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Banks Lose Pivotal Massachusetts Foreclosure Case
By Thom Weidlich - Jan 7, 2011 11:56 AM PT

http://www.bloomberg.com/news/2011-01-07/us-bancorp-wells-fargo-lose-pivotal-massachusetts-foreclosure-case.html

U.S. Bancorp and Wells Fargo & Co. lost a foreclosure case in
Massachusetts’s highest court that will guide lower courts in
that state and may influence others in the clash between bank
practices and state real-estate law.
The ruling drove down bank stocks.

The state Supreme Judicial Court today upheld a judge’s decision
saying two foreclosures were invalid because the banks didn’t
prove they owned the mortgages, which he said were transferred
into two mortgage-backed trusts without the recipients’
being named.

Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co., called the decision
“a landmark ruling”
showing that at least in Massachusetts a mortgage
“must name the assignee to be valid.”

“This is likely to open the floodgates to more suits
in Massachusetts and strengthens cases in other states,”
Rosner said.

“We agree with the judge that the plaintiffs, who were not
the original mortgagees, failed to make the required showing
that they were the holders of the mortgages at the time of
foreclosure,” Justice Ralph D. Gants wrote for a unanimous court.

Wells Fargo, the fourth-largest U.S. lender by assets,
fell 96 cents, or 3 percent, to $31.19 at 2:43 p.m. in New York
Stock Exchange composite trading. U.S. Bancorp, the fifth-
largest U.S. bank by deposits, declined 25 cents,
or 1 percent, to $26.04.

Bank Index

The 24-company KBW Bank Index fell as much as 2.4 percent after
the decision was handed down.

Claims of wrongdoing by banks and loan servicers triggered
a 50-state investigation last year into whether hundreds
of thousands of foreclosures were properly documented as
the housing market collapsed.

The probe came after JPMorgan Chase & Co. and Ally Financial Inc.
said they would stop repossessions in 23 states where courts
supervise home seizures and Bank of America Corp. froze
U.S. foreclosures.

“This judgment has no financial impact on U.S. Bancorp,”
Teri Charest, a spokeswoman for the Minneapolis-based bank,
said in an e-mailed statement.
“Our role in this case is solely as trustee concerning
a mortgage owned by a securitization trust” and the bank
had no responsibility for transferring the loans.

Company Representatives

Jason Menke, a spokesman for San Francisco-based Wells Fargo, and Philippa Brown, a spokeswoman for Coppell, Texas- based American Home Mortgage Servicing Inc., the mortgage servicer, didn’t have an immediate comment.

The Massachusetts cases started in 2005 when Rose Mortgage Inc.
lent Antonio Ibanez $103,500 and Option One Mortgage Corp. lent
Mark and Tammy LaRace $129,000, according to the banks’ brief to
the high court. Ibanez and the LaRaces stopped paying on their
adjustable-rate subprime mortgage loans and were foreclosed
on in 2007.

By that time, U.S. Bancorp and Wells Fargo & Co. said they
controlled the loans, which had been subsumed in mortgage-backed
trusts.
The banks bought the homes in foreclosure auctions in July 2007.

In March 2009, Massachusetts Land Court Judge Keith C. Long
voided the foreclosures, finding that the mortgage transfers
were done months after the house sales and so U.S. Bancorp and
Wells Fargo didn’t own them.

Ruling Unchanged

In October of that year, Long declined the banks’ request to
abandon that ruling after they argued the documents that bundled
together the mortgages had transferred those instruments to them.

Long found that Option One Mortgage Corp., which early in the “chain of title” owned the mortgages, erred in assigning the mortgages without naming who they were transferred to, so- called blank assignments.

“We have long held that a conveyance of real property,
such as a mortgage, that does not name the assignee conveys
nothing and is void,” the Supreme Judicial Court said today.

The banks argued, as does the securitization industry, that
the right to a mortgage follows the sale of the promissory note
it secures, and since they held the notes, they should be
deemed to have the right to the mortgage.

The court disagreed.

“In Massachusetts, where a note has been assigned but there is no
written assignment of the mortgage underlying the note, the
assignment of the note does not carry with it the assignment
of the mortgage,” Gants wrote.

Noteholder Suit

A holder of the note in that case could file a lawsuit to obtain the mortgage, the court said. Otherwise, the mortgage holder remains unchanged, which is why the banks didn’t have the right to foreclose in the two cases, according to the opinion.

“The question about ownership is certainly a big one
for the banks, and any time you have a case that sets
a precedent, there is the possibility that other states
and a federal court will be influenced by that,”
said Michael Nix, who helps manage about $900 million at
Greenwood Capital Inc., in Greenwood, South Carolina.

He said he sold his Bank of America stake for Citigroup shares
because of BofA’s foreclosures and mortgage issues.

Bill Halldin, a spokesman for Bank of America, declined
to comment.

Bank stocks are getting hit because investors don’t fully
understand the ruling and it looks it may preclude banks
from foreclosing on delinquent borrowers, said Paul Miller,
a bank analyst for FBR Capital Markets in Arlington, Virginia,
and former examiner for the Federal Reserve Bank of Philadelphia.

Slower Process

“I don’t think that’s the case at all,” Miller said, adding
that the decision will probably slow down the process. “Any time
you bring into question the foreclosure process, it will be
negative for the banks.”

“It definitely puts into question some of the foreclosure
practices of the transfer of notes,” Miller said.
“The banks are going to feel some pain until we get a better,
clearer picture of what’s happened.”

The high court said that documents properly transferring
a mortgage, along with a schedule of the pooled loans
clearly identifying it as one of those assigned,
“may suffice to be proof that the assignment was made
by a party that itself held the mortgage.”

“However, there must be proof that the assignment was made
by a party that itself held the mortgage,” the court said.
U.S. Bancorp and Wells Fargo didn’t supply the proof
in this case, it said.

Timing Request

The court rejected the banks’ request to apply the decision only to future foreclosures if they lost. It does that when it makes a big change in the law, which it didn’t do here, it said.

“All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements” in the law “in the rush to sell mortgage-backed securities,” Gants wrote.

In a concurring opinion, Justice Robert J. Cordy said he was struck by “the utter carelessness with which the plaintiff banks documented the titles to their assets.”

He said the court’s decision didn’t address, because it wasn’t raised in the case, what effect that conduct would have on “a bona fide third-party purchaser” who relied on the methods the banks used and may now not have clear title to their homes.

Thomas Mitchell, an analyst at Miller Tabak & Co., said today in a note that “we do not see this type of decision as representing a major financial event” for banks. Lenders will already have taken 85 percent to 90 percent of their losses on the loans by the time of a foreclosure, he said.

“In most cases, we believe, the lender will end up retaining significant legal rights once the paperwork is properly amended,” Mitchell wrote.

The case is U.S. Bank v. Ibanez, 10694, Supreme Judicial Court of Massachusetts (Boston). The lower-court cases are U.S. Bank National Association v. Ibanez, 08-Misc-384283, and Wells Fargo Bank NA v. LaRace, 08-Misc-386755, Commonwealth of Massachusetts, Trial Court, Land Court Department (Boston).

To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at [e-mail].

To contact the editor responsible for this story: David E. Rovella at [e-mail].


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