Consumer Financial Services Alert - January 11, 2011

The Massachusetts Supreme Judicial Court recently held two foreclosures invalid where the plaintiff foreclosing entities had not demonstrated that they were either the record holders of the mortgages or in possession of effective assignments of the mortgages at the time of notice and sale. In the two cases, written assignments of the mortgages to the plaintiffs (the trustees of securitized mortgage pools) were not executed until 10 and 14 months after the foreclosure sales were consummated, respectively, though one of the assignments purported to have an effective date prior to the date of foreclosure. After the foreclosures, the plaintiffs separately filed quiet title actions in the Massachusetts Land Court, each seeking a declaration that it held clear title to the properties in question. The Land Court denied relief, concluding that both foreclosures were invalid because the notices of sale named the plaintiffs as the mortgage holders before they had actually received written assignment of the mortgages in recordable form, in violation of the Massachusetts foreclosure statute’s command that a statutory power of sale may only be exercised by a mortgagee.

On appeal, the Massachusetts Supreme Judicial Court affirmed, holding that the foreclosing entity must hold the mortgage at the time of the notice and sale in order to accurately identify itself as the present holder in the notice of sale and to have the authority to foreclose under the power of sale. Because the plaintiffs were not the original mortgagees, the Court held that for them to have the authority to exercise the statutory power of sale, they needed to show that they were assignees of the mortgages at the time of the notice of sale and the subsequent foreclosure sale. Furthermore, because Massachusetts is a “title theory” state, in which a mortgage is viewed as a conveyance of legal title to real estate, the Supreme Judicial Court held that any such assignment must be in written form consistent with the statute of frauds.

In arguing on appeal that they were in possession of valid written assignments of the mortgages in question, plaintiffs relied upon the mortgage securitization documents, claiming that these documents established valid assignments making them the holders of the mortgages before the notice and sale. The Supreme Judicial Court conceded that an assignment need not be in recordable form at the time of notice and sale, and expressly noted that an agreement assigning a pool of mortgages to a securitized trust can satisfy this requirement if there is evidence clearly and specifically setting forth the chain of title by which the mortgage passed into the pool. The Supreme Judicial Court concluded, however, that the plaintiffs had failed to provide evidence establishing that the securitization documents actually assigned the mortgages in question. Both plaintiffs failed to show how the mortgage had been assigned from the originator to the depositors in the pools; the plaintiff in one of the cases failed to offer the pooling and servicing agreement under which the mortgage was assigned into the pool; and the plaintiffs in both cases failed to offer the mortgage loan schedule for either securitization, which identified the specific mortgages being assigned to the pool. In short, although it seems likely that the plaintiffs, in fact, were mortgagees by assignment under the securitization documents, plaintiffs failed to prove as much. The opinion suggests that if the complete documentation had been submitted, the Court would have ruled in plaintiffs’ favor.

The Court rejected plaintiffs’ separate argument that, because they held the mortgage notes, they had a sufficient financial interest in the mortgages to allow them to foreclose. Unlike in many states, under Massachusetts law, an assignment of the note does not carry with it an assignment of the mortgage. As such, the Court ruled, possession of the note does not automatically entail possession of the mortgage. While the holder of the mortgage holds the mortgage in trust for the note holder, and the note holder has an equitable right to compel assignment of the mortgage to it, the Court held that the note holder may not foreclose unless it is also the holder of the mortgage.

The decision also contained a concurring opinion by two justices which, among other things, stressed that the Court’s decision does not address the rights of a bona fide purchaser of foreclosed property, or any other remedy for that matter.

The implications of the Ibanez decision will vary considerably depending on the facts of each case and upon the securitization documents that form any part of a chain of title on a Massachusetts loan. Please feel free to contact Boston Goodwin Procter partners Jim McGarry (617-570-1332) or Rich Oetheimer (617-570-1259) if you would like to discuss Ibanez’ implications for your REO portfolio or otherwise.

Click here for U.S. Bank National Ass’n v. Ibanez, No. SJC-10694 (Mass. Jan. 7, 2011).

The Consumer Financial Protection Bureau and the Conference of State Bank Supervisors signed a memorandum of understanding to establish a foundation of state and federal coordination and cooperation for supervision of providers of consumer financial products and services. The memorandum provides that the CFBP and state regulators will: (1) promote consistent examination procedures and enforcement of state and federal consumer laws; (2) minimize regulatory burden and efficiently deploy supervisory resources; and (3) consult each other regarding the standards, procedures, and practices used to conduct compliance examinations of providers of consumer financial products and services, including non-depository mortgage lenders, mortgage servicers, private student lenders, and payday lenders. Click here for the Department of Treasury’s press release.