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Don’t Believe Everything You Read Dept.: Foreclosure Case in Massachusetts Gives New Protections to Homeowners

A ruling in a long-awaited foreclosure case in Massachusetts had an ambiguous result today, though it’s presented here by Nick Timiraos as a win for banks:

The highest court in Massachusetts rejected a challenge from a Boston homeowner who had contested the validity of her foreclosure in a widely watched case that threatened to create a wave of new legal problems for banks seeking to repossess homes.

The ruling allows Fannie Mae to proceed with a foreclosure and avoids what the real-estate industry had feared would be a “legal volcano” that could create clouded titles on thousands of foreclosed properties in Massachusetts, particularly after the same court issued two rulings last year that reversed foreclosures.

“The real-estate bar up here is breathing a great sigh of relief,” said Edward Bloom, a partner at Sherin & Lodgen in Boston and the former president of the state’s Real Estate Bar Association. A decision challenging the industry’s practice of repossessing homes “would have screwed up real-estate titles for the last 50 years,” he said in an interview Friday.

Based on my conversations, the ruling does not allow Fannie Mae to foreclose. It remands the case back to the lower court for them to decide how to proceed. And while the case is prospective, meaning that it only applies to foreclosure actions from this point forward, as Adam Levitin explains there are still some added protections for homeowners granted. In the case, Eaton v. Fannie Mae and Green Tree Servicing, the homeowner argued that a lender cannot foreclose unless they hold both the mortgage and the promissory note. And the high court in Massachusetts agreed with that.

Georgetown University Law Professor Adam Levitin, who wrote a friend-of-the-court brief supporting Eaton’s position, said the decision makes clear that lenders who do not hold both the mortgage and the promissory note do not have the right to foreclose, an area of state law that until now has been ambiguous.

“It’s not an outright victory. The court was definitely concerned that if it applied the ruling retroactively, that it would cloud title for a lot of real estate in Massachusetts. They avoided that,” Levitin said.

“However, for people who are currently in foreclosure or worried that foreclosure will happen in the future, this rule matters quite a bit because the mortgage industry was, frankly, sloppy about its paperwork.

“If you lost your house in foreclosure, you’re not getting it back because of this, but overall, it means homeowners have pretty good protections, namely, you can’t be thrown out of your house unless the lender can absolutely prove they have the right to do so.”

The ruling also alluded to a mortgage-holder being able to skate by if they could prove that they were acting on the noteholder’s behalf. But I am going with Levitin on this one, it sounds like an advance, albeit a bittersweet one, because it’s not prospective.

You do need to beware banker propaganda in these matters. If the banks continue business as usual in Massachusetts with this case law clarification, and try to foreclose without holding the mortgage and the note, they will be extremely likely to get challenged. The “legal volcano,” then, is dormant but still has the potential to be active.

In other litigation in recent weeks, homeowners have secured victories.

First, in the Congress case, a wrongful foreclosure action in Alabama (see my previous blogging on it here), the Alabama appellate court reversed and remanded, a victory for the homeowner. The reversal and remand was on a rather narrow ground, namely that the trial court applied too demanding a standard when evaluating the homeowner’s argument that the allonge in the case had been fabricated. Yet this means that this securitization fail case is still alive […]

Second, the Illinois Court of Appeals for the 2d District just issued a ruling in a commercial mortgage foreclosure case, Bank of Am. Nat’l Ass’n v. Bassman FBT, 2012 Ill. App. LEXIS 487 (Ill. App. Ct. 2d Dist. 2012), with some wide reaching implications for securitization fail arguments. It’s mainly a choice of law opinion, but there are two interesting things about the case. First, the Illinois court very clearly understood the securitization fail standing argument made by the defendants and was taking it seriously. Second, the Illinois court applied New York law to the interpretation of the PSA. This is critical because once the argument shifts to New York trust law, its 90% of the way there.

In short, the arguments that the banks screwed up in securitization are still alive. And among those are the arguments that the banks failed to convey the notes to the trust, which would have a significant impact in Massachusetts, because there would functionally be no noteholder to speak of. As Levitin told Timiraos: “You still have to show that someone else is actually the noteholder.”

UPDATE: More detail from Prof. Levitin at Credit Slips. Short-term, the banks got a win because of the prospective nature of the case. Longer-term, it’s anyone’s guess.

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David Dayen

David Dayen

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