Foreclosure Apocalypse Now? What Every REO & Foreclosure Realtor Needs To Know About The Massachusetts Ibanez Decision

By
Services for Real Estate Pros with Vetstein Law Group, P.C., TitleHub Closing Services LLC

The Massachusetts Supreme Judicial Court’s U.S. Bank v. Ibanez foreclosure decision is already a huge national story and has huge implications for the foreclosure and REO market.  (The ruling is embedded below). The high court ruled that two foreclosures of sub-prime mortgages were null and void where the lenders could not establish the chain of ownership within the securitized mortgage backed securitized pools. CNN-Money calls it a “beat down” of the big banks. Reuters says it’s a “catastrophe risk” for banks. The Huffington Post claims there’s some Obama Administration-Bank of America conspiracy in play. The ruling has spooked investors, as bank stocks were down in reaction to the ruling. In reaction to the ruling, a coalition of seven major public pension systems called on the boards of directors of Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo to immediately undertake independent examinations of the banks’ mortgage and foreclosure practices.

National Implications

The case certainly has national implications as the Massachusetts SJC is the first state supreme court to weigh in on the legal ramifications of widespread irregularities in the residential securitized mortgage industry. Over half of U.S. states have foreclosure laws similar to Massachusetts’ regarding the assignment of mortgages, such as California and Georgia. Other courts across the country will likely be influenced by the ruling, especially since the SJC is widely regarded as one of the most respected state supreme courts in the country. If other state courts follow this ruling, it's going to have a huge impact on the foreclosure and REO markets, as billions of dollars of mortgages could be rendered "un-forecloseable" and without resource against mortgaged property.

What Happened Here?

For those new to the case, the problem the Court dealt with in this case is the validity of foreclosures when the mortgages are part of securitized mortgage lending pools. When mortgages were bundled and packaged to Wall Street investors, the ownership of mortgage loans were divided and freely transferred numerous times on the lenders’ books. But the mortgage loan documentation actually on file at the Registry of Deeds often lagged far behind. In the Ibanez case, the mortgage assignment, which was executed in blank, was not recorded until over a year after the foreclosure process had started. This was a fairly common practice in Massachusetts, and I suspect across the U.S. Mr. Ibanez, the distressed homeowner, challenged the validity of the foreclosure, arguing that U.S. Bank had no standing to foreclose because it lacked any evidence of ownership of the mortgage and the loan at the time it started the foreclosure.

He won, and now gets his home back, despite defaulting on the loan.

What This Means For Realtors

For Realtors in the foreclosure and REO markets there are 3 take-aways from this case:

  • If the ruling spreads to states other than Mass., foreclosures will get a lot harder to complete, and the REO market will be impacted with less inventory.
  • The ruling could have a positive impact on short sales and loan modifications. With foreclosures being more costly and riskier to undertake, lenders may be more willing to (finally!) negotiate loan mods and short sales. This is good news!
  • The ruling underscores why you should always insist that your buyers obtain their own owner's policy of title insurance. There are a lot of folks who purchased property at foreclosure auctions, and if the mortgage suffered from the same type of problem as the Ibanez case (which could be 100,000's of incidents), they no longer have good title. If they have title insurance, at least they have some protection. If they didn't, they are basically screwed, for lack of a better word.

If you are interested in a more indepth analysis of the case and its impact on the securitized mortgage industry, read my outside blog post here, and Georgetown Law Prof. Adam Levitan's piece here.

Ibanez Case JAN 2011
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Comments (43)

Kim McMahon
Executive Realty Group - Skokie, IL

Richard~ Excellent post definitely going to repost this one.  The comments here are almost as interesting as the post.  My question to you is: Where do we go from here? It's obvious there is plenty of blame to go around, but if the banks don't start lending again how do we pull ourselves out of this mess? And with this now overshadowing everything, will they lend?

Jan 12, 2011 03:54 AM
Karen Hurst
RICOASTALLIVING.COM - Warwick, RI
Rhode Island Waterfront!

Richard,

I tried suggesting another post from a Mass Realtor last week about this because I feel it is extremely important that all Realtors are aware, whether they are REO Realtors, or not. If you are a Buyer Rep, you need to be aware.

Rhode Island is also a non-judicial state.  I will confess that I only read about 6 comments but I wanted to note that in my opinion SHORT SALES will have just as much, if not more problems.

MERS   (Mortgage electronic registration systems) is the company that took over for recording documents when the Banks sold mortgages to other servicers or banks, etc.   I just recently lost a short sale due to this very thing.

It was not recorded...Now, this may appear to be an easy fix, but only if someone actually takes care of the issue.   In this cae, we could not get the supposed Mortgage Owner to follow up (it was a condo) and it got auctioned out from under us by the Condo Association!! 

So now it has to go to court...Who has legal rights, a lienholder or a servicer with (blank) documents. According to Mass....I am guessing a lien holder!!

Oh, and I just read the rest of the comments, sorry if I duplicated anything:)

Jan 12, 2011 04:05 AM
Kathleen Cooper
Kathleen Cooper, Sposato Realty Group - Worcester, MA
Sposato Realty Group - Broker Owner

Hey you!  Awesome post & congrats on the feature.  Going to share this on my blog!  :)  Glad to see you have something to do in this blizzard.  

Jan 12, 2011 04:18 AM
Gary Frimann, CRS, GRI, SRES
Eagle Ridge Realty / Signature Homes & Estates - Gilroy, CA
REALTOR and Broker

Hi Richard,  I'm in CA and we are a lien state.  Don't know if it applies here as well.  I have been following the case, and I am sure there are mix ups and insufficient statuatory evidence.  I think for a point of clarification, when you said Ibanez won, and he gets his home back, it should be stated the foreclosure did not go through.  I think a lot of people will misinterpret this to mean he now has his home back (free and clear) which would not be the case.  It just delays the foreclosure.
Am I correct in this?  (Both public perception and actual outcome).

He still would have to catch up and make the lender whole, which is probably an impossibility, as most people just do not save the money or are capable of paying all the late fees, and costs.  I think the inevitable will happen, and US Bank will get it all in order, so it really just delays the inevitable.
Anpother question arises-- What if the home was an investment.  Perhaps the loan was obtain fraudulently, regarding occupancy, which is something I've seen a lot of, and now the oowner is rent skimming--a felony in CA.  In the meantime, the property taxes are not being paid, etc.

Jan 12, 2011 04:21 AM
Brent Wells
The LivingWell Team - Prosper, TX
Real Estate Broker serving all of North DFW

Richard,

I agree with the above posters, this won't stand without a challenge to a higher court. The potential ramifications are huge. Just extrapolate the example you gave and include homes that have since sold and are occupied. This could get very interesting and the last thing we need is any more instability in the real estate market.

-Brent

Jan 12, 2011 05:57 AM
Tim Klingman
North Shore Homes, Inc. (Milwaukee, Wisconsin) - Whitefish Bay, WI
President

Wisconsin is a judicial foreclosure state.  Our consumer-friendly laws typically do not allow a party to contract its judicial rights away.

Before reading the case and discovering how easy it is to foreclose in Massachusetts, my comment was going to be along the lines of, "Most mortgagors probably defaulted and didn't meet any appeals deadlines.  Current litigation will be re-analyzed for compliance.  Banks will continue to re-analyze their files to make sure that their chains are complete."

After reading the case, all I can say is, "My civil procedure professors would be embarrassed by this filing."

Well, I guess I can also say that the law is the law is the law., and it is surprising that some media outlets have criticized this decision, which adhered to the strict letter of Massachusetts law.  Seems that some of these same outlets decry "activist" judges.

Jan 12, 2011 06:07 AM
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

In some markets, the REOs flooded the market, and toppled things.  And what's up with BLANKS!?!  GEEZ, talk about sloppy.  Thanks for posting on this issue.  I've heard a few other posts, and IMHO it's always good to keep the issues of the day at the forefront.  I do think the matter will be appealed, but for the sake of this post it is amazing to me how sloppy they all were / are.  And what's their defense?  "Hmmmm . . . we didn't know we had to fill in the blanks"  I'm sure this is all very intriguing and interesting since you're in the State of MA, and an attorney.  Keep us posted!  ;-)

Jan 12, 2011 06:08 AM
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Richard - Good info, but in the end, I believe the greatest impact is that the process gets delayed which may encourage lenders to take a more serious look at short sales and modifications. Virtually all of the homes in default---those that cannot be corrected--must ultimately end in foreclosure.  And ultimately, the housing market will remain in turmoil until it is cleared of potential foreclosures.  

Jan 12, 2011 06:27 AM
Karen Pannell
Real Living / Home Realty - Owensboro, KY
Owensboro KY Real Estate -270-903-2167 Homes, Cond
Thanks for info. This year is going to be a doozey!
Jan 12, 2011 06:36 AM
Brian O'Neil, Worcester, MA Real Estate Foreclosures, and Shortsales and REO
RE/MAX Advantage 1 - Worcester, MA

Hi Richard,

I am an REO agent from Massachusetts and have been familiar with the Ibanez case since the ruling was rendered in March of '09. Most of the properties I had were taken off the market, then re-foreclosed. We saw  many of them back on the market in late 2009.

I have heard much about what the banks are now calling "shadow inventory". In essence, they are holding off on putting too many foreclosures on the market at once.

Do you have any thoughts/predictions on the volume of inventory the banks may be releasing in the coming months here in Mass? It was my feeling that most of the Ibanez related properties have already hit the market.

Thanks! I'm new to Active Rain and blogging and enjoy this informative post!

Jan 12, 2011 06:42 AM
Richard Vetstein
Vetstein Law Group, P.C., TitleHub Closing Services LLC - Framingham, MA

Thanks Brian, welcome to AR!

What I'm worried about with these "re-dos" is that they, too, were done improperly.  And now the innocent buyer is left holding the bag of defective title.  In most of these cases, the entire chain of ownership is not documented through recorded assignments, and that's the problem.

Jan 12, 2011 06:54 AM
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg Real Estate

Richard:  I don't agree with some, I say it will stand up in a higher court after appeal. The process has been shoddy & it's judgment day for the banks that got caught with their pants down.  I always wondered how they got away with it & I think that now many states are investigating all of it because they also have great examples of how the system was skirted.  Good post.

Jan 12, 2011 08:11 AM
Laurie Mindnich
Centennial, CO

Richard, at what point do you guess (or not) that title companys will pull the plug on all foreclosures in a more blanketed way than they already have, and what impact will this have on any (short sales specifically) home closing that involves paperwork that doesn't fly legally? Why would title companies insure any closing with this issue of a defective chain of title?

Jan 12, 2011 09:57 AM
Richard Vetstein
Vetstein Law Group, P.C., TitleHub Closing Services LLC - Framingham, MA

Laurie, here in Mass., before the SJC ruling, title insurers were not insuring any titles with Ibanez type issues.  We are waiting for formal guidance from the title companies which should be coming hopefully soon.  We're expecting a guidance memo listing what documents will be required under Ibanez to establish proper ownership and title going forward.

I don't see insurers pulling the plug on foreclosures generally. But the underwriting will definitely be stricter, and it will depend on if and how other state courts follow Ibanez.

See my comments about re. short sales.  I don't think Ibanez presents as much of an issue with short sales as it's not a foreclosure.

Jan 12, 2011 10:25 AM
William James Walton Sr.
WEICHERT, REALTORS® - Briotti Group - Waterbury, CT
Greater Waterbury Real Estate

Thanks, Richard, for explaining this ruling in the depth that you have. I read about this last week and was not so sure of how it would impact what, if anything.

For those who are wondering about appeals, the only court that can hear an appeal from the highest state courts is the Supreme Court, as Richard already stated in response to Lenn.

Unless there are federal laws that pertain to cases like this, or there are precedents in federal case law that could be applied, Richard is also correct in seeing a rejection by the U.S. Supreme Court of any appeals presented by the banks.

Jan 12, 2011 02:30 PM
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Richard, state law or not, if the big boys feel this is a threat to them they will spend the money to go to the Supreme Court. If they think this could become precedent for the rest of the country, why wouldn't the appeal it?

Jan 12, 2011 02:37 PM
Richard Vetstein
Vetstein Law Group, P.C., TitleHub Closing Services LLC - Framingham, MA

Frank, the Supreme Court only takes 1% of all cases, and jurisdictionally there must be a federal issue--and there's not here.  Lenders will have to wait for another case to make its way through the system.  Trust me on this.

More likely scenario is some type of Congressional intervention.

Jan 12, 2011 02:41 PM
Richard Vetstein
Vetstein Law Group, P.C., TitleHub Closing Services LLC - Framingham, MA

Gary, from what I'm hearing from other attorneys, the Ibanez mortgage documentation was so screwed up that after this decision, the lenders will most likely never be able to foreclose.  But of course, Mr. Ibanez still owes the money.  But he can live in his house without ever worrying about being foreclosed. Where can I sign up for that deal?!

Jan 12, 2011 02:45 PM
Jose Dias
Home Sellers Help in Scottsdale-Phoenix-Peoria-Glendale - Scottsdale, AZ
Sell Your Home in Scottsdale-Phoenix-Peoria-Glendale-Goodyear

Richard, thank you for posting this... The link you made between the rule and the title insurance is important. I am already using this when discussing title insurance with my clients.

Jan 12, 2011 04:30 PM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Thank you for giving such a clear and concise explanation of a very complicated and potentially far reaching decision.  It will be interesting to see what happens in other states such as California.

Jan 13, 2011 05:31 PM