The 16-page decision in the case of US Bank vs Ibanez does not make for easy reading. But it’s a very important case: it’s a solid precedent saying that if a bank doesn’t own a mortgage, then it can’t foreclose on a home. That was the decision of the lower court in Massachusetts, back in March 2009, and it has now been unanimously upheld on appeal to the Massachusetts supreme court.
After speaking to crack Reuters reporter Jonathan Stempel, I’m even more worried about this case than I was before.
The immediate effect of the ruling, which covers two separate cases, is that Mark and Tammy LaRace get to stay in their home, despite being foreclosed on in 2007. And Antonio Ibanez gets title to his home back, which means that the bank will either have to let him retake possession or else pay him for his deed.
Essentially, these homeowners bought their homes, defaulted on their mortgages, and then — after a long legal struggle — get to stay in their homes. It’s unclear whether they still owe money to any lender, and Massachusetts is a recourse state, which means that the bank could try to go after them personally, as it might had it lent them money on an unsecured basis. But in reality, if a bank does not have the ability to foreclose and the borrower is genuinely distressed and in default, there’s no point pursuing them for the balance of the loan.
The legal craziness that this decision sets in motion is going to be huge, I’m sure. Anybody who was foreclosed on in Massachusetts should now be phoning up their lawyer and trying to find out if the foreclosure was illegal. If it was — if there was a break in the chain of title somewhere which meant that the bank didn’t own the mortgage in question — then the borrower should be able to get their deed, and their home, back from the bank. This decision is retroactive, and no one has a clue how many thousands of foreclosures it might cover.
Similarly, if you bought a Massachusetts home out of foreclosure, you should be very worried. You might not have proper title to your home, and you risk losing it to the original owner. It might be worth dusting off your title insurance: you could need it. And if you ever need to sell your home, well, good luck with that.
Going forwards, every homeowner being foreclosed upon will as a matter of course challenge the banks to prove that they own the mortgage in question. If the bank can’t do that, then the foreclosure proceeding will be tossed out of court. This is likely to slow down foreclosures enormously, as banks ensure that all their legal ducks are in a row before they try to foreclose.
This decision won’t be appealed: the state law seems pretty cut-and-dried, every judge who’s looked at it has come to the same decision, and there’s no conceivable grounds for the US Supreme Court to take on the case.
What’s more, courts in the other 49 states are likely to lean heavily on this decision when similar cases come before them. The precedent applies only in Massachusetts for now, but it’s likely to spread, like some kind of bank-eating cancer.
If a similar decision comes down in California, which is a non-recourse state, the resulting chaos could be massive. People who are current on their mortgage and perfectly capable of paying it could simply make the strategic decision to default, if and when they find out or suspect that the chain of title is broken somewhere. They would take a ding to their credit rating, but millions of people will happily accept a lower credit rating if they get a free house as part of the bargain.
The big losers here are the banks — of course — as well as investors in mortgage-backed securities, including of course Fannie and Freddie, a/k/a the US taxpayer. No one knows how it’s all going to play out: there’s certainly going to be a lot of litigation in every US state, and there’s a good chance that the federal government is going to feel the need to get involved as well. Not every jurist and legislator is going to see things the same way as the judges of Massachusetts, and there’s a case to be made that banks should have the ability to go back and cure their mistakes once they’re pointed out, rather than just losing the house altogether, as they did in this case.
But of course the problem is that the banks can’t cure their mistakes: in many cases the original mortgage is lost, at this point, if it ever properly existed in the first place.
The tail risk here is enormous, and there’s no easy solution to the problem. And this is over and above the problem of putbacks, or legal risk associated with the scandal of banks lying to investors in many mortgage-bond deals. And it’s certainly yet another reason not to buy a house right now. You don’t know if you really have title to what you’re buying, you don’t know whether you’ll be able to sell it if you have to, and there’s a good chance that as a result of all these problems shaking out, home prices could fall dramatically.
Maybe we’ll muddle through this somehow — that’s still probably the base-case scenario. But maybe we won’t. And if we don’t, the downside here, to the banking system and to the economy as a whole, could hardly be larger.
Update: Adam Levitin emails with three other points, all important:
Danny_Black
I concede that several articles referred to these two mortgages being securitized; my mistake. But that misstatement doesn’t change my argument about the relevance of this court case to the broader MBS market.
As for your offer to purchase MBS at a discount: I didn’t say, nor did I imply, that faulty MBS units are worthless.
Indeed, investors have a number of claims and rights — not just over cash flows but also the right to put back faulty and/or fraudulent securities to the originator bank.
So, thanks for the offer but I think I’ll hold my position for a while…
Jon7, you missed the last part of the quote…
he executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder,"
Gants wrote. *However, there must be proof that the assignment was made by a party that itself held the mortgage.*
Danny Black, I ensured some time ago that none of my self directed pension funds are attached to High risk Wallstreet instruments and anything to do with Goldman Sachs. I am too close to retirement to be a gambler.
No one said that there was NO worth, but they are being further downgraded and another mortgage crisis is going to affect everyone’s homes, not just those who are unemployed.
Wallstreet doesn’t give a whit, but they will care that investers putback… something we might see much of soon.
Marty,
I’m a corporate bankruptcy lawyer. I’ve never done a home foreclosure, but I’m familiar with the process.
I agree with the earlier commenter that it would be a sleazy scheme. In any event, it wouldn’t work. The note is enforceable. The note holder could still foreclose on your house after they get a judgment. All the loss of the mortgage means is that they don’t have a lien on the house – so someone else can get to it first.
The problem is for quite some time the American public has operated under the belief that all the legal actions taken were true and proper. With the debt collect processes and abuses incurred over the past 10 years this points to the larger problem of who really owns the collateral after a loan is securitized, sold, or serviced, etc. If the chain of title is broken or if it cannot be perfected then by all accounts the legal action to foreclose is fraught with legal suspicion and the courts should demand that the plaintiff in recourse states of which they are all the ones east of the Mississippi perfect that chain prior to using up the courts time thus possibly delaying the process out over a year. In the non recourse states all heck will break loose because how in good consciousness can the states demand that the non judicial process be underwritten by the enforcement of eviction, and title sold by public officials on the steps of government property. This all makes them unwilling coconspirators in all of this. It is a bad day at black rock a coming pardners.
dbsmith1, yeah we all make mistakes.. Luckily for posterity, a extremely and undeservedly rude post i made to you got deleted so that when i inevitably make one in the future you won’t be able to point to that one and crow….
MA_Attorney, I have to say I was amazed they tried to appeal this rather than just re-foreclosing. According to judgement there is no dispute the banks own the mortgage now, it is just at the time of the foreclosure they didn’t, a defect which in at least one case they didn’t cure for over a year AFTER foreclosing. I would love to have a true investigative journalist dig into why they thought having an **unsigned** contract constituted proof of a deal.
hsvkitty, so you all in cash? How is that working out for you?
hsvkitty, the issue wasn’t with the assignment or ownership it is that they couldn’t show the loan got assigned at all. There are unsigned agreements, lists of loans in the trust that don’t include the mortgage in question and the mortgage transfer only formally got recorded long after the foreclosure.
ErnieD, actually what this proves is that there is rather a large amount of regulation, contrary to the belief that somehow the financial world got deregulated. I cannot believe that anyone seriously believes that claim. You think you sign millions of pieces of paper whenever you interact with your bank because they hate trees?
The point is that the regulations just lead to lots and lots of boilerplate that no one reads and lots of steps that are just done pro-forma – such as telling the person just before he invests in a fund that prices may go down as well as up after days of telling him how great this fund is. It also incentivises the creation of products that have no real economic value – they are reg arb or tax arb products – and a “get out of jail free” card for people who don’t bother to actually do the due diligence.
Danny Black – There are fundamentally three aspects to regulation:
1) Rules 2) Following the rules 3) Oversight and enforcement
I agree with you that there are lots of rules. The judges themselves point out what the well-defined and established rules are for this case.
The judges then point out that there is no immediate oversight that the rules are being followed which raises the bar for the diligence that the banks need to use in ensuring the rules and procedures are followed.
They then express various degrees of lack of amusement that the banks elected not to follow the well-defined rules and procedures due to “utter carelessness.”
Personally, I think the US has far too many rules, too few principles, and too little actual oversight and enforcement despite a plethora of purported regulators. It shouldn’t be this difficult and expensive to achieve so little protection against incompetence, negligence, and fraud.
However, what this case shows is that the banks appear to be executing basic well-defined requirements that are essential to their own financial health only when forced to by oversight. That is unacceptable for institutions that are critical to the financial and economic well-being of this country, particularly institutions that are receiving massive bail-outs from the government.
Danny_Black, it proves that banker cannot control their immoral urges and greed… Ernie was explaining that while we were dotting our I’s and crossing the T’s, and spending a lot of money to get everything in a buyers process to get the mortgage legally bound.
The banks were sloughing off and robo signing and using fake documents and bribing and coercing those along the way. And not even keeping track of the bank notes, or in some cases DESTROYING THEM. You are so full of it! The statutes of property go a long way back and the judgement cites them because they are the back bone of property law and were disregarded.
And what your last “point” says is typical of bankster (former in your case, but obviously still an unethical bank apologist) You said…”It also incentivises the creation of products that have no real economic value.”
Is that not another way to say we couldn’t help our immoral greedy guts selves to find ways around regulations and rules to do our risky financial crack as regulators gave us no choice?
The banks reaction to this lack of oversight was to simply dump the procedures in order to save a few pennies to improve their margins. They viewed the lack of oversight as an opportunity to tear up the rule book. They are now acting shocked that the courts are really pissed off at them for thumbing their noses at MA state law.
What ErnieD said is RIGHT ON and so I will quote him:
“This decade has proved over and over again the financial sector is incapable of regulating itself and following basic principles. This case is just another example of their flaunting basic requirements and then demanding that these provision be over-ridden because they would cost the banks money. In most other social scenarios, this would be termed fraud and extortion. In the financial sector, it is just called normal business practice.”
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