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A recent decision from Massachusetts’ highest court could impact courts across the country and lead to a flood of overturned foreclosures, exacerbating the mortgage mess.

The Massachusetts court is the first state supreme court to rule that only the holder of a mortgage may foreclose on a property, upholding a Land Court judge’s earlier decision in U.S. Bank v. Ibanez.

The opinion invalidates foreclosure sales by two banks that had been assigned mortgages on the properties, and calls into question the validity of countless other foreclosures.

In the decision, Judge Ralph D. Gants wrote that the foreclosure sales in question were invalid because the banks failed to show that they held the mortgages at the time of foreclosure.

“As a result,” he said, “they did not demonstrate that the foreclosure sales were valid to convey title to the subject properties.”

The banks had claimed that “securitization documents” they submitted established valid assignments that made them the holders of the two mortgages before the notice of sale and the foreclosure sale.

But the court disagreed.

“The [Land Court] judge did not err in concluding that the securitization documents submitted by the plaintiffs failed to demonstrate that they were the holders of the … mortgages, respectively, at the time of the publication of the notices and the sales,” Gants said.

A “foreclosing entity must hold the mortgage at the time of the notice and sale” to establish authority to foreclose.

Right to foreclose

While foreclosure law varies from state to state, the Massachusetts decision highlights an important universal rule, said Henry J. Sommer, supervising attorney at the Consumer Bankruptcy Assistance Project in Philadelphia.

“The basic fact, which I think is true anywhere, is that if you don’t own a mortgage and note, you don’t have a right to foreclose on somebody’s house,” he said. “That is really what this decision boils down to.”

In a concurring opinion, Judge Robert J. Cordy noted “the utter carelessness with which the plaintiff banks documented the titles to their assets.” He said the banks failed to prove that the underlying mortgage assignments “ever existed in any cognizable form before they exercised the power of sale that accompanies those documents.”

Sommer cautioned that the decision, while well-intentioned, may tempt unscrupulous mortgage servicers to backdate documents in an attempt to validate illegal foreclosures.

“That’s my biggest concern,” he said. “We’ve seen all sorts of fraud and bad practices by the services. Now that they have all these foreclosures in question, I wouldn’t be surprised if there’s a flurry of backdating documents to justify that the assignments took place before the foreclosures when, in reality, they didn’t.”

Marc S. Stern, a Seattle bankruptcy lawyer, shares Sommer’s concern.

“You’ve got a whole bunch of people who are in deep trouble and are looking at their careers on the line,” he said. “The question is: How do you prove [backdating]? Was it assigned six months ago or a year ago? That can be really difficult to prove.”

‘Unpredictable problems’

Foreclosure lawyer Robert J. Pomerene of Plymouth, Mass., said the Ibanez decision may provide leverage to residents who are defending against or trying to reverse foreclosures, but does little to ease the concerns of title insurers or buyers of foreclosed homes.

“It raises unpredictable problems with the title to foreclosed properties,” he said. “Title insurers have basically been reluctant to issue titles since [the Land Court's] decision and that’s not going to change.”

The banks had asked the court to apply its ruling prospectively, which would have protected prior foreclosure sales, but the court rejected the request, concluding that the decision brought no significant changes to the existing law and therefore did not warrant a prospective application.

The result, said Stern, is “now you have to look at all these people who have had their houses foreclosed, and you’re opening the floodgates.”

He predicts the decision will likely wreak “havoc” on the mortgage system.

“The banks did some dumb things and it’s going to need to be cleaned up.”

Questions or comments can be directed to the writer at: phillip.bantz@lawyersweekly.com

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