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.
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.