REQUIRED READING: An important and far-reaching decision recently issued by the Massachusetts Land Court significantly changes the state's foreclosure practice and detrimentally affects many real estate titles derived from foreclosures completed under the usual and customary foreclosure procedures.
The issues raised by this case, as well as some recent cases from the Massachusetts Bankruptcy Court, bring into question the ability of holders of securitized mortgages to exercise their right to foreclose. It is vital for any lenders and servicers referring foreclosures in Massachusetts to understand the implications of these decisions.  This memorandum will provide a brief overview of Massachusetts foreclosure practice, describe the case, critique its holding and then offer some possible solutions to the problems it creates.
Overview of Bay State practice
Massachusetts is referred to as a "title theory" state. For the purposes of foreclosure, the holder of the mortgage holds legal title to the real estate, while the borrower has equitable title (called the equity of redemption). Foreclosure forever cuts off the right of the borrower to redeem the debt owed to the lender, merging legal and equitable title.Â
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Although Massachusetts has three statutory types of foreclosures, the vast majority of foreclosures are semi-judicial. First, the lender files a complaint to foreclose a mortgage where the sole issue is whether the borrower is entitled to the protections of the Servicemembers Civil Relief Act. The borrower is precluded from raising any defenses in this proceeding, except that he or she is in the active military service. Once a judgment is issued, the lender may exercise the statutory power of sale in the mortgage.
U.S. National Association, Trustee v. Ibanez
In 2008, three companion cases were filed in the Massachusetts Land Court to quiet title to confirm foreclosure sales that had already been completed (U.S. National Association, Trustee v. Ibanez, Mass. Land Court Misc. Case No. 384283, et al.). The Land Court is a specialized trial court with jurisdiction over real estate-related cases, including foreclosures. All three cases involved foreclosures of mortgages that had been securitized.
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The limited question presented to the court was whether the publication of the notices of sale was in a legally acceptable newspaper. All three cases were uncontested by the borrowers. Before issuing default judgments, the court, on its own initiative, raised the issue of whether there were valid assignments establishing standing to foreclose. On March 26, 2009, the court issued a decision in Ibanez that answered the newspaper-publication issue in the affirmative but went on to invalidate two out of three foreclosures before it.
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The initial Ibanez decision required that the present holder of the mortgage have in its possession a fully executed and recordable assignment prior to serving and publishing the notice of foreclosure sale. The case cast doubt on thousands of foreclosures already completed because the well-established industry practice (formally codified in Title Standard No. 58 of the Real Estate Bar Association of Massachusetts) was that assignments could be executed and recorded at any time, even after a foreclosure sale.
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Based on the initial holding in Ibanez, most lenders rescinded any sales that had assignments executed after the first publication of the notice of sale and repeated the foreclosure from the point of the notice of sale. Because of the uncertainty created by this case, not to mention the possible negative effect on thousands of titles derived from previously completed foreclosures, a motion to vacate judgment was filed, asking the court to reconsider its decision based on additional evidence and legal argument.
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Several parties and real estate-related organizations filed amicus briefs. On Oct. 14, 2009, the court issued a lengthy written memorandum and order essentially affirming its March decision, but also took the opportunity to explain what is necessary to establish "standing" to foreclose a mortgage that has been securitized.
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The two cases decided in the recent Ibanez opinion involve the foreclosure of mortgages that were securitized. After the mortgages were originated, they were pooled with other mortgages and sold to a depositor and then to an issuing entity, which created different classes of certificates. The certificates were purchased by an underwriter, which then sold the certificates to investors. The foreclosures were brought in the name of the issuing entity.Â
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The collateral file – which included a copy of the mortgages, the original promissory notes endorsed in blank, assignments in blank and securitization agreements – was transferred and held by a custodian and subsequently provided to the court in Ibanez.
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The collateral file was offered to the court to establish that there was a chain of ownership from the originating lender to the current holder bringing the foreclosure action. Also submitted to the court were the original promissory notes, which showed that the present holders were the lawful owners of the indebtedness. Finding pertinent language in the private-placement memorandum, the court determined that "[a]ssignments in recordable form to each successive entity were�required at every step in the securitization chain."
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There were no such assignments in the collateral file, and none were offered to the court. Typically, no such completed and recordable assignments are included in the collateral file. Thus, according to the court, the lender in Ibanez could not establish its ownership of the mortgage and, as a result, had no standing to foreclose.
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The usual and accepted practice, prior to Ibanez, was to obtain an executed and recordable assignment from the originating mortgagee to the current holder. Despite the usual practice, the court explained that to establish ownership under Massachusetts law and the contractual arrangements of the parties to the securitization documents, there must be assignments by, and between, each successive owner. The court concluded that although the current holders had possession of the notes, they did not have title to the mortgage, and, thus, no standing to exercise the power-of-sale provisions in the mortgages.
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It was argued to the court that possession of the note, and nothing more, is sufficient to bring the foreclosure. The court rejected this argument for two reasons.
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First, the court observed that the ownership of the mortgage was governed by contract (i.e., the securitization documents), which required executed and recordable assignments. Thus, the present holder could not have contractually been entitled to foreclose without the assignments, despite possession of the note.
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Second, in Massachusetts a mortgage is a conveyance of land. Any further conveyance of rights must be by a writing – in this case, by an assignment. The court declared that having possession of the note only gives the holder the right to an assignment of the mortgage. Merely having the right to the mortgage, according to the court, does not make a party the holder of the mortgage for the purposes of foreclosure. In effect, the holder of the note and the holder of the mortgage can be two distinct entities.
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A further argument made to the court was that the present holder was authorized to act on behalf of the original mortgagee for the purposes of foreclosure. The court rejected this argument, as well, on the grounds that any such authority had to be of record. It stated that interests in land must be recorded to give notice to all those that have rights in the particular property and that, as a matter of consumer protection law, complete transparency is preferred, especially where there is a foreclosure forever terminating the borrower's rights to the property. Here, the foreclosure was brought by the purported present holder of the mortgage, but with no apparent assignment or authority.
Analysis of Ibanez
The Ibanez decision is problematic for several reasons. First, it goes against the longstanding Massachusetts practice represented by Title Standard No. 58. Thousands of foreclosures in Massachusetts over several decades, including foreclosures of securitized mortgages, have been conducted without all of the "necessary" assignments executed and in recordable form prior to the first publication of the notice of sale, as ruled by the court in Ibanez.
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Second, the requirement that each successive owner in the securitization process must execute an assignment in recordable form is not only contrary to current industry practice, but also may be impossible to accomplish.
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Third, no title derived from a foreclosure that does not comply with the requirements set out in this case is marketable, and may not be insurable. The court offered no curative to this problem, either by some type of documentation or by making the ruling prospective.
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There is some question as to the precedential value of this decision. It was made by a trial judge in the land court and not an appellate court. Nevertheless, the real estate bar and the major title insurers have taken the position that, at least as to the earlier Ibanez ruling, an assignment from the original mortgagee to the present holder must be executed in recordable form prior to the notice of sale. Thus, the foreclosures without such an assignment will not be able to be sold after the foreclosure sale.
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As of the publication of this article, the title insurance industry has not issued underwriting guidelines in light of the Ibanez decision for real estate title derived from a foreclosure.
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A further problem is the possibility that borrowers will more vigorously challenge the validity of foreclosures of securitized mortgages. Massachusetts has an active plaintiffs' bar, as evidenced by a class action pending in the U.S. District Court, District of Massachusetts (Manson, et als v. Wells Fargo Bank NA as trustee). There is a strong possibility that the court's reasoning in Ibanez will provide ammunition for the plaintiffs' bar to sue the lenders and servicers in this case for wrongful foreclosure, as well as for other foreclosures involving securitized mortgages.
Bankruptcy cases: Samuels and Almeida
There have been two recent cases decided by different judges in the Bankruptcy Court for the District of Massachusetts (In re Samuels, Case No. 06-11656 (D. Mass. 2009); In re Almeida, Case No. 08-17047 (D. Mass. 2009)).
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In Samuels, the debtor objected to the lender's proof of claim, which was for a residential mortgage, based on standing. The debtor asserted that the lender did not have standing to enforce its secured claim, because it did not own the mortgage. To prove its standing, the lender submitted the securitization documents.
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The court determined that the securitization documents, in and of themselves, did not establish standing. As in Ibanez, there were no written, properly executed assignments among the various parties to the securitization documents. There was, however, a confirmatory assignment between the originating mortgagee and the present holder of the secured claim. The court decided that the confirmatory assignment was sufficient to establish the authority of the present holder to enforce its claim.
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The Almeida case involved a motion for relief from the automatic stay filed by a mortgagee seeking relief to foreclose its securitized mortgage. The debtor objected to the mortgagee's standing to bring the motion. As in Samuels, the mortgagee submitted the securitization documents and a confirmatory assignment from the original mortgagee to the present holder of the mortgage to demonstrate its standing. The court concluded that the properly executed confirmatory assignment conferred standing on the present holder, despite the fact there were no written assignments among the parties to the securitization documents.
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Samuels and Almeida were decided prior to Ibanez, and both were from the bankruptcy court. Although there are obvious and different considerations between standing for a creditor to enforce its rights and ownership to foreclose a mortgage in state court, there is, arguably, no reason that distinguishes what is required to establish ownership of the mortgage. There does, in turn, appear to be a conflict between the Massachusetts Land Court and the Bankruptcy Court with regard to their respective interpretations of the securitization documents.Â
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Securitization of mortgages provided the financial fuel for the boom in real estate that occurred in the past 10 years. Now that the housing boom has gone bust and the investors holding those nonperforming mortgages want to enforce their rights, the securitization process is throwing up legal obstacles.
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The problems created by securitization go beyond the investors, however, by clouding real estate titles involving a foreclosure. Because there are potential defects in thousands of properties with foreclosures in the chain of title, potential buyers at foreclosure auctions will be scared off, and it will be difficult to sell these properties in the distressed-property market. Cities with large numbers of foreclosures may face a deepening crisis by being unable to get these properties to new owners, furthering urban blight.
Complications stemming from securitization will also likely lead to increased, costly litigation as distressed borrowers look for ways to keep their homes, even in cases where they are in serious default. The courts may feel they are protecting homeowners from invalid foreclosures, but the consequences, intended or otherwise, may cause great societal harm.
James L. Rogal is an attorney with Woburn, Mass.-based Ablitt Law Offices who specializes in real estate law, bankruptcy and civil litigation. He can be reached jrogal@acdlaw.com
