Massachusetts Court Requires Assignment Of Mortgage Prior To Foreclosure
On January 7, 2011, the Supreme Judicial Court of Massachusetts issued a ruling in U.S. Bank v. Ibanez, SJC-10694 invalidating two foreclosures by Wells Fargo Bank, N.A. and U.S. Bank, N.A., and holding that the banks were unable to prove they held the securitized mortgages at the time of foreclosure. Some “anti-foreclosure” advocates and news reports have hailed the decision as a significant blow to routine foreclosures of securitized mortgages. On the contrary, the decision merely reinforces that each state has its own set of foreclosure laws that must be followed in order for a foreclosure sale to be valid. Furthermore, the ruling illustrates how important it is for lenders and loan servicers to understand applicable state laws and to review their foreclosure practices to ensure that any legally required documentation is in place prior to initiating foreclosure proceedings.
Unlike many other states, Massachusetts law requires a written assignment of the mortgage or security instrument to the foreclosing entity prior to foreclosure. The banks in Ibanez produced a significant amount of documentation about the history and securitization of the loans and possessed the original promissory notes with valid indorsements. The mortgages, however, had not been assigned to the foreclosing banks at the time of the foreclosures. Furthermore, the Court ruled that the “blank assignments” of the mortgages were invalid under existing Massachusetts law. Therefore, the Court affirmed the lower court’s decision to void the foreclosure sales.
Recognizing the limited application of its ruling, the Court distinguished Massachusetts law from other jurisdictions that do not require assignment of the mortgage or security instrument prior to foreclosure. In many other states, the equitable security of a deed of trust follows the underlying debt obligation. Therefore, any entity that is entitled to enforce the debt obligation enjoys the security of the deed of trust, regardless of whether there has been an assignment of the deed of trust.
Furthermore, the Court in Ibanez ruled that under Massachusetts law banks and other holders of mortgage loans are legally entitled to obtain assignments of the mortgages based on their ownership of the underlying debt obligations. Therefore, the Massachusetts properties are still subject to foreclosure, provided that the foreclosing entities obtain assignments of the mortgages either from the current beneficiaries or by petitioning the appropriate court. Contrary to comments by several “anti-foreclosure” advocates, the ruling does not render the loans unsecured or bar foreclosure on the properties. Although the Ibanez decision is limited to foreclosures in Massachusetts, lenders and loan servicers would be well-advised to review their foreclosure practices to ensure compliance with a particular jurisdiction’s foreclosure laws.
Importantly, the Massachusetts ruling does not invalidate securitization of mortgage-backed assets or foreclosures on securitized mortgages. Nor does it invalidate or affect mortgages designating Mortgage Electronic Registration Systems, Inc. (“MERS”) as nominee for the mortgage holder. In fact, MERS mortgages, as opposed to non-MERS mortgages, may provide a more efficient method for obtaining any assignments required by state law, as MERS (as nominee) may assign the mortgage to the foreclosing entity prior to foreclosure.
Over the past year and a half, Troutman Sanders’ Financial Services Litigation team has successfully litigated attempts by borrowers and “anti-foreclosure” advocates to stop or invalidate foreclosures across the country. We can provide valuable advice and analysis to make sure that your pre-foreclosure procedures conform with the terms of the loan documents and the controlling law. We can also provide experienced and efficient legal representation in the event that the validity of a foreclosure sale is challenged in a lawsuit. In today’s litigious climate, the Ibanez decision makes it clear that a strong understanding of the specific property and foreclosure laws within each jurisdiction is critical to protecting the interests of financial institutions.