In U.S. Bank National Association vs. Ibanez, the Massachusetts Supreme Judicial Court invalidated two foreclosure sales based on a break in chain of title from the originating lender who sold the mortgage to the homeowner to the foreclosing lender. This ruling provided a major win for homeowners and a severe blow for banks trying to clear a backlog of millions of defaulted mortgages. Ibanez means that millions of homeowners could have a basis to challenge their bank's ability to foreclose.
Ruling in favor of the homeowners, the court in Ibanez found that the lower court did not err in concluding that the securitization documents submitted by the banks failed to demonstrate that they were the holders of the mortgages at the time of the publication of the notices and sales. The court rejected the banks' claims that (1) that the mortgages were transferred via the pooling and servicing agreement ("PSA")- a contract of sale of the mortgages; (2) that the mortgages were transferred via assignments in blank; and (3) that the mortgages followed the note and transferred ownership via transfer of the notes. The court made clear that foreclosing banks must prove a complete and unbroken chain of title from origination to the foreclosing lender and must unambiguously show the association of the defaulted mortgage loan with the trust pool where it was placed.
In his concurring opinion, Justice Cordy addresses the often heard argument that "the paperwork is a technicality as long as the homeowner is in default":
I concur fully 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. .
While some commentators have pointed out that Ibanez involved mortgage chain of title issues, rather than break in chain of promissory note issues-- a distinction they claim could hurt claimants in states like California given that California law requires transfer of the note, whether or not it is accompanied by the mortgage (Deed of Trust), to grant title to the foreclosing party. "... {A}n attempted assignment of the mortgage (or trust deed), without the note, transfers nothing to the assignee; and a transfer of the note, without the mortgage, gives the assignee the right to the security. (See 4 Miller & Starr 3d, 10:38 et seq.)) This distinction will probably not thwart California claimants, however, since he wealth of evidence in many other courts around the country reveals that in most instances the banks did not properly assign the promissory notes to each of the parties in the securitization chain of title. Thus, as in Ibanez, the banks will likely not be able to demonstrate a proper assignment of the note sufficient to establish standing to proceed with a lawful foreclosure.
Indeed, a well recognized expert on the topic, Georgetown Professor, Adam Levitin, comments that break in chain of note issues may provide even bigger problems (in states like California) than break in chain of mortgage issues (as in Massachusetts):
Ibanez... involve{s} mortgage chain of title issues, not note chain of title issues. There are plenty of problems with mortgage chain of title. But the note chain of title issues, which relate to trust law questions, are just as, if not more serious. We don't have any legal rulings on the note chain of title issues. But even the rosiest reading of Ibanez cannot provide any comfort on note chain of title concerns.
In sum, Ibanez provides no cover to banks in California who are attempting to foreclose on properties for which notes were not properly assigned. This realization has caused many California homeowners to seek legal counsel to investigate the facts surrounding their loans and/or initiate lawsuits asking the foreclosing banks to demonstrate they have an enforceable interest in the property. The Ibanez case could turn out to be a watershed moment in the foreclosure crisis requiring that banks finally negotiate with homeowners in good faith to resolve their bungled documentation of securitized mortgages-- or risk similar appellate rulings that could invalidate foreclosures throughout California.
Copyright (c) 2011 Deborah Gutierrez
Ruling in favor of the homeowners, the court in Ibanez found that the lower court did not err in concluding that the securitization documents submitted by the banks failed to demonstrate that they were the holders of the mortgages at the time of the publication of the notices and sales. The court rejected the banks' claims that (1) that the mortgages were transferred via the pooling and servicing agreement ("PSA")- a contract of sale of the mortgages; (2) that the mortgages were transferred via assignments in blank; and (3) that the mortgages followed the note and transferred ownership via transfer of the notes. The court made clear that foreclosing banks must prove a complete and unbroken chain of title from origination to the foreclosing lender and must unambiguously show the association of the defaulted mortgage loan with the trust pool where it was placed.
In his concurring opinion, Justice Cordy addresses the often heard argument that "the paperwork is a technicality as long as the homeowner is in default":
I concur fully 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. .
While some commentators have pointed out that Ibanez involved mortgage chain of title issues, rather than break in chain of promissory note issues-- a distinction they claim could hurt claimants in states like California given that California law requires transfer of the note, whether or not it is accompanied by the mortgage (Deed of Trust), to grant title to the foreclosing party. "... {A}n attempted assignment of the mortgage (or trust deed), without the note, transfers nothing to the assignee; and a transfer of the note, without the mortgage, gives the assignee the right to the security. (See 4 Miller & Starr 3d, 10:38 et seq.)) This distinction will probably not thwart California claimants, however, since he wealth of evidence in many other courts around the country reveals that in most instances the banks did not properly assign the promissory notes to each of the parties in the securitization chain of title. Thus, as in Ibanez, the banks will likely not be able to demonstrate a proper assignment of the note sufficient to establish standing to proceed with a lawful foreclosure.
Indeed, a well recognized expert on the topic, Georgetown Professor, Adam Levitin, comments that break in chain of note issues may provide even bigger problems (in states like California) than break in chain of mortgage issues (as in Massachusetts):
Ibanez... involve{s} mortgage chain of title issues, not note chain of title issues. There are plenty of problems with mortgage chain of title. But the note chain of title issues, which relate to trust law questions, are just as, if not more serious. We don't have any legal rulings on the note chain of title issues. But even the rosiest reading of Ibanez cannot provide any comfort on note chain of title concerns.
In sum, Ibanez provides no cover to banks in California who are attempting to foreclose on properties for which notes were not properly assigned. This realization has caused many California homeowners to seek legal counsel to investigate the facts surrounding their loans and/or initiate lawsuits asking the foreclosing banks to demonstrate they have an enforceable interest in the property. The Ibanez case could turn out to be a watershed moment in the foreclosure crisis requiring that banks finally negotiate with homeowners in good faith to resolve their bungled documentation of securitized mortgages-- or risk similar appellate rulings that could invalidate foreclosures throughout California.
Copyright (c) 2011 Deborah Gutierrez