As the wave of bad loans and foreclosures slowly works its way through the national real estate market, legal issues represent a serious, and troubling, wild card. In recent months, court decisions in different states have done little to remove that uncertainty.
Most significantly, a Massachusetts Supreme Judicial Court ruling in January voided two foreclosures on grounds that the foreclosing banks had failed to maintain a clear paper trail, and had proceeded to foreclose on homeowners without establishing a clear right to do so. The New York Times covered that story here (?Massachusetts Ruling on Foreclosures Is a Warning to Banks ,? by Gretchen Morgensen). Legal expert Kathleen Cully told the Times, ?The broad implication is you?ve got to dot your i?s and cross your t?s. You need a proper chain of title, and in both of these cases there was a gap in the chain.? (Note: The New York Times has changed its website policy, and stories on the paper?s website will soon go behind a $15-per-month paywall.)
Massachusetts real estate attorney Richard Vetstein discussed the Massachusetts ruling on his legal blog (?Ibanez Foreclosure Ruling Upheld,? by Rich Vetstein).
?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.
The Court?s ruling appears rather elementary: you need to own the mortgage before you can foreclose. But it?s become much more complicated with the proliferation of mortgage backed securities (MBS?s) ?which constitute 60% or more of the entire U.S. mortgage market. The Court has held unequivocally that the common industry practice of assigning a mortgage ?in blank? ? meaning without specifying to whom the mortgage would be assigned until after the fact ? does not constitute a proper assignment, at least in Massachusetts.?
Massachusetts is the first state where a foreclosure case touching on the assigning and bundling of mortgages, or ?securitization,? has reached the state?s top court. In other states, case law remains murky as judges in different jurisdictions apply their own approaches to the crush of mortgage filings. But in many of these local courtrooms, judges have become increasingly strict with banks who take a casual approach to legal paperwork. In New York?s Suffolk County on Long Island, for example, Justice Jeffrey Arlen Spinner gained prominence last year for a series of tough decisions that ?struck fear? into lenders? attorneys, according to a July 2010 story in the New York Law Journal (?Quiet Judge Facing a Foreclosure Crush Gets Lenders Attention,? by Mark Fass). Describing mortgage contracts and bank behavior as ?unconscionable,? ?vexatious,? ?opprobrious,? and ?unreasonable,? Spinner in several cases has voided the mortgages entirely and handed title to the homes to the occupants, free and clear. In a 2009 case, Indymac Bank FSB v YanoHoroski, Spinner wrote, ?Plaintiff [Indymac]'s actions toward Defendant in this matter have been harsh, repugnant, shocking and repulsive to the extent that it must be appropriately sanctioned so as to deter it from imposing further mortifying abuse against Defendant.?
Other New York State courts, however, have continued to process mortgages as usual. And in other states, court verdicts have been mixed. In Alabama, a Montgomery County judge has ruled that the trustee for a securitization agreement ? in this case, Wells Fargo bank ? had the right to foreclose on a home, HousingWire reported in April (? Third Alabama judge takes on foreclosure standing for securitized trustees). One other Alabama court has issued a similar ruling, HousingWire notes, while a third court issued a contrary decision: ?The Wells Fargo v. Thomas suit is the third case of this type to surface in Alabama. Thus far, the outcome of the three cases is two courts have denied third-party beneficiary status to borrowers on the PSA agreements while also granting the trustee standing to foreclose. The remaining case ? Horace ? said the trustee had no standing to foreclose, and it recognized third-party rights for the homeowner on the PSA.?
Meanwhile, in Florida, increasingly testy judges have begun to lower the boom on foreclosing banks more frequently, according to the Palm Beach Post (? Foreclosure crisis Fedup judges crack down on disorder in the courts,? by Christine Stapleton and Kimberley Miller). Writes the Post, ?Angry and exasperated by faulty foreclosure documents, judges throughout Florida are hitting back by increasingly dismissing cases and boldly accusing lawyers of ?fraud upon the court.??
The Post highlights one example, a case in the courtroom of Miami-Dade County Circuit Judge Maxine Cohen Lando:
?In February, ? Lando took one of the largest foreclosure law firms in the state to task in a public hearing meant to send a message. She called Marc A. Ben-Ezra, founding partner of Ben-Ezra & Katz P.A., before her to explain discrepancies in a case handled by an attorney in his Fort Lauderdale-based firm.
"This case should have never been filed," said Lando, who referred to the firm's work on the case as "shoddy" and "grossly incompetent." She called Ben-Ezra a "robot" who filed whatever the banks sent him, and held him in contempt of court. She then gave the homeowner the home - free and clear - and barred the lender from refiling the foreclosure.?
The backlog of foreclosure filings, and the oversupply of already foreclosed homes on the market ? many of them standing empty and neglected ? represents a drag on the housing market, especially in coastal states, depressing property values in whole neighborhoods even for occupied homes with mortgages in good standing. But as the legal status of foreclosure remains in doubt, the lingering shadow of foreclosure appears likely to hang over the market for some time to come.