MA Court: Banks Must Own a House to Foreclose on It

A radical thought, I know.

But still only definitively true in Massachusetts.

At issue is a Massachusetts case, U.S. Bank v. Ibanez, which challenged a foreclosure because of processes banks have widely used in securitizing a bunch of loans into something they can sell investors chumps. Here’s how Bloomberg described the case earlier this week:

Massachusetts’s highest court is poised to rule on whether foreclosures in the state should be undone because securitization-industry practices violate real- estate law governing how mortgages may be transferred.

The fight between homeowners and banks before the Supreme Judicial Court in Boston turns on whether a mortgage can be transferred without naming the recipient, a common securitization practice. Also at issue is whether the right to a mortgage follows the promissory note it secures when the note is sold, as the industry argues…

“This is the first time the securitization paradigm is squarely before a high court,” said Marie McDonnell, a mortgage-fraud analyst in Orleans, Massachusetts, who wrote a friend-of-the-court brief in favor of borrowers. The state court, under its practices, is likely to rule by next month…

If loans weren’t transferred properly, the banks that sponsored such trusts may have to repurchase them, Adam J. Levitin, an associate professor at Georgetown University Law Center in Washington, said in prepared testimony in the U.S. House of Representatives in November.

If the problem is widespread enough, it may cost the banks trillions of dollars and make them insolvent, Levitin said.

The court just ruled against the bank.

This is just one state, just one ruling, but it may well mean the efforts to help banks avoid accountability for their shitpile mess will fail.

Update: Here’s dday on this.

The point here is that the mortgage assignment and the securitization process was improper. US Bank and Wells Fargo did not have possession of the mortgage note, and thus did not have the standing to foreclose. In addition, they put the endorsement in blank, without naming the entity to which they were assigning the mortgage. This violated Massachusetts law, according to the original judge in the case, and now the MA Supreme Court agreed. And as we know, this is more the norm than otherwise. But this is one of the first major cases, decided by a state Supreme Court, that affirms that a lack of securitization standards means that the bank who thinks they have the power to foreclose on a delinquent borrower actually does not.

If this ruling gets applied far and wide, you’re basically going to have a situation where most securitized mortgages in the country cannot be foreclosed upon. It depends on state law and the associated rulings, but you can see the Ibanez case being used as precedent.

  1. Neil says:

    Good news for the rule of law in property rights. Good news for people who live in homes at risk of being foreclosed, especially people working in good faith to address the financing problem as the banks play them like chumps.

    • BayStateLibrul says:



      I’ll bet you two Tom Brady’s that the Supreme Court of Arizona would rule

      for the Banks…

      • bmaz says:

        The current Arizona Supreme Court is actually quite decent, although it took a slight hit with Jan Brewer’s appointment of Brutinel to replace the retiring Mike Ryan.

  2. janeeyresick says:

    Wow! Rubber meets the road right here.

    Is this is the culmination of that whole “bifurcation” of the note from the mortgage discussion? Seems like it.

    I will always remember Republicans shouting “Rule of Law! Rule of Law” when they wanted to impeach Clinton for his bj, but how Rule of Law went into the deep freeze re illegal government wiretapping, torture, outing CIA agents, and the like and seems to be on the track for ignoral in foreclosure fraud as well except for the occasional glimmer of justice in instances like this one.

    It will be interesting to watch the SCOTUS trying to twist themselves into a pretzel to back the banks and financial behemoths over the homeowners in this one.

    • masaccio says:

      No. This is a matter of state law. The nub of the holding is that the mortgage was not assigned to the bank on the day the foreclosure began. The bank claimed that it had an “assignment in blank”, which the MA court says is worthless. The bank claimed that it had title under the mortgage follows the note doctrine, but Massachusetts rejected that idea a century ago.

      The mortgage follows the note argument is a big loss. Unfortunately, not all states have that rule. Some even have statutes on the subject. On the other hand, the ones that don’t can reconsider in light of the fraud which is so rampant as this case shows.

      • papau says:

        Well said – depends on state –

        indeed Maine court just ruled for the bank in a similar case.

        But this Mass case is the first case I know of that ruled against the bank – was a big deal when the ruling came down about a year ago.

  3. DeadLast says:

    This is the money shot:

    Recognizing the substantial power that the statutory scheme
    affords to a mortgage holder to foreclose without immediate
    judicial oversight, we adhere to the familiar rule that “one who
    sells under a power [of sale] must follow strictly its terms. If he
    fails to do so there is no valid execution of the power, and the
    sale is wholly void.” Moore v. Dick, 187 Mass. 207, 211 (1905).
    See Roche v. Farnsworth, 106 Mass. 509, 513 (1871) (power of
    sale contained in mortgage “must be executed in strict
    compliance with its terms”). See also McGreevey v. Charlestown
    Five Cents Sav. Bank, 294 Mass. 480, 484 (1936). [FN16]

  4. DeadLast says:

    To rub the banks’ noses in their own messes, the court concluded with:

    What is more complicated, and not addressed in this opinion, because the issue was not before us, is the effect of the conduct
    of banks such as the plaintiffs here, on a bona fide third-party
    purchaser who may have relied on the foreclosure title of the
    bank and the confirmative assignment and affidavit of foreclosure
    recorded by the bank subsequent to that foreclosure but prior to
    the purchase by the third party, especially where the party
    whose property was foreclosed was in fact in violation of the
    mortgage covenants, had notice of the foreclosure, and took no
    action to contest it.


    • Mary says:

      That is the biggie for the banks who have foreclosed. And it goes to the title insurance issue we discussed here awhile back. And may send a second round of shocks through those institutions.

    • janeeyresick says:

      Warning that Frankenstein previously left for dead foreclosed owners may rise from the grave and make claim against the new owner who relied on the banks affirmations that they were the true legal owner with the right to pass title.

      Well, many people predicted that could be a result of the title clouding actions of the multiple mortgagee/noteholders.

      I hope that everyone who bought a foreclosure property also had the good sense to buy an owner’s title policy.

      Oh what a web . . . blah blah blah, but how true. The rippling effects from the greed motivated actions and inactions of the banks, securitizers and servicers is only beginning to be evident.

      And on further thinking about it, the banks trying to foreclose paid money to some entity at sometime for something (maketable title). Once each link in the chain discovers that they bought an illusion, could not every link sue every previous link? Does anyone even have clean hands? Could they be alternately suing and being sued for every transaction they had a part in?

  5. klynn says:

    We have this case and then the law suits against the ratings firms…Fraud on all levels.

    I would have a bank holiday and clean house…

  6. Mary says:

    The Bloomberg article is very good and if the Judge’s ruling is pretty much as the article outlines, it sounds like it does really go to the heart of the problems. The one thing most of the articles don’t do is highlight one of the big reasons that things were done they way they were (i.e., to avoid paying counties recording fees and cash-strap them while utilizing their services and offices for commercial gain).

    I’m going to toss in this explanation, even though I know most people here already know all of this, but just as a fwiw.

    The mortgage process has always been a hybrid of two different types of law – real property law and commercial paper (these days, non-paper, but I’m old fashioned and will stick with the old fashioned terms). State law has a big impact on both of those laws – but State law is pretty much at its peak of authority when it comes to real property law. You can’t really pick up real estate and move it around to claim it is “in commerce” and traditionally, the feds don’t have a heckuva lot of say in who owns real property – state law is almost never disregarded on that front.

    Under most States real property law (actually, all that I can think of but I don’t understand LA law which is civil based instead of common law) ownership has two aspects. One is “as between the parties” to a document; the other is “as to the world.”

    Typcially, the mortgage or, in some states, deed of trust (which is a little different thing too) has to be in “recordable form” and properly executed in order to actually convey a security interest in the real property “as between the parties.” “Recordable form” varies bewteen states, but prety much always includes requirements that signatures be notarized and that certain information as to the Grantor and Grantee of the document (Mortgagor/Mortagee, Assignor/Assignee all as may be relevent) be included in the document.

    Name is ALWAYS a part of the recordaton requirments (name is how title is indexed – everywhere – in some way shape or form, without names, there is no ability to track title). Often address/contact information for the Mortgagee (bank) is required. A state’s requirement as to “recordable form” is different than consumer lending law requirements that might, for example, require that certain statements appear in a document in bold face or a particular font size, etc. but in some cases, states will also have their own consumer laws that might impact whether or not a document is in recordable form.

    Anyway – for state law purposes, if you have a mortgage or deed of trust that is in recordable form, it is valid AS BETWEEN THE PARTIES (the original lender, the original borrower/homeowner) whether or not it is recorded. BUT.

    But, if the document is not recorded, it is not valid with respect to the world. So if the Mortgagor/Borrower gives a mortgage to Bank A, and Bank A never records (or records improperly – a different issue), then if the Mortgagor sells the property to Mr. Buyer, Mr. Buyer takes title “free and clear” of any claims on the real property. The mortgage may still be good “as between the parties” but if the mortgagor no longer owns the property, well, that means there is nothing to which the mortgage can atttach. So the way a bank/lender protects its interest in the real property is to record the mortgage. Pretty simple.

    Did I mention that costs money?

    So at an initial closing, things like recording costs are all going to be a part of the loan process. Usually is all taken care of fairly well.

    So let’s look at the other aspect of the mortgage/deed of trust transaction. That’s usually the Mortgage Note. A note is typically not required to be in “recordable form” and the note doesn’t “grant” an interest in the real property – the note is just a promise to pay. It’s a lot like your checks you give every day. Unlike a mortgage, which has to have a specified Grantor and a specified Grantee, a note is a different creature. Notes are mere promises to pay that don’t really attach to collateral (real property collateral or other assets). They also can be made and transfered “in blank” (without any name). Ever made out a check and left the “to” line blank, for someone to use a stamp on? Or made out a check “to cash” etc.? Notes can be handled in much the same way.

    The trick to a note isn’t “recordation” the way it is for a mortgage, it’s possession. Think of your checks again – if a check is made out to you, you usually have to have actual possession of that check to get the bank to pay to you. Now there is a lot of “commerical paper” law that isn’t just state law that can and does apply to notes and as the world has gone digital (and before that really, for other reasons) there had been some chipping away at the old, common law precepts of “possession” as the “perfection” of a person’s interest in a note. So there have been some recognitions of things like trust account possession being the same as a person’s possession, or of transfer of a note by entry on certain kinds of commerical accounts instead of by possession, so I’m going to leave that aspect a bit to the side.

    Back to a mortgage. So once a bank has a mortgage, can it transfer its interest in the mortgage? Sure, by the tried and true way. It uses a document typically called an Assignment and trots off to the local Recorder’s office and records its transfer of its interest in Mortgage A (complete with a reference to the recording information for Mortgage A) from itself as Assignor, to Holder B as Assignee. No problem. Did I mention that costs money?

    Over time, in many places, the amount it costs has gone up quite a bit. Once upon a time, you could pay a buck a page recording fee and list 50 mortgages on a one page Exhibit to a one page document and you had Bank A transfer to Holder B all it’s interest in 50 mortgages for … 2 bucks in recording charges. Notsomuch anymore.

    Depending on where you are (and now you get into not just State law, but City/County laws/ordinances) a Recorder these days is not likely to let 50 mortgages be transfered without there being a separate document for each one. 2 bucks becomes 100. In addition, the fee isn’t likely to be a buck a page – more like maybe 3-10 for the first page, 1.50-3 for the next pages. 100 becomes 500-? And then there’s actual transfer fees that are going to be charged in some places, if the transaction is a commercial one. Those are a fee based on the “value” of the property being transferred.

    By contrast, the wheeler-dealers in the commercial paper industry can digitally transfer notes a lightening speed without having to pay anyone anything. And gosh-golly, who wants to be encumbered with the whole recording process (which is the pillar that supports real property law). Plus, you have to personalize the mortgages – you can’t treat them as fungible bc they are going to be subject to different costs of transfer and different delays and different form requirements etc not just from state to state, but from county to county. Fudge. What’s a security wheeler dealer to do?

    Well, how about set up a system to try to avoid recording fees and delays and the need to understand and comply with the laws and requirements of various states and instead set up your own, inner circle, non-gov, digital entry based recording system so they can just keep track “between themselves” as to who “owns” what mortgages, under their own private “law” They used some trust accounts (bringing in yet another, typcially state law, aspect of agency law into the whole spiel, bc under agency law there are ways to sever “legal” and “equitable” title and let one person hold legal title while equitiable/beneficial title gets swapped around).

    In the end, what they are aruging is that commercial paper law and agency law are like the dynamic duo in their “sophisticated” hands and they can deliver a knockout punch to that evil villain, Recordo. Which is just silly. Should have always been treated as silly.

    What happened in the cases reported in the Bloomberg story – and in many others – is that once the wheeler dealers set up their super spiffy “trust” where they could make up the law that would be applicable among themselves as to ownership of mortgages and notes, they kind of forgot they might ever be subject to any other kind of law, like state law, real property law, etc. and didn’t pay all that much attention to their paperwork.

    In a typical foreclosure of a mortgage by someone other than the original mortgagee, the current mortgage rights holder can point to an assignment (or string of assignments if there have been multiple transfers) of record in a recorder’s office. It’s what we mean when we talk about the “of record” owner of those kinds of rights. So they have the right in the real estate – but what right do they have? Well, they have the right to recover what is still owed on the note – but they can’t point to the recorder’s office to show they have rights in the note. Those rights are typically held by the “possesor” of the note, so they have to have possession of the note and of the payment records for the note.

    Usually, a court isn’t going to be too pushy on making an “of record” mortgage holder produce the actual note in order to foreclose. That is cumbersome, time consuming, puts the court at risk if documents are lost in its possession, etc. The court can usually rely on affidavits of representatives of the morgage holder or the signatures of counsel to pleadings asserting the truthfulness of the fact that the notes are in the actual possess of the mortgage holder.

    So two aspects – a mortgage that has to be assigned, of record. But with the mortgage, you only have a right to foreclose if you own and are owed money under the note, which you prove up by possession and payment records. If the note has been paid or you don’t own it anymore, you can’t foreclose even if you are the valid mortgage holder of record. If you have the note and possession and payment records, but you are not the mortgage holder of record, you can’t foreclose.

    So the judge had a situation where mortgages had not been sequentially assigned of record and not only that, but where the assignments that the lenders were arguing had been made were assignments “in blank” (i.e., no named Assignee). I don’t know of any state/commonwealth where an Assignment can be recorded “in blank.” There’s a lot of variation in state law, but I don’t think you’ll be able to find a state that allows real property to be conveyed “in blank”)(to no specified person).

    As to the note, the judge likely said, ok, heck, sure, you can still get a judgement from me on your note, then you can record that judgement and that will give you a lien that you can foreclose against for the real property, so yu may lose priority, but still, you can protect your interest. Your note can be transferred in blank, so that’s fine, all you have to do is … produce the note. Prove it’s in your possession.

    So that’s a much more expanded version that most people probably didn’t need or want as to the double whammy aspect that EW and DD and the Bloomberg article are reporting. The Note could be assigned in blank, but forecloser needed to have actual possession fo the note (this is the part that I’m not as sure will hold as fast everywhere and it can usually be fixable without a lot of cost to the foreclosing parties if someone can find the note and get it into the right hands, it can be fixed at greater costs through the kinds of procedures typically avaiable in most courts for situations where original notes have been lost). But what was done with the note – transfers in blank – isn’t all that atypcial.

    The second part of the whammy is the bigger one and it is that no one recorded the assignments to protect interests and now that they are doing that, the assignment they are trying to use isn’t in recordable form. This is one that ultimate can be fixed as well, but this is also one where you have to look to the reason that the assignment(s) were never recorded and they tried to assign in blank (and I would sure as hell like to see any real property precedent – not agency/between the parties precedent, but real proeprty/between the world precedent – for assignments in blank.

    But mom, everyone else is doing it – that’s not much in the way of precedent.

    In the end, though, I do think that for properties with value, the problems with the paperwork aren’t going to so much prevent foreclosures, as slow them down and make them much more expensive. IMO, the bigger issues is the deliberate decision by the securitizaion gurus to try to avoid payment of legitimate state government fees and charges. Someone needs to push on that for some direct accountability, bc it sure reads like something that could be viewed as a scheme to defraud and deprive state and local governments.

    It may be that slowing down a lot of foreclosures will be helpful to the consumers, but sometimes that just drags out the fees and interest that they end up owing under the note once it is legitimately sued upon. A judgment on a note can end up becoming a lien on the real esate (upon recordation) and a judgement lien can be foreclosed upon just as a mortgage can, so in the end, in most cases it’s not as if a problem with the paperwork means that the banksters can’t get judgments/foreclosures. It is more a matter of the fact that it will take longer and be more expensive. Those expenses may even be rolled into the judgements given against the borrowers. So while I think the court’s ruling is correct, and it will at least be a boon to cash strapped counties, the main relief aspect for borrowers that I see is that for some, if things are really egregious on the paperwork front, a court might void the note – but that would be really unusual and the note is a burden around the borrower’s neck whether the mortgae is “good” or not. Generally the relief is going to be “respite” and maybe additional bargaining power for those in the default process that are not yet in foreclosure for getting things worked out, given increased costs of foreclosure to the banks.

    The other big relief, though, might come from state AGs pursuing the schem themselves under state fraud laws. That’s the one where it seems Obamaco has been working hard to keep the State AGs left footed.

    all fwiw

    • janeeyresick says:

      I really appreciate your long and thoughtful post.

      To me, and as you point out, it all began really as a way to avoid the inconvenience and cost of recording, not to mention I think there was/is a secondary desire to add opaqueness to what had been pretty transparent in the local land recording systems.

      I always say, people only hide what needs to be hidden

    • Arbusto says:

      Let’s wait for Obamaco to propose, and Congress to dispose, a bill legalizing MER’s policies and procedures called something like Mortgage and Recordation Modernization Act. We don’t need no stinking Recorders office populated by Unionized, overpaid clerks.

      Also, if I understand from other reading on FDL, once a note is disassociated from real property, it becomes an unsecured note and can be wiped out in Bankruptcy. A new law will be passed to counter that, not doubt.

      • Mary says:

        Mostly so on the note. Notes come in two flavors. Secured and unsecured. Secured notes come in combinations of perfected and unperfected and real property security and personal property security (and you can even get into inchoate stuff if you want).

        Once upon a time, before the Dem Bankruptcy law “reform” sellout, I knew a fair chunk of Bankruptcy law, but I’m not certifying that anything I did know is very valid now. But the underlying concepts that should have survived intact, even with the massive revsion, are that ALL notes can be discharged in bankruptcy, secured and unsecured. The differnce is that secured creditors whose security interests are “perfected” get the first claim on the money from the sale of “their security” So what we would have called an undersecured note – one where the note balance is 100,000 and where the property only brings say $50,000 at forecloasure sale – would leave a remaining, unsecured balance on the note and that would be plopped in with the other non-secured creditors.

        Part of what the bankruptcy rewrite did was to make it much more difficult for regular people to go a “liquidation-fresh start” bankruptcy than it once was. If you have any kind of earnings ability/capacity, as I understand it from both colleagues sitll doing BRs and people I know who are going through it, these days everyone gets stuck in plans and a prolonged period of indentured servitude basically, instead of a fresh start.

        Don’t get me wrong – I represented the “bad guys” back when I did a lot of BR, 30 years back, but if you aren’t going to have liquidation and fresh start, you pretty much undercut a lot of the reasons to have consumer BRs I mean, you basically just use a Federal Court and BR Trustee to act as garnishment agents for creditors. imo, fwiw, based on less than full and certain knowledge.

        Back in the bad old days, before the re-write – there was another hammer for consumers and I really don’t know if it exists now or not. A bankruptcy court/trustee could pull back into the bankruptcy estate things called preferences and other things called fraudulent conveyances, and the Trustee/Court could do that using the federal statutes OR using state law if it gave better rights (there was a lot of blending of state law in bankruptcy – things like weird state law defined homestead rights that let John Connally keep a megamansion and IIRC, he also got to keep a pretty damn expensive car bc tx homestead rights allowing for a debtor to keep a horse were interpreted to mean they could keep a form of transporation, no cap)

        Anyway, some jurisdictions viewed a sale of assets, even in a properly noticed auction or other public sale, that brought less than a certain percentage of their deemed fair market value to be a fraudulent conveyance (the old time Durrett test). Things have changed since Durrett, which has been rejected now by the Fifth circuit as to the actual strict percentage test (which was anything less than 70% of FMV under Durrett) and now the standards are more along the line of reasonable equivalence, which isn’t the same as fair market value.

        Still, this leave a big door open wide for debtors who might file for br within a year of a foreclosure sale that was evena properly handled foreclosure sale but where the banks bid in againtt their mortgages and got the property for a song. Tack on the fact that they might not have had the right to sell to a 3P pruchaser and a BR trustee might want to bring the asset back into the estate for the benefit of other unsecured creditors, and you could have a real wild west situation.

        The downside is that I don’t really think a lot of the problems with the process inure as much to the ultimate benefit of the debtor as people might think. The fact that multiple assignments might have to be recorded prior to foreclosure and that more costly filings might need to be made with respect to things like lost notes and the lenders feet can be held more to the fire doesn’t necessarily (except in the kinds of fraud situations that we have seen hints of with some loan foreclosures – like the robo signing) mean the debtor will have the kind of defense that liquidates their debt or allows them to keep their home.

        If that was the case, there’d be a lot more litigation than there is now, even. But having a sale set aside, when the debtor does still owe on the note and where a judgement can be obtained on the note and then recorded as a lien against the real estate – isn’t going to help the vast majority of debtors whose homes have bizarro world unrecorded mortgage assignments. Unless there is huge value in the home, bankruptcy trustees (if the debtor files br to extinguish a note) aren’t likely to go to the risk and lit expense of trying to pull the home back into the br estate and if they do, all creditors benefit, share alike, but not the debtor – at least, not much.

        I guess, without State AGs going after the lenders over the scheme, one way someone might try to use private actions to force accountability would be for the debtors to quitclaim their rights in the RE to someone else and let the someone else, who has a house to gain out of it, file some quiet title action and see what happens. ??

        I think that if you had some AGs crack down on the recording and avoidance of recording scheme aspects, you’d either end up with more centrally held, less securitized, mortgage debt bc of the costs of assignments for packagine (and IMO that regionalization would be a good thing, bc I’m not sure that there is benefit to the economy as a whole from securitization) or you might have them continue with securitization, but follow the rules on recordation, which means slower transfers and less “marketability” for the securities (also not a bad thing imo) and would also mean MORE FEES to counties (and free standing citites) which is a good thing.

        The good thing of keeping people in their homes isn’t necessarily going to be tied to working out this mess though, IMO. fwiw, ymmv.

      • BeachPopulist says:

        Let’s wait for Obamaco to propose, and Congress to dispose, a bill legalizing MER’s policies and procedures called something like Mortgage and Recordation Modernization Act. We don’t need no stinking Recorders office populated by Unionized, overpaid clerks.

        Yep. That’s what’s coming. Directy from our Constitutional Law professor and his pals in Congress.

    • DeadLast says:

      Thanks for your lengthy description. I am not an attorney, so your thoughts were very insightful.

      There was something else in the Supreme Court’s decision, albeit the concurrence, that could expose the banks to even more litigation on the commercial side: if I were a shareholder, I would be pissed.

      “…what is surprising about these cases is
      not the statement of principles articulated by the court regarding
      title law and the law of foreclosure in Massachusetts, but rather
      the utter carelessness with which the plaintiff banks documented
      the titles to their assets….”

      To me, that seems like a big invitation to the Trial Lawyers Association!

    • earlofhuntingdon says:

      Nice summary. I would add that there are requirements to make an instrument – paper, etc., that evidences a promise to pay money – negotiable, that is, that allows all the rights of ownership to be easily traded without a host of pesky defenses to payment. Most often, that’s through a valid signature and delivery, and an absence of knowledge of such defenses. As you know, there are other requirements that relate to the nature of the debt (such as that it be unconditional, etc.).

      Among other state law rules, as you point out, are those that deal with agency – the rules that define how and to whom authority to act in a certain way can be delegated – and laws that determine through whom a legal entity such as a corporation or trust can validly act. The latter has similar, as between us and as to the world aspects, to it.

      There are internal rules about who is authorized to act in connection with transactions of a certain kind or up to a certain dollar amount. Notwithstanding those, someone who reasonably appears to have authority can still bind a legal entity.

      The banksters’ system played fast and loose with all those rules. And now they want a federal fix that gets them out of a trillion dollar jam the same way the White House and Congress got the telecoms out of their illegal domestic spying jam. One difference is that spying and constitutional limits on government conduct are fundamentally national issues. These are not. But I don’t think Washington will care, so long as Citi and Goldman and their ilk get enough of their “former” staff hired inside the Beltway and raise enough electoral cash.

    • Jesterfox says:

      In addition to avoiding the recording fees, they also avoided government entities recording who owned what. By not recording the mortgages, they were free to sell them multiple times as part of different trusts. Who would know?

      Recording the mortgage doesn’t just protect the interests of the owners of the mortgage. It also protects the interests of the society at large by making fraudulent sale more difficult.

    • Acharn says:

      Back in 2007 or 2008, the late Tanta at Calculated Risk wrote a column commenting on a couple of files she had been asked to look at, and commented that the banks (and the servicers and the mortgage brokers who weren’t banks, but you know what I mean) had been criminally careless with processing the paperwork. She pointed out that the Mortgage Backed Securities of all kinds are created and controlled by a legal contract called a Pooling and Servicing Agreement (PSA. Almost all of these were executed under New York state law, partly because that’s where the big gamblers, errr… banks, were, and partly because New York law is so well developed and clear. Now all the PSAs are different, but most of them incorporate a lot of boilerplate (to save money). Most of them contain a provosion requiring that the underlying notes MUST be properly assigned through two or more intermediary firms, to create what is called “bankruptcy remoteness.” The PSAs are very specific about what companies are in the chain of ownership REQUIRED, and also the time frame when all the endorsements must be made. Furthermore, most of them specify that the endorsements MUST NOT be made in blank.

      When the big gam… err, banks started doing MBSs in a big way, they realized that they were going to be paying a LOT of money in registration fees to counties. They decided they could keep this money for themselves if they used a central registry, and thus was born MERS. Now MERS has essentially no employees (probably half a dozen clerks and a couple of programmers, plus their president). What they do is claim that individuals nominated by their clients are designated as “assistant secretaries” or “directors.” Those people, therefore, are supposed to be officially authorized to sign the endorsements effecting the transfers. What Tanta mentioned was that the banks and mortgage brokers, after they had “registered” the mortgage with MERS, then SHREDDED THE NOTES! This was the standard practice for many. In a case in, I think, Illinois, Wells Fargo said they kept the notes in a warehouse. Anyway, the point is, millions of these notes were never transferred, as clearly required by the PSAs. Millions. That means that the PSAs were not validly completed, and the investors were defrauded.

      The story is long, and the details are complicated, but I think the banks that bundled all those mortgages into “securities” and got the ratings agencies to call them AAA grade investments, are going to have huge expenses trying to straighten that mess out. That’s where the real losses are going to come. But I’m delighted to see that, because of their own careless efforts to save a few bucks, they’re not going to be able to foreclose on some properties, too.

  7. earlofhuntingdon says:

    These are historically fundamental state law issues. Nothing could be more fundamental to state and local governments and a state’s citizenry than who owns real property in that state, that their use of it comports with applicable laws, and that the owner bears the burden of timely paying taxes assessed on it. State real property recording systems – which the banksters securitization process explicitly attempts to avoid complying with – are the foundation for ownership, use and tax compliance issues.

    It’s hard to imagine a federal fix for such national, massive non-compliance that would effectively void the requirements and protections of those 50-odd state systems (though it will be fun to see the GOP’s fundamentalist states’ righters rationalize their attempts to do so). It is, however, easy to imagine federal fixes for national bank and security issuers and traders whose collective actions put national and international financial systems – and every state’s real property recording and tax system – in jeopardy, while protecting those state-based systems. Beltway imaginations, however, are down-the-rabbit-hole reversals of normal logic.

  8. person1597 says:

    Every paycheck a fortune, every formation a parade…

    Kind of makes you wander just what is lurking beneath the surface of this forsaken world…

    And then, along comes Mary… Your explanation is a triumph of clarity and context. Many, many thanks!

    Another expert weighs in… Calculated Risk’s explanation brief but pointed…

    • This case is really about the “utter carelessness with which the plaintiff banks documented the titles to their assets”…

    Xenomorph is in da building!

  9. marblex says:

    The question of whether the federal government could intervene statutorily to annoint these mortgage practices “legal” raises some extremely thorny issues of soveriegnty.

    First, property law has always been controlled in the jurisdiction of situs, literally because the property is part of the State in which it is situated. Hence, actions relating the property are in rem, necessarily and there is no federal jurisdiction.

    For the federal government to assume any control over securitization practices, it would have to invade a traditionally state controlled area of law; including recordation, transfer rights, methods of holding and conveying title, etc. and so forth.

    Even more sticky is the fact that the MERS mortgages and trust deeds are not retained in original form and many do not have the original note. The Note is the only instrument that operates to bind the borrower and the lack of an original Note is FATAL in many jurisdictions. (Indeed there has been testimony that the original instrument was DESTROYED in many of these cases, which raises an interesting issue as to whether, having destroyed the original note, the obligation was extinguished along with it.

    Getting back to issues of state versus federal law, I see no legitimate and constitutional way that the federal government can assume any jurisdiction over these issues. They will have to wait until the States adjudicate them and then, even federal appeals will have to be determined by the law of the state of original jurisdiction.

    • lsls says:

      “The Note is the only instrument that operates to bind the borrower and the lack of an original Note is FATAL in many jurisdictions. (Indeed there has been testimony that the original instrument was DESTROYED in many of these cases, which raises an interesting issue as to whether, having destroyed the original note, the obligation was extinguished along with it.”

      Aren’t the original notes and deeds filed with the “County” at the time of closing? They are available for searching clear title. But, if they’ve been bundled and sold without further filing under “others” “ownership” with each transfer….well, that is definitely not clear title… period.

    • jpe12 says:

      (Indeed there has been testimony that the original instrument was DESTROYED in many of these cases, which raises an interesting issue as to whether, having destroyed the original note, the obligation was extinguished along with it.

      Under the UCC – which every state has – the holder of the note can make a duplicate provided they explain how the note was lost.

      • Acharn says:

        Under the UCC – which every state has – the holder of the note can make a duplicate provided they explain how the note was lost.

        Yes, that’s where the “robo-signing” mess came from. Thousands and thousands of affidavits, signed by people who say they have personal knowledge of what happened, even though they are signing the affidavit years after the companies involved were bankrupt and dissolved. Sometimes years after the person signing the affidavit died. And I don’t think the banks want to put in their affidavit that they shredded the note because the mortgage was registered with MERS and they didn’t realize the two different documents were both essential components of the transaction.

  10. earlofhuntingdon says:

    The feds can regulate banks and those involved in the issuing, vetting and trading of securities. Where those players pose a national or international risk to states and to investors, various federal agencies could intervene through their rulemaking authority or by simply enforcing existing laws.

    There are also a myriad of ways considerable informal pressure could be applied to shape business practices. That happens all the time here, in Europe and Asia, though we take special pride in the myth that the US government doesn’t interfere in subsidizing or limiting corporate profits. The taxation of oil alone should prove what a lie that is, let alone the blind generosity of the government’s gifts to the banking system the last two years, or its unwillingness to hold telecoms or defense contractors to account.

    • masaccio says:

      It would really be something for the Feds to interfere with decisions like Ibanez, because it has to do with the mortgage itself, rather than the note. I see that the note moves in interstate commerce, but the mortgage is purely a creature of state law.

      • earlofhuntingdon says:

        I had in mind regulation of the banking and securitization process, not direct interference with state mortgage or filing requirements. But Republicans in Congress have mooted such things as authorizing robo-signatures after the fact and by people that state agency and other laws would suggest have no actual or implied authority to so act. That sort of interference would be an attempt to exculpate bankers, not to protect individuals or the state-based system of real property recording.

      • jpe12 says:

        Virtually everything economic implicates interstate commerce. There’s no doubt that Congress could intervene if they wanted to.

  11. earlofhuntingdon says:

    The deed shows precisely what property is involved – where and how much, who sold it to whom, and what kind of ownership was sold, typically, everything the prior owner had the ability to sell (which isn’t always as much as the buyer expected or needed).

    The mortgage shows that the new owner gave up certain rights in the purchased property to a lender, to persuade it to lend the money needed to buy the property. It describes what those rights are, and that it was done in the manner required to make it binding. The rights include the obligation to give the lender notice when anything important happens to or is done to the property, the obligation to maintain insurance, etc. The most important one is the right to force a sale of the property in order to pay the debt subject to the mortgage that the owner has failed to pay the lender on time.

    Those are traditional public issues. Exactly how much the new owner owes the bank, which is in the note and associated records of payments mad, is a traditionally private matter, that is, unless and until the new owner fails to pay the lender what it’s owed and on time. When the lender can show those facts exist, its rights under the mortgage become actionable. Public filing of the mortgage puts everyone who might be interested – another buyer or lender, for example – on notice.

  12. bigbrother says:

    Local property tax issues. No proof of ownership then the bank owes all the taxes from the mortgage formation. Property tax is what funds local and state government. Where is that monster going?

  13. jpe12 says:

    The point here is that the mortgage assignment and the securitization process was improper.

    That’s not right. The court is quite explicit in noting that assignment documents, like a PSA, are sound legal documents that transfer legal title. The issue in front of the court was essentially evidentiary, not substantive. Had the banks shown up at court w/ assignment contracts, then they’d have won. None of the concerns about securitization itself were shown correct by this ruling. (the trust wasn’t void, endorsement in blank doesn’t destroy title, etc)

    OTOH, if banks didn’t keep the intermediary assignment documents (ie, from originator to sponsor and so on), then in MA they’re pretty much fucked.

    • Mary says:

      To clarify a couple of things –

      The court did say that the kind of process used in the case before the court was improper. Proper assignments can transfer title in two ways as I tried to hit on above. As between the parties to that document and as between the parties and the rest of the world.

      What it takes for an assignment to be proper depends on what you are assigning. With respect to real property interests, a proper assignment has to meet the real property conveyancing and recordation requirements of state law to be good as against the world (and sometimes as to the other party) without either a failure of the transfer or a need for a quiet title action for curative on the assignment.

      Assignments in blank do not meet most states real property conveyancing and real property recordation requirements.

      Based on that, I think it is correct to say that this aspect – assignment of mortgages in blank, was deemed to be improper.

      @37 – This is why I was pointing out the specific kinds of law being implicated and I don’t think you either understand well enough the distinction that massacio was making or, if you do, I don’t agree with your analysis. There’s not much question that Congress can intervene a boatload on the commercial paper aspects of the transactions but there are some limits on what Congress can do constitutionally, what congress will/would do politically, and what fallout might be.

      (Btw, for the Uniform Commercial Code, keep in mind that states have adopted it in different forms and in different aspects and with different interpretive case law and then go research some 3-309 and related code section cases and you’ll find out pretty quickly that there’s not always a failsafe way for a bank to make their case. In particular here, there are going to be evidentiary aspects with respect to the issues of who had possession when the note was lost and was the person/entity in actual possession at the time it was lost someone/someentity who only had rights to transfer and/or hold for a third party, or was it someone/someentity who had the right to enforce the note. At a guess, I’d say there will be some fiddle faddling on that one, but that the process is such that you may have had a clerical/custodial/fiduciary entity without direct enforcement rights who had possession at the time of loss.)

      Anyway – a state’s system for determining title to real property interests held in the state is going to be a tough row for Congress to hoe even under the commerce clause. Almost (not quite, but almost) as tough will be interference with state agency law which is going to be tied up in the issue of what fiduciary transfers to split out legal title while continuing to make swaps of equitable title do vis a vis recordation laws and 3rd parties to the assignment and agency agreements (and here, the original borrower is a much a 3p to those kinds of agreements as anyone else).

      In which case, depending on the state, the manner in which UCC was adopted there, etc. the risk of loss of the note may lie between the bank and their selected fiduciary/custodian who lost the note.