The Massachusetts Supreme Court has issued its highly-anticipated opinion in the case of US Bank National Association v. Ibanez (and the related case of Wells Fargo Bank v. LaRace), bringing with it more bad news for the lending industry. The unanimous opinion, authored by Justice Ralph Gants (available here and embedded below), upholds the prior decision in Massachusetts Land Court that foreclosure sales conducted as to properties inhabited by borrowers Antonio Ibanez and Mark and Tammy LaRacemakes were invalid because the Trustees attempting to foreclose were not the holders of the mortgages at the time they initiated foreclosure proceedings.
The decision confirms what many legal commentators had feared: that the common industry practice of assigning a mortgage “in blank” – meaning without specifying to whom the mortgage would be assigned until after the fact – does not constitute a proper assignment. The Supreme Court further held that, without proof of a proper assignment to the party attempting to foreclose prior to the initiation of foreclosure proceedings (and proof that the party from whom the mortgage was assigned was a holder of the mortgage at the time of such assignment), the trustees could not rely on assignments after the fact to cure this deficiency. The majority opinion was careful to distinguish between proper assignment in advance of foreclosure and proper recording of that assignment, holding that the latter could be effectuated after the fact. The Court also found that being the holder of the promissory note was not enough to foreclose, if that entity did not also hold the mortgage.
Wells Fargo and US Bank, who are acting as the Trustees for the securitizations purporting to hold the mortgages at issue, each argued that, aside from having been assigned the mortgages via assignments in blank, they had been assigned the mortgages under their respective pooling and servicing agreements. The Court rejected both arguments. First, the Court found that, “We have long held that a conveyance of real property, such as a mortgage, that does not name the assignee conveys nothing and is void; we do not regard an assignment of land in blank as giving legal title in land to the bearer of the assignment” (Order p. 11). The Court went on to find that poolwide assignments of “all right, title and interest” in the mortgages contained in the trust agreements were also ineffective because the trustees did not provide any proof that the loans at issue were included in any schedules attached as exhibits to those agreements.
Further – and this is important for investors considering possible legal action with respect to private label MBS – the Court held that there was no evidence that the Trusts, the entities that purportedly assigned the mortgages to Wells and US Bank, ever held the mortgages to be assigned. This suggests that many mortgages were never properly transferred into the securitizing trusts in the first place, meaning that investors may be holding unsecured debt instruments. As two of the four biggest Trustees of mortgage backed securitizations, Wells Fargo and US Bank could experience increased liability as a result of this decision, as they had certain obligations to confirm that the mortgages were properly transferred into the trusts and that all relevant paperwork was in order. Both banks’ stock prices took a hit immediately following the release of the Mass. Order.Notably, the Court also explicitly rejected the Trustees’ request that the ruling be held to be only prospective in application, and not retroactive (see Order p. 12). The Court noted that its opinion had not changed settled case law, but was simply enforcing well established legal principles and requirements. Thus, there was no need to restrict the opinion only to future foreclosure cases. This opens the door for borrowers who were previously foreclosed-upon on the basis of an assignment-in-blank to come back and challenge the foreclosure as invalid. Chaotic times, indeed.
Even if foreclosing banks can cobble together the necessary paperwork to prove valid assignment prior to initiating proceedings going forward, the Ibanez decision means that private investors will take an even greater loss on their MBS investments than they have already, as this ruling will certainly lead to longer foreclosure timelines, higher legal costs coming out of securitization trusts, and higher loss severities for delinquent loans. And the costs will be even higher if banks have lost paperwork or are unable to cure their assignment problems, as many suspect. Of course, the allocation of this loss could change if bondholders mobilize and take legal action against the arrangers of the securtizations in which they invested. Indeed, if the debt instruments they purchased were held out to be backed by collateral (i.e. mortgages) that the trusts never really held, investors will have some potent legal arguments that they can return these instruments to Wall Street for a full refund.
[For additional solid analysis of this opinion, check out this article on Felix Salmon’s Reuters blog and the comments at the end from Adam Levitin – IMG.]
