Huge Mass. Ruling Gives Homeowners New Power in Foreclosures

Huge Mass. Ruling Gives Homeowners New Power in Foreclosures

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BOSTON—In a decision that could have a far-reaching impact on foreclosures nationwide, Massachusetts' highest court ruled Friday that Wells Fargo and US Bancorp had no right to seize the homes of Antonio Ibanez and Tammy and Mark LaRace because the banks could not prove that they legally owned the mortgages at the time they foreclosed.

That unanimous ruling rejected the way lenders in recent years have conducted foreclosures — without having all the documentation in place at the time a property is seized.

Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co., called the ruling “a landmark” and predicted it would “open the floodgates to more suits in Massachusetts and strengthens cases in other states.”

While the ruling itself only applies to Massachusetts, the same arguments are being made in other cases in other states. "This decision is going to raise serious problems in hundreds of thousands of foreclosure cases," Thomas Cox, a Maine attorney who defends the rights of homeowners, told the Associated Press. "It has the potential to require that foreclosures be done over, and I think there's going to be significant turmoil nationally."

The 6-0 decision by Massachusetts’s Supreme Judicial Court—the same court that overruled the state’s ban on same-sex marriage in 2003—upheld a controversial lower court ruling from 2009.

The high court found that Wells Fargo and US Bancorp—which did not issue the original mortgages to Ibanez and the LaRaces but received them through a complicated series of financial transactions that are common in the mortgage-lending industry—"failed to make the required showing that they were the holders of the mortgages at the time of foreclosure."

Both Ibanez and the LaRaces bought homes in Springfield, Mass., in 2005 and lost them to foreclosure in 2007. Rose Mortgage was the original issuer of Ibanez’s $103,500 loan, which eventually ended up with US Bancorp; the LaRaces’ $103,200 loan was issued by Option One and eventually found its way to Wells Fargo.

Foreclosures are supposed to occur only when lenders can prove they own the bank note underlying the property. But it turned out that in the Ibanez and LaRace cases, the banks had not yet completed the formal paperwork to carry out an assignment from the existing owner even though, for business purposes, the transfer had effectively taken place.

Justice Robert Cordy blasted the banks' "utter carelessness" in documenting their right to own the properties.

It is often difficult to prove which institution owns a particular mortgage because millions of home loans were bundled into bonds and sold to investors during the housing boom, creating long and twisted paper trails, the Boston Globe noted. Before the 2009 lower court decision in the Ibanez and LaRace cases, however, lenders believed they could complete foreclosure transactions first and only later produce formal proof that they held title to the properties.

Banks have argued that the paperwork requirements are mere technicalities. But the Massachusetts high court court responded that because state law gives financial institutions "substantial power" to foreclose, they must "follow strictly" the procedures for doing so.

Massachusetts is one of a 30 states, including California, that allows "nonjudicial foreclosures"—i.e., courts are not required to sign off before a bank seizes a property.

Analysts said the decision may threaten banks' ability to package mortgages into securities, and may raise the possibility that loans transferred improperly will need to be bought back.

"What they were doing was peddling these mortgages and leaving the paperwork behind," said Michael Pill, a Massachusetts lawyer who represents homeowners but was not involved in the case.

In another blow for the banks, the Massachusetts high court also rejected their request that the ruling apply only to future foreclosures.

"I'm ecstatic," Glenn Russell, a lawyer for the LaRaces, said in an interview with Reuters. "The fact the decision applies retroactively could mean thousands of homeowners can seek recovery for homes wrongfully foreclosed upon."

Russell said the LaRaces moved back to their home after the 2009 ruling, while Paul R. Collier III, Ibanez's lawyer, said Ibanez has not returned to his home. "U.S. Bancorp will have to compensate him in exchange for the deed or will have to walk away," Collier told Reuters.

In the last year, lenders' foreclosure practices have come under intense scrutiny, much of that focusing on the so-called robo-signing scandal, in which mortgage servicers approved hundreds of thousands of foreclosures without scrutinizing the underlying documents to see whether the seizures were legal or fair.

Claims of wrongdoing vy robo-signers triggered a 50-state investigation, and mortgage servicers nationwide issued a temporary moratorium to make sure their paperwork was in order.

Although the high court decision carries no legal weight outside Massachusetts, it will be used by homeowners facing foreclosure cases in other states, said Matthew Weidner, a St. Petersburg, Florida, lawyer, told Bloomberg News.

“This is a very detailed, very specific indictment of an entire industry’s practices and procedures, and it’s an indictment that is going to send shockwaves throughout the entire mortgage, foreclosure, real-estate servicing industry,” he said.
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Collier agreed that the ruling could have a far-reaching impact on the nation's banking industry.

"For homeowners and foreclosures in general, it means that any mortgage foreclosure which was initiated by a securitized trust at a time when the trust had not obtained a mortgage assignment which gave it the lawful right to do so is void. Those homeowners, like Mr. Ibanez, still own the property," he told the Associated Press.