The highest court in Massachusetts ruled against U.S. Bancorp and Wells Fargo & Co. Friday in a widely watched mortgage foreclosure case that could have serious implications for the nation's largest banks.
The Supreme Judicial Court affirmed a lower court judge's ruling invalidating two mortgage foreclosure sales because the banks did not prove that they actually owned the mortgages at the time of foreclosure.
Last fall, the banking industry's foreclosure machine came under intense scrutiny with the revelations that low-level employees called "robo signers" powered through hundreds of foreclosure affidavits a day without verifying a single sentence. At the time, analysts warned that the banks' allegedly fraudulent document procedures could imperil their ability to prove that they owned the mortgages.
The Supreme Judicial Court found that the banks, who were not the original mortgagees, did not make a required showing that they held the mortgages at the time of foreclosure. As a result, the court found, the banks did not demonstrate that the foreclosure sales were valid to convey title to the properties.
"We agree with the judge that the plaintiffs did not demonstrate that they were the holders of the ... mortgages at the time that they foreclosed these properties, and therefore failed to demonstrate that they acquired fee simple title to these properties by purchasing them at the foreclosure sale," Justice Ralph Gants wrote for the court in the unanimous 6-0 ruling.
Massachusetts Secretary of State William Galvin said he agrees with the ruling, which he said demonstrates the need for judicial review of foreclosures in the state to give homeowners more protections.
It's up to lawmakers to take action to remove the uncertainty over mortgages raised by the decision, he said. Without legislative action, the court's ruling will have a "chilling effect" on the real estate market, he said. "The effect is that it throws a monkey wrench into foreclosures," Galvin said. "This is an urgent situation."
Attorney Paul Collier III, who represents Antonio Ibanez, one of the homeowners in the case, said the ruling affects thousands of mortgages in Massachusetts and could have a far-reaching impact on the nation's banking industry.
"For homeowners and foreclosures in general, it means that any mortgage foreclosure which was initiated by a securitized trust at a time when the trust had not obtained a mortgage assignment which gave it the lawful right to do so is void. Those homeowners, like Mr. Ibanez, still own the property," Collier said.
The banks argued that securitization documents they submitted were sufficient to prove they owned the mortgages before the publication of the notices of sale and the foreclosure sales.
The banks asked the court to apply its ruling only to future transactions, but the court rejected that. The court said it had not made a significant change in common law and scolded the banks for not following those mandates.
"The legal principles and requirements we set forth are well established in our case law and our statutes. All that has changed in the plaintiffs' apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities," Gants wrote for the court.
In a concurring opinion, Justice Robert Cordy used even stronger language, citing what he called the "utter carelessness" with which the banks documented the titles to their assets.
"There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order," Cordy wrote.
The Massachusetts Mortgage Bankers Association has argued against judicial review of foreclosures, saying it would add another layer to an already complex process leading to foreclosure — an outcome the organization said would hurt both borrowers and lenders.
The broader implications of the case sent bank stocks lower in afternoon trading, with Wells Fargo stock falling 65 cents, or 2 percent, to $31.50 in heavy trading. It earlier traded as low as $30.64.
U.S. Bancorp shares slid 19 cents to $26.10, after dropping as much as 2.4 percent after the ruling.
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