The Massachusetts Supreme Judicial Court recently issued a decision in the case of U.S. BANK NATIONAL ASSO. v. IBANEZ, (Mass. 172011) (Jan 7, 2011) in which the court held that two foreclosures in Massachusetts were void. Some commentators have treated this decision as a landmark decision in real estate that will shake up the mortgage industry. I think that this case is a reaffirmation of traditional concepts in real estate law. It may help some homeowners understand their rights, Some people who have lost their homes to foreclosure may even get their homes back. It should cause mortgage companies to be more careful in their attention to the paperwork and detail of mortgages and foreclosure.
Massachusetts law of mortgages and foreclosure was created in a day before computers when banks treated mortgages one at a time. Usually, banks loaned money and held the mortgage until it was paid off. Today, banks loan money for mortgages and sell them to other investors before the ink dries on the promissory note. Mortgages are bundled together and sold to investors in large groupings of mortgages. Paperwork has changed from selling a single transaction to selling thousands of loans at a time by transferring them to a trust or other entity. This process, called securitization, may have to change in light of the Ibanez decision.
In Ibanez, two properties were foreclosed upon and then the banks that bought the properties brought actions in land court to declare that they held good title to the properties. To the suprise of the banks, the court held that they did not have good title. The foreclosures were void.
Massachusetts has always held that any legal action that causes a forfeiture must strictly comply with the procedures required. Failure to comply with the formalities will result in failure to cause the forfeiture. This applies to foreclosures, evictions, or any other action that the law considers a forfeiture. The Ibanez decision was based on this concept that the mortgage companies failed to strictly comply with the formalities of foreclosures.
In Ibanez, the mortgages were sold many times before the foreclosure. The documentation of the transfers or assignments was not properly filled out until after the foreclosure process was started. Since a foreclosure can only be conducted by the party who holds the mortgage, the failure to properly assign the mortgage makes any subsequent foreclosure void. This doesn’t mean that assignments must be recorded at the registry to be valid. It does mean that the banking industry must take care to check the paperwork before foreclosing.
What does this case mean for future foreclosures? Actually, it makes very little difference. Banks and bank attorneys will have to do more work to prepare for foreclosures. If the paperwork isn’t correct, they need to correct it before a foreclosure is conducted. This may slow down the process a little. It should not be a significant difference. Homeowners may consult hire attorneys about stopping or reversing foreclosures. Since most people face foreclosure because they can’t make the payments, this won’t change the result. This case doesn’t put money in the pockets of homeowners. It merely forces banks to pay more attention to detail. A homeowner can hire a lawyer to fight a foreclosure but if the homeowner can’t find the money to bring the mortgage current, foreclosure will still occur. Eventually, the bank will own the property.
The Ibanez case is important but it is not earth shattering. Massachusetts law didn’t change. Instead, mortgage companies will change their practices a little.