate lawyer. Particularly if the property is in Massachusetts.
The full text of the ruling is here. (Wikipedia on Raffles v. Wichelhaus, the Two Ships Peerless case.)