Foreclosures: Not without proper paperwork, says Mass. supreme court

During the housing boom, banks carved up mortgages into pieces and sold the pieces in a process known broadly as securitization. What they didn't realize: without flawless paperwork, you can't foreclose on a defaulting homeowner.

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    Demonstrators Stephanie Montez (r.), who plays one of the three kings, and Ivan Navarette (l.), who plays an angel, participate a rally in front of Bank of America in San Jose, Calif., Dec. 16, protesting thousands of bank foreclosures. Their signs read, 'Bank of America, please don't take away my little piece of heaven.'
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The Supreme Judicial Court of Massachusetts affirmed a lower court judge’s ruling invalidating two mortgage foreclosure sales because Wells Fargo and U.S. Bank did not prove that they actually owned the mortgages at the time of foreclosure.

Neither bank had originated the mortgages in question but had purchased mortgage securities that included the mortgages.

“For homeowners and foreclosures in general, it means that any mortgage foreclosure which was initiated by a securitized trust at a time when the trust had not obtained a mortgage assignment which gave it the lawful right to do so is void. Those homeowners, like Mr. Ibanez, still own the property,” Paul Collier, attorney for one of the homeowners, said.

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Real estate law requires the physical transfer of loan documents and loan sale assumption agreements. In the heady days of the housing boom it is questionable that all the paperwork and loan documents were transferred properly during each step of the securitization process or in the case where loans were sold numerous times.

Only the holder of the actual paper and ink signed note has the standing to file foreclosure and evict homeowners. Not so many years ago this wasn’t an issue because the savings and loan down the street made the loan and kept it on its books.

However, securitization changed all of that as local mortgage originators sold the loans and the loans became part of mortgage-backed securities (MBS). The paperwork got sloppy with all of this selling and packaging.

Now these foreclosure cases are being tested in court (and higher court). In a concurring opinion, Massachusetts Justice Robert Cordy used even stronger language, citing what he called the “utter carelessness” with which the banks documented the titles to their assets.

“There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order,” Cordy wrote.

“If banks can’t prove ownership, it will clog up the foreclosure process,” said Blake Howells, head of equity research at Becker Capital Management in Portland, Oregon. “The inventory on foreclosures will keep a lid on housing prices for some time.”

Meaning more underwater homeowners will walk away.

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