In a major ruling in the Massachusetts Supreme Court today, US Bank and Wells Fargo lost the “Ibanez case,” meaning that they don’t have standing to foreclose due to improper mortgage assignment. The ruling is likely to send shock waves through the entire judicial system, and seriously raise the stakes on foreclosure fraud. Bank stocks are plummeting at this hour.

Tracy Alloway of the Financial Times has a very good explainer of the case.

In late 2005, Antonio Ibanez gets a $103,500 adjustable-rate mortgage loan on a Springfield, Massachusetts property from Rose Mortgage Inc. Rose then sells the loan to Option One Mortgage Co., which then passes it to Lehman Brothers Bank, which then sends it to Lehman Brothers Holdings. Lehman Bros Holdings then sends it to its Structured Asset Securities Corp. to be pooled with other loans and assigned to US Bank, acting as trustee for Structured Asset Securities Corp. Mortgage Loan Trust 2006Z.

In other words, the Ibanez mortgage gets pooled and securitised into a typical run-of-the-mill subprime Residential Mortgage-Backed Security (RMBS) […]

At some point in the foreclosure process, there’s doubt about whether the Boston Globe advertisements (as opposed to say, a Springfield-based paper) satisfy foreclosure notice requirements in the state of Massachusetts.

The two trustee banks go to the Massachusetts Land Court in the fall of 2008 to debate this — when suddenly, Massachusetts Land Court Judge Keith C. Long orders US Bank and Wells Fargo to prove they had the right to foreclose in the first place.

Here’s what happens next:

The Land Court then proceeded to find that (1) neither Appellant had a valid assignment of mortgage at the time of publication of the notices or at the time of the foreclosure sale, (2) the foreclosure notices failed to identify the “holder” of the mortgage, and (3) the notices were deficient under Mass. Gen. L. ch. 244, 5 14. [A592-93]. Put another way, the Land Court held that Appellants lacked authority as assignees to conduct the subject: foreclosures.

The notice requirements are a bit of a sideshow. The point here is that the mortgage assignment and the securitization process was improper. US Bank and Wells Fargo did not have possession of the mortgage note, and thus did not have the standing to foreclose. In addition, they put the endorsement in blank, without naming the entity to which they were assigning the mortgage. This violated Massachusetts law, according to the original judge in the case, and now the MA Supreme Court agreed.

And as we know, this is more the norm than otherwise. But this is one of the first major cases, decided by a state Supreme Court, that affirms that a lack of securitization standards means that the bank who thinks they have the power to foreclose on a delinquent borrower actually does not.

If this ruling gets applied far and wide, you’re basically going to have a situation where most securitized mortgages in the country cannot be foreclosed upon. It depends on state law and the associated rulings, but you can see the Ibanez case being used as precedent.

UPDATE: This is from the concurring opinion from the state Supreme Court:

I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it. As the opinion of the court notes, such strict compliance is necessary because Massachusetts is both a title theory State and allows for extrajudicial foreclosure.

The banks are screwed if this precedent holds.

UPDATE: The full opinion is below.

UPDATE II: Yves Smith has more, as does Calculated Risk. The ruling is applicable only to Massachusetts, of course, so it’s not clear how it could be applied in other states, as all of them have their own particular real estate laws. But this from CR is ridiculous:

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 would be true if it weren’t the case that every single bank exhibited utter carelessness on documenting the titles to the assets, which has been proven by simply looking at the mortgage assignments the banks are trying to pass off, and by the actions of robo-signing and document forgeries. Carelessness is the entire point.

UPDATE III: If I wasn’t clear about this, I’ll try again. This was a Massachusetts ruling. It’s applicable only to Massachusetts. As I wrote, If applied broadly, it could be a foothold for those arguing against improper foreclosures elsewhere, but there’s evidence to suspect that the ruling has limited applicability. In particular, the assignment of the mortgage in blank is not legal in Massachusetts, even though it was largely the industry standard. This may end up to be only good news for borrowers in the state of Massachusetts. Nonetheless, it’s among the first rulings to seriously address the issue of mortgage assignments. There are others at the state Supreme Court level having to do with MERS, but this one is a bit different. I suspect it won’t be the last case.

David Dayen

David Dayen