Less Than Meets The Eye In Ibanez Foreclosure Case

Lots of doomsday scenarios floating about concerning the Massachusetts Supreme Judicial Court’s decision in US Bank vs Ibanez. Is it all warranted?

First the bare bones. The Court’s decision upheld lower court’s finding that two foreclosures were improper as the banks involved had not proven that they owned the mortgages on the properties. To make matters just a bit more complete, both mortgages had been transferred into mortgage-backed trusts. That pretty much throws all the players who can sue into the pot.

Now the thinking among some is that this could open up the flood gates in as much as the two homeowners in this case get their houses back. Or do they?

Felix Salmon frets that homeowners in Massachusetts who have been foreclosed will begin to challenge the banks and regain their homes.

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 sellyour home, well, good luck with that.

Going forwards, every homeowner being foreclosed upon will as a matter of course challenge the banks to prove that they own the mortgage in question. If the bank can’t do that, then the foreclosure proceeding will be tossed out of court. This is likely to slow down foreclosures enormously, as banks ensure that all their legal ducks are in a row before they try to foreclose.

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.

Felix goes on to speculate that if this were to become a nationwide trend then the game would be over for the banks. He points out that if something similar were to transpire in California that would probably be enough to bring the entire house of cards crashing down, and he’s probably right. But a lot of his reasoning is based on the assumption that the banks have no further recourse in the Ibanez case.

The big losers here are the banks — of course — as well as investors in mortgage-backed securities, including of course Fannie and Freddie, a/k/a the US taxpayer. 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.

Taking his last point first, I think it’s speculation at best that there never were mortgages or any other form of security agreement created at the time the home loans were funded. They may be lost or possibly have not caught up with other documents but I have seen no hard evidence that significant numbers of loans were made without proper security. As for his point that the banks have lost the houses altogether, well there is a difference of opinion on that.

Calculated Risk offered this assessment of the decision.

These are important points:
• The “assignments do not need to be in recordable form or recorded before the foreclosure”. That is a key point.
• This case is really about the “utter carelessness with which the plaintiff banks documented the titles to their assets”.

And this means that
• These issues are curable, but will be costly for the banks. As Tanta frequently argued, the upfront “cost savings” would be paid for in arrears!
• This does not appear to be a systemic risk.

Quite a different interpretation! If indeed the problems surrounding the actual ownership of the mortgages is curable then the banks have not lost their security in perpetuity. The fact that the assignments of the mortgages do not have to have been recorded prior to the foreclosure or even in recordable form gives the banks ample room to address the issues assuming they can locate the paperwork. The takeaway for me is that Calculated Risk is probably on the money when he concludes that there is not a systemic risk here. The Court gave the banks a way out!

Is this going to be one more obstacle to clearing the housing markets? Of course it will be. Lawyers were already looking for undotted I’s and uncrossed T’s in order to contest foreclosures, and unfortunately finding much more than that. This decision is going to give them case law to argue and that will cause judges to probably be a little less forgiving towards any defects in paperwork. The banks will have to get their ducks in line before they go to court and that is going to take a lot of time and money, both of which they have no choice but to spend.