Bottom line: even thought the Supreme Court ruling in this Massachusetts case, Ibanez, was narrow, it still represents a major blow to the securitization industry, specifically, the argument made by the American Securitzation Forum and securitization law firms that have liability on opinions they provided on residential mortgage securitizations. It is also certain to fuel more challenges in court based on failures of the parties to securitizations to adhere to the requirements of their contracts.
The judges based their ruling strictly on Massachusetts law issues, and did not opine on the New York trust law issues we have highlighted. The ruling emphasized the horrible job the banks did in protecting and documenting their ownership interest and the overall carelessness of the securitization process. Massachusetts. law is somewhat unique in requiring that not only the note (the borrower IOU) be assigned correctly, but also that the lien (the so-called mortgage, or deed of trust) also be conveyed properly.
Effectively this shows the shortcomings of the fundamental design of the securitization process, of developing a one-size-fits-all process when some states have long-standing law (real estate is very well settled) that is idiosyncratic. How, in this case, could you design a securitiztion process that did NOT account for the need to handle the assignment of the mortgage, as Massachusetts requires?
As the ruling describes, one of the issues raised in the lower court case was “whether the plaintiffs were legally entitled to foreclose on the properties where the assignments of the mortgages to the plaintiffs were neither executed nor recorded in the registry of deeds until after the foreclosure sales.” Note that “out of time” assignments are common, often coming well after the timeframe required in the securitization documents, and even, as this case demonstrates, after foreclosure proceedings have commenced. At a hearing, the plaintiffs agreed that the documents they presented showed the transfer took place too late, but claimed they had other documents that would confirm that the transfer took place earlier. These documents, for the most part, were the original pooling and servicing related documents. In effect the argument was that there was an intent to transfer, and money had changed hands, which is a position the ASF and bank lobbyists have made repeatedly.
If you read the decision, you will see the judges recite the history of the two mortgages at issue and how they describe the language of the PSA and its requirements, how the banks did not adhere to its requirements, and how the documents the banks provided fail to link the properties in question specifically to the securitizations (meaning you can’t look at the closing documents and see clear evidence that the loans in question were even intended to be in these pools).
This is the key sentence from the decision, that the use of a securitization does not alter or reduce the requirements that apply to transfers and ownership of the loans and the related property:
Where, as here, mortgage loans are pooled together in a trust and converted into mortgage-backed securities, the underlying promissory notes serve as financial instruments generating a potential income stream for investors, but the mortgages securing these notes are still legal title to someone’s home or farm and must be treated as such.
Here is the decision:
Further commentary from Bloomberg. Note the market reaction. This ruling increases the odds that more borrowers will sue bank servicers and trustees for wrongful foreclosures.
US 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 improperly transferred into two mortgage-backed trusts….
The 24-company KBW Bank Index fell as much as 2.2 percent after the decision was handed down.