Two new, pivotal foreclosure cases were decided this month by the Massachusetts Supreme Court that could have an impact on foreclosure cases here in California.
In U.S. Bank N.A. v. Ibanez and Wells Fargo Bank NA v. LaRace, the lenders foreclosed on the mortgages secured by the properties owned by Ibanez and the LaRaces. Both properties reverted back to the lenders. The lenders brought an action to perfect title in order to sell the properties. Both Ibanez and the LaRaces argued that the lenders did not have the authority to foreclose. Under Massachusetts foreclosure law (as in most states, including California) only the present holder of the mortgage is authorized to foreclose, and the statutory law must be strictly followed because there is no judicial oversight. If the Notice of Sale does not identify the current holder of the note at the time of the notice and sale, the Notice of Sale is void. In Ibanez and LaRace, the Court noted that this often occurs when the party is identified as the “beneficiary” in the Notice of Default or the Notice of Sale, but later it is learned through Fannie Mae and Freddie Mac that the beneficiary as stated is not the real owner of the loan.
The Massachusetts Supreme Court held that the lender must prove that it has authority to foreclose. In both Ibanez and LaRace, U.S. Bank and Wells Fargo Bank were assignees of the original mortgages only. Therefore, they had authority to exercise the power of sale contained in the original mortgages if they were the assignees at the time of the Notice of Sale and foreclosure sale. The court went on to discuss what is required to prove ownership of securitized loans (loans that are pooled with other loans and assigned to a securitized trust), as was the case in Ibanez. The court held that an executed agreement that assigns the pool of mortgages, and contains a schedule of the loans clearly identifying the mortgage at issue may be sufficient. However, the court stressed that there must be proof that the assignment was made by a party that itself held the mortgage. U.S. Bank and Wells Fargo argued that because they held the notes, they had sufficient financial interest in the mortgages to allow them to foreclose. The Massachusetts Supreme Court rejected this argument stating, “Where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment.” The court went onto note that in most cases there is never any proof that the securitized loan trustee ever has the original note properly endorsed and assigned.
Ultimately, in Ibanez and LaRace, the court held that, “the Plaintiffs (U.S. Bank and Wells Fargo Bank) did not demonstrate that they were the holders of the mortgages at the time they foreclosed on the properties and therefore, failed to demonstrate that they acquired fee simple title to these properties by purchasing them at a foreclosure sale.” The court also held that the foreclosure sales were void. To add insult to injury, the court further held that because U.S. Bank and Wells Fargo Bank failed to abide by well-established case law and statutes, this holding would apply retroactively to all previous foreclosures conducted by both banks. This ruling could affect to thousands of properties foreclosed upon by U.S. Bank and Wells Fargo Bank.
Even though Massachusetts law is not controlling in California, California courts can look to this ruling when addressing similar issues, which may impact California foreclosure cases. Here is the Massachusetts Supreme Court standard that may impact California law in the future:
- Foreclosures must be done by the real party in interest;
- Chain of title must be perfected, meaning all assignments of the mortgage must be in order;
- All documents have to be proper at the time of the foreclosure proceedings or the foreclosure can be deemed improper, and
- Mere possession of the Note is not enough – lenders must demonstrate that they have proper standing to foreclose.
It should be noted that currently in California, the courts have rejected the argument raised by borrowers that lenders have to produce the original note in order to have standing to foreclose. However, it will be interesting to see how this new ruling by the Massachusetts Supreme Court, will affect future foreclosure cases in California and other states.
Application to REALTORS®:
- If this ruling is applied here in California, foreclosures will be harder to complete, which will impact the REO market with less inventory;
- REALTORS® may see an increase in short sales and loan modifications; and
- REALTORS® should always advise their buyers to obtain their own owner’s title insurance policy to protect themselves in the event it is later proven that the property had defective title at the time of the foreclosure sale.