BLOOMBERG — BANKS TO THE WALL: MASS SUPREME CT WILL RULE ON SECURITIZATION

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

NOTABLE QUOTES:

The fight between homeowners and banks before the Supreme Judicial Court in Boston turns on whether a mortgage can be transferred without naming the recipient, a common securitization practice. Also at issue is whether the right to a mortgage follows the promissory note it secures when the note is sold, as the industry argues.

“This is the first time the securitization paradigm is squarely before a high court,” said Marie McDonnell, a mortgage-fraud analyst in Orleans, Massachusetts, who wrote a friend-of-the-court brief in favor of borrowers. The state court, under its practices, is likely to rule by next month.

There is “a surprising lack of consensus” as to “what method of transferring notes and mortgages is actually supposed to be used in securitization and whether that method is legally sufficient,”

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Editor’s Note: Bloomberg reports that Mass Court is poised to rule on the basic issue of securitization. But the narrow issue they are set to rule upon is whether you can transfer a mortgage without naming a recipient. So this does not cover all the issues raised by securitization. But it is entirely possible that the Court may comment on the other issues as well, and expand the narrow issue to a larger one.

The stakes are pretty high on this ruling. If the court determines that the pretender lenders win, then real estate law will be changed forever unless they figure out a way to narrow their decision just to this case ( see Ibanez).

The problem faced by the court is that if the pretender lenders get their way, the point of recording, notice and certainty in the marketplace will be turned over on its head. In order to purchase property, you would need to go outside the title record and make inquiries as to the identity the real creditor, mortgagor, note holder and get estoppel information for payoff from that party. If your information is wrong you might have a satisfaction of mortgage from the wrong party and thus the original mortgage would remain clouding title.

If the borrower wins, then virtually all foreclosures in the State of Massachusetts will be reversed along with any subsequent transactions in which the property was sold after an auction sale. In addition, the proposition advanced here on these pages that “the pools are empty” would be corroborated. That would mean that the investors bought nothing. The liability would arise from the investment banker possibly replacing the liability of the homeowner. But there are several paths the Court can take with regard to the obligation, even with an apparently favorable ruling on the note and mortgage.

The investment banker would be left with a liability to investors and a potential claim against the homeowner without any documentation showing that there was any contractual relationship between the borrower and the investment banker. Thus the investment banker might have an action in equity for unjust enrichment against the homeowner, but they would only have an unsecured obligation unless they somehow obtained an equitable lien against the property.

The homeowner would be left with title to his or her property — with an encumbrance of record based upon a note that was purportedly assigned. The homeowner’s lawsuit for quiet title — directed at the record mortgagee — would probably be sustained by the court because the mortgage originator in most cases had no economic interest at the time of the transaction, the money having been funded from a remote undisclosed source.

The servicer may or may not be left in position depending upon whether the court limits its ruling to the mortgage or expands it to include the note or obligation.

In bankruptcy court, a ruling in favor of the borrower would mean that the debt is dischargeable because it is unsecured.

The bottom line is that there are many issues and sub-issues that are going to be effected but not necessarily decided by this one decision in Massachusetts.

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Foreclosures May Be Undone by Massachusetts Ruling on Mortgage Transfers

By Thom Weidlich – Jan 6, 2011

Massachusetts’s highest court is poised to rule on whether foreclosures in the state should be undone because securitization-industry practices violate real- estate law governing how mortgages may be transferred.

The fight between homeowners and banks before the Supreme Judicial Court in Boston turns on whether a mortgage can be transferred without naming the recipient, a common securitization practice. Also at issue is whether the right to a mortgage follows the promissory note it secures when the note is sold, as the industry argues.

A victory for the homeowners may invalidate some foreclosures and force loan originators to buy back mortgages wrongly transferred into loan pools. Such a ruling may also be cited in other state courts handling litigation related to the foreclosure crisis.

“This is the first time the securitization paradigm is squarely before a high court,” said Marie McDonnell, a mortgage-fraud analyst in Orleans, Massachusetts, who wrote a friend-of-the-court brief in favor of borrowers. The state court, under its practices, is likely to rule by next month.

Claims of wrongdoing by banks and loan servicers triggered a 50-state investigation last year into whether hundreds of thousands of foreclosures were properly documented as the housing market collapsed. The probe came after JPMorgan Chase & Co. and Ally Financial Inc. said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America Corp. froze U.S. foreclosures. Massachusetts is one of 27 states where court supervision of foreclosures generally isn’t required.

Took Their Homes

The Massachusetts homeowners argued that the banks that took their homes didn’t follow their own rules for transferring mortgages into mortgage-backed trusts that issued bonds. The banks and the mortgage-bundling industry counter that the securitization documents themselves assign the mortgages.

If loans weren’t transferred properly, the banks that sponsored such trusts may have to repurchase them, Adam J. Levitin, an associate professor at Georgetown University Law Center in Washington, said in prepared testimony in the U.S. House of Representatives in November.

If the problem is widespread enough, it may cost the banks trillions of dollars and make them insolvent, Levitin said.

There is “a surprising lack of consensus” as to “what method of transferring notes and mortgages is actually supposed to be used in securitization and whether that method is legally sufficient,” he said.

Persuasive Ruling

While real-estate law varies by state, litigants may point to decisions from other jurisdictions as being persuasive.

“It ties into a theme nationally,” said Professor Kurt Eggert of the Chapman University School of Law in Orange, California. “The broader theme is the argument that efficiency of transfer is more important than real-property law.”

The Massachusetts cases started in 2005 when Rose Mortgage Inc. lent Antonio Ibanez $103,500 and Option One Mortgage Corp. lent Mark and Tammy LaRace $129,000, according to court papers. Ibanez and the LaRaces stopped paying on their adjustable-rate subprime mortgage loans and were foreclosed on in 2007.

By that time, US Bancorp and Wells Fargo & Co. said they controlled the loans, which had been subsumed in mortgage-backed trusts. The banks bought the homes in foreclosure auctions in July 2007.

‘Substantial Discount’

They were the only bidders, buying “at a substantial discount” from the appraised values and “wiping out all of the defendants’ equity,” according to a lower-court ruling.

The banks had initially filed the state-court lawsuits to obtain judicial approval of the use of the Boston Globe to announce auctions in Springfield, Massachusetts.

Massachusetts Land Court Judge Keith C. Long in Boston ordered the banks to prove they had the right to foreclose in the first place.

In March 2009, he ruled they didn’t. Published notices listed U.S. Bancorp unit U.S. Bank and Wells Fargo as the foreclosing parties when they weren’t the actual mortgage holders at the time of the 2007 auction, a violation of state law, the judge said.

The Ibanez mortgage had been transferred to U.S. Bancorp 14 months after the auction, and the LaRace mortgage was transferred to Wells Fargo 10 months after, the judge said.

Long voided the two foreclosures, saying U.S. Bancorp and Wells Fargo didn’t own the mortgages.

‘Standard Practice’

“It was not only common, it was the standard practice” to foreclose before doing the mortgage transfer, said Richard D. Vetstein, a real estate lawyer in Framingham, Massachusetts, who isn’t involved in the case. “Judge Long kind of changed the rules in the middle of the game.”

In October 2009, Long denied the banks’ request to change his decision because of new evidence purportedly showing that the mortgages were effectively transferred to their control by the documents establishing the mortgage-backed trusts.

The judge found that even if the documents could assign the mortgages, fatal missteps occurred in transferring them to the loan pool. Long said it was important to address the new facts and arguments “since they are alleged to be common to many securitized loans.”

Rose Mortgage, the original lender to Ibanez, endorsed the promissory note and assigned the mortgage to Option One Mortgage, which was also the LaRace couple’s original lender.

Option One endorsed both notes and assigned both mortgages “in blank,” meaning no assignee was identified. The loan passed eventually into the trusts overseen by U.S. Bank and Wells Fargo.

Mortgage Assignment

Long said the banks couldn’t foreclose without a mortgage assignment that could be recorded in a local land office. The assignments they had didn’t pass muster, he said, because they didn’t name the assignee.

“These blank mortgage assignments were never recorded and they were not legally recordable,” he said.

At the time of the foreclosures, Option One, not U.S. Bank and Wells Fargo, held the mortgages because the blank assignments “transferred nothing,” according to Long. Option One was then owned by H&R Block Inc. and is now owned by American Home Mortgage.

Stephen F.J. Ornstein, a Washington partner of the Chicago- based law firm SNR Denton LLP, said there’s nothing wrong with making blank mortgage assignments.

‘Quite Common’

“It’s quite common,” said Ornstein, who has co-written an article on mortgage loan transfers to securitization trusts. “The fact that the mortgages were assigned in blank doesn’t invalidate the foreclosures. The trial-court judge was terribly misguided there.”

The judge also rejected the banks’ contention that having the note, the blank mortgage assignment and a contractual right to obtain the mortgage gave them the “indicia of ownership” of the mortgage.

“Even a valid transfer of the note does not automatically transfer the mortgage,” Long wrote. In this case, U.S. Bank and Wells Fargo owned the notes while Option One owned the mortgages, he said. The banks’ title-defect problem “is entirely of their own making as a result of their own failure to comply with the statute and the directions in their own securitization documents,” Long wrote.

The American Securitization Forum, an industry lobbying group, said in a Nov. 16 white paper that Long “cast doubt on the ‘mortgage-follows-the-note’ rule.”

The Supreme Judicial Court heard the banks’ appeals of Long’s rulings on Oct. 7. They argued that the documents they received that bundled the loans into pools legally transferred them the mortgages.

‘New Business Model’

“The record in this case reflects how mortgage lending changed in recent years and how the industry failed to ensure that its new business model conformed to state law,” Massachusetts Attorney General Martha Coakley wrote in a brief supporting the borrowers.

Teri Charest, a spokeswoman for Minneapolis-based US Bancorp, the fifth-largest U.S. bank by deposits, referred questions to American Home Mortgage Servicing Inc., the servicer of the mortgages. Philippa Brown, a spokeswoman for Coppell, Texas-based American Home Mortgage, said in an e-mail that agreements to pool mortgages that formed the basis for issuing bonds were sufficient to make transfers effective.

The agreements “assigned and transferred the borrowers’ mortgages and notes to the two securitization trustees at issue,” giving them the authority to foreclose, Brown said.

Appeal Brief

Jason Menke, a spokesman for San Francisco-based Wells Fargo, the fourth-largest U.S. lender by assets, said American Home Mortgage filed the appeal brief on the trusts’ behalf.

The banks, acting as trustees on behalf of the owners of debt issued based on bundled home loans, argued in their brief that borrowers can’t challenge their compliance with securitization agreements because they aren’t parties to them.

The Securities Industry and Financial Markets Association, Wall Street’s largest lobbying group, said in a statement Oct. 20 that customary securitization methods, which it described in terms similar to the Ibanez and LaRace assignments, “are sound and in accordance with generally applicable legal principles.”

Katrina Cavalli, a spokeswoman for the organization, declined to comment.

The banks said that if the Supreme Judicial Court upholds Long, the ruling should apply only to future foreclosures. Some people who bought from other homeowners — possibly as long as 15 years ago — would lose their property because of the bad chain of title, the Real Estate Bar Association for Massachusetts said in a brief to the high court.

Wreaked Havoc

Vetstein, the Framingham lawyer, said Long’s rulings have wreaked havoc, putting hundreds or thousands of Massachusetts foreclosures in limbo.

The home-loan-bundling industry bears the responsibility and should bear the cost of such title disputes, Coakley, the state attorney general, told the state high court.

“Having profited greatly from practices regarding the assignment and securitization of mortgages not grounded in the law, it is reasonable for them to bear the cost of failing to ensure that such practices conformed to Massachusetts law,” she wrote.

Glenn F. Russell Jr., a lawyer in Fall River, Massachusetts, who represented the LaRaces before the state high court, said the mortgages were illegally transferred because the banks and servicers were interested in maximizing their business volume.

“The most insidious part of this is, it’s the roof over someone’s head you were playing around with,” said Russell, who added: “And then they said, ‘Who’s going to challenge us?’”

The case is U.S. Bank v. Ibanez, 10694, Supreme Judicial Court of Massachusetts (Boston). The lower-court cases are U.S. Bank National Association v. Ibanez, 08-Misc-384283, and Wells Fargo Bank NA v. LaRace, 08-Misc-386755, Commonwealth of Massachusetts, Trial Court, Land Court Department (Boston).

To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at tweidlich@bloomberg.net.

10 Responses

  1. PJ

    May be wrong but do not think so. The years later “confirmatory” assignment — is to confirm what SHOULD have happened — a recipient — many years ago.

    My problem is that the recipient has long likely changed by the the time “confirmatory” assignment is done!!!!!

    You cannot go back in time without documenting what HAS SINCE OCCURRED!!!!!

    It is a trick.

  2. “…they are set to rule upon is whether you can transfer a mortgage without naming a recipient.”

    Pure insanity! We are in BIG TROUBLE!

  3. The case is an important decision — for publicity only. The case is now so old — that relevant issues were not even raised. Case completely avoids issue that even if “confirmatory” assignments are “legal” — what happened in the interim?? That is – the time between when the assignment was supposed to be done — and the time when it is actually done and back-dated to be effectuated.

    Was there a repurchase? Was there removal of charged-off receivables — ie – the loan itself — via swap protection and/or direct sale – “swapped” out of trust??. Was the loan traded into another trust (done all the time)???

    WHAT HAPPENED IN THE INTERIM??????
    Case does not address. AND, that is where mortgage title fraud continues.

  4. I am confused by this news about the ruling to be decided by the Supreme Judicial Court in Boston…
    I thought that the 1872 U.S. Supreme Court case of Carpenter vs Longan (83U.S.271::Volume 83::1872) already addressed the necessity of proper transfer of secured debt. This U.S. Supreme Court case takes precedent over any lower court ruling, therefore, hasn’t the answer already been decided?
    This would mean that any secured debt transfer that did not conform to the requirements decided in the Carpenter case would not be valid…
    This would protect homeowners faced with wrongful foreclosures based on issues such as mortgages/promissory notes that were not properly transferred to the foreclosing entity.

  5. “…they are set to rule upon is whether you can transfer a mortgage without naming a recipient.”

    I am getting confused, doesn’t an “in blank” assignment (which has been around for eons) of the note cover this, especially where some courts have held that it is not possible to separate the (inextricably entwined) mortgage and note?

    Would this mean, if these cases are reversed, that going forward a record of mortgage assignment must be available for each pass of the note–the note passes that are now supposedly supported with MERS holding the mortgage for whichever member might have the note as any given time?

  6. Aren’t in blank indorsements accepted in all states? They have been around for eons and hardly questioned.

    I thought in blank indorsements in general were the main tool that made the securitization workable. No?

  7. Elections should be held by lottery. At least the home owners and tax payer have a better chance to be represented. This resolves any conflict of interest with the “big” banks. Finally, very major bank CEO should be kicked to the streets or jailed. This is the only way we will find some satisfaction.

  8. It may be best for all banks to be dissolved. Next, issue new currency for each independant state.
    All US reps and US Senators find a new job or if necessary be jailed. Enough is enough.

  9. I wonder who the Real Estate Bar Association is really arguing for. Since most real estate attorneys are paid by banks, it doesn’t surprise me that their stance would be one is support of the banks. I wonder if there is a Foreclosure defense Bar up there?

  10. This sentence intrigued me:

    “The banks, acting as trustees on behalf of the owners of debt issued based on bundled home loans, argued in their brief that borrowers can’t challenge their compliance with securitization agreements because they aren’t parties to them.”

    If borrowers aren’t parties to these agreements, then they wouldn’t need our signatures, no?
    (of course, we are silent parties since we don’t know all this stuff is going on and it was never disclosed to us that our basic needs for survival were being traded on Wall Street.)

    The people are only parties to these transactions when it is convenient to the banks. When they foreclose on you, then you ARE a party.

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