Apparently the Massachusetts Supreme Court neglected to read the bipartisan memo reminding politicians and judges to refrain from doing anything that might upset the banks.
Most judges have shown extraordinary deference to bankers, even amid growing evidence that those bankers haven’t been following the law in pursuing foreclosures.
That may be beginning to change, in the wake of a Massachusetts ruling against banks in a closely watched foreclosure case.
Right now the decision only has force in Massachusetts. But as other cases challenging foreclosures make their way through the courts across the country, other judges are likely to be guided by it. In addition, the ruling will also provide guidance for lawyers posing legal challenges to other mortgages scrambled in the securitization process.
The Obama administration has consistently downplayed evidence of rampant fraud and sloppiness in the way banks split up, packaged and sold off mortgages to investors in the heat of the housing bubble.
Almost all subprime mortgages as well as millions of conventional mortgages originated before the meltdown were securitized and sold to investors. Securitized mortgages account for more than half of the $14.2 trillion in the total outstanding U.S. mortgage debt.
Bankers have tried to dismiss these problems with what’s known as the securitization process as a matter of mixed-up paperwork that can be straightened out.
But the highest level court to examine the issue thus far took the issue much more seriously. Last week the Massachusetts Supreme Court invalidated what had become a common practice – banks seeking to foreclose on properties without properly holding ownership of the promissory note and mortgage as part of the securitization. The court focused heavily on the use of the power of sale contained in mortgages; the same power exists in the vast majority of California deeds of trust.
Ruling in a closely watched case, the high court rejected arguments by U.S. Bancorp and Wells Fargo & Co. that they didn’t have to prove their authority to foreclose. The banks had argued that evidence that they intended to transfer ownership was enough to establish their standing to foreclose.
The ruling makes dense but fascinating reading, with some passages coming through loud and clear even if you’re not steeped in real estate law.
The justices stressed they weren’t creating any new interpretation of law. “The legal principles and requirements we set forth are well established in our case law and our statutes,” wrote Justice Ralph D. Gants. “All that has changed is the (banks) apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.”
Banks have argued that their “pooling and servicing agreements” allowed them to transfer mortgages to securitized trusts “in blank” without specifying whom the new owner would be.
But the justices ruled in U.S. Bank v. Ibanez that the “foreclosing party must hold the mortgage at the time of the notice and sale in order accurately to identify itself as the present holder and in order to have the authority to foreclose under the power of sale…”
In a concurring opinion, Justice Robert Cordy wrote: “There is no dispute that the mortgagors (borrowers) had defaulted on their obligations.”
But that’s not the legal standard. “Before commencing such an action…the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order,” Cordy stated.
The ruling could lead to an increase in complicated and expensive litigation, if those whose homes have already been foreclosed on sue to challenge the financial institutions’ authority to conduct the foreclosures. Investors may also sue, contending that the banks didn’t properly document the ownership trail on the mortgages contained in a particular investment pool.
Can banks go back in and straighten out their securitization mess? So far the banks are downplaying the significance of the ruling. But untangling the paperwork may not be so easy. Many of the entities that created the securitized pools have gone bankrupt or dissolved into other businesses. At the very least, it could pose a costly and complicated process for the bankers, one that would entail taking a hard look at the details of the deals that led to the country’s financial collapse.