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Massachusetts Ruling in the Ibanez Case Reverberates

The landmark ruling in the Massachusetts Supreme Judicial Court in the Ibanez case has many wondering about the implications. The underlying process that the court found unsatisfactory to prove ownership in foreclosure was fairly normal; most banks endorsed in blank, carried off several trades of the mortgage and passed them along in less than pristine ways. However, state laws differ on these points, and one state court ruling cannot be applied to another. For instance, in a case on the same day, the Maine Supreme Court allowed JP Morgan Chase to foreclose on a borrower, even though they did not have possession of the mortgage at the beginning of the foreclosure action. That case seemed to turn on the fact that the borrower, Mr. Harp, didn’t raise the issue of standing to foreclose at the beginning, and JP Morgan acquired possession of the mortgage later (“we hold that JPMorgan improperly filed the foreclosure complaint before it owned both the note and the mortgage, but this defect was cured when JPMorgan was assigned the mortgage. Because Harp did not raise this issue until after the assignment, the court did not err in considering JPMorgan’s motion for summary judgment”). So these rulings can be idiosyncratic.

On the third hand, Massachusetts is a pretty decent-sized state. And this ruling has the potential to affect thousands of mortgages there even if it has no applicability anywhere else. Here’s Gretchen Morgenson of the NYT:

Paul R. Collier III, a lawyer in Cambridge, Mass., represented Antonio Ibanez, one borrower in the case. “It’s been pretty clear and becoming ever more clear that the securitization industry has behaved as though it were immune from consumer protection laws, state homeowner protection laws and real estate regulations in its underwriting, securitization and foreclosure practices,” Mr. Collier said. “I am quite confident that this is merely the first petal off the rose with regard to predatory foreclosure practices.” […]

The banks involved in the matter had asked the Massachusetts court to make its ruling prospective, meaning that it would affect only new foreclosures. The court declined to do so, allowing foreclosure cases that have been completed to be reopened and brought under scrutiny.

Mr. Collier said he had a dozen similar cases. In a legal brief presented to the Massachusetts court, representatives of the real estate industry said there were thousands of foreclosure cases in the state with facts like those in the Ibanez matter.

Just the facts that the banks tried to limit the damage by asking that the ruling be made prospective shows their acknowledgement of liability in thousands of cases. It’s highly likely that the legal paperwork on mortgage assignments was never in order, and as a result thousands of foreclosures in Massachusetts were undertaken improperly. There’s no telling what this means for those borrowers evicted from their homes illegally, homeowners who purchased the homes post-foreclosure, or the banks and title insurance companies engaged in the transaction.

And if the ruling does in fact have relevance to states outside of Massachusetts, well, all bets are off. Felix Salmon:

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 […]

If a similar decision comes down in California, which is a non-recourse state, the resulting chaos could be massive. People who are current on their mortgage and perfectly capable of paying it could simply make the strategic decision to default, if and when they find out or suspect that the chain of title is broken somewhere. They would take a ding to their credit rating, but millions of people will happily accept a lower credit rating if they get a free house as part of the bargain.

Not only that, but securitization trusts pulled mortgages from all over the country. It’s highly likely that Massachusetts mortgages are included in a substantial amount of those trusts, and this ruling basically says that those assignments were improper, and the bank cannot foreclose on those mortgages. Plus, you can pretty clearly extrapolate that all the mortgages in those trusts were handled through the same faulty process.

A lot of lawyers – and a lot of investors – are licking their chops at this decision. WSJ:

Bank stocks fell on worries that Friday’s ruling could make it harder for financial firms to foreclose on mortgages that wound up in securities. The defeat also might provide ammunition to mortgage-bond investors who have accused and even sued servicers for what the investors claim is systematically shoddy loan documentation […]

“It’s deeply disturbing to investors that it even got to this point, but it potentially strengthens any bondholder claim that the servicers are mishandling foreclosures,” said Talcott Franklin, a lawyer representing bond investors.

Franklin isn’t just “a lawyer,” he’s the lawyer massing investors together in repurchase cases.

When reporters are scratching their heads in a few months wondering why the banks are asking for another huge bailout and what this whole foreclosure fraud thing means, you can steer them around to this decision.

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David Dayen

David Dayen