On January 7, 2010, the Massachusetts Supreme Judicial Court (SJC) issued its much-anticipated decision in U.S. Bank National Association v. Ibanez  (pdf).  The SJC affirmed a trial court ruling that, to validly foreclose a mortgage, the foreclosing party must actually hold the mortgage at the time of foreclosure.

Ibanez is really two cases with almost identical facts and legal issues, which were consolidated in the trial court.  The plaintiffs, U.S. Bank National Association and Wells Fargo Bank, foreclosed mortgages under Massachusetts’ non-judicial foreclosure process.  The banks were trustees of trusts in which these mortgages and hundreds of others were pooled for conversion into mortgage-backed securities.  The banks were at the end of a chain of assignments that brought these mortgages into the pool.  When the mortgages went into default, the banks foreclosed and bought the properties at the foreclosure sales. 

The problem – at least in Massachusetts – is that, at the time of the foreclosures, the assignment paperwork had not been completed, meaning the banks were not yet the holders of the foreclosed mortgages.  Post-foreclosure, the banks filed actions in the Massachusetts Land Court to confirm that they held valid title to the foreclosed properties.  The Land Court ruled against the banks, holding that under both key statutes – M.G.L. c. 183, § 21, which prescribes the form of “statutory power of sale” to be used in a mortgage, and M.G.L. c. 244, § 14, which sets out the procedure for a foreclosure under a power of sale – the foreclosing mortgagee must be the holder of the mortgage both at the time notice of the foreclosure sale is published and at the time of the sale itself.  

The SJC affirmed the Land Court’s decision in all respects.  As the SJC saw it, Ibanez is an easy case:  it requires the application of plain statutory language to a set of undisputed facts.  Under the relevant statutes, only a “mortgagee” – which the court read (with plenty of supporting authority) to mean the actual, present holder of a mortgage – has the authority to foreclose.  The court flatly rejected the banks’ arguments that (1) the trust agreements and other pool-related paperwork sufficed to show that the banks were entitled to assignments, (2) the banks’ possession of the underlying promissory notes gave them a sufficient interest in the mortgages to foreclose, and (3) the banks’ post-foreclosure receipt of valid assignments, together with the other evidence, gave them authority to foreclose.  In an effort to mitigate the impact of an adverse ruling, the banks also asked the court to specify that its decision would only apply prospectively, but the court saw no reason to depart from the “normal rule of retroactivity.” 

The majority opinion in Ibanez, authored by Justice Gants, is a rather matter-of-fact rendering of the pertinent law and its application to the undisputed facts.  Only at the very end of the opinion does the majority give us a glimpse of its true feelings, when it observes:

The legal principles and requirements we set forth are well established in our case law and our statutes.  All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.

However, in a short concurring opinion, Justice Cordy, joined by Justice Botsford, takes the plaintiffs directly to task, stating:

I concur fully in the opinion of the court, and write separately only to underscore that 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 . . . Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it.

The Ibanez decision has already garnered lots of attention, both in the major media and in numerous trade publications.  Here, for example, is some good, detailed reporting from Reuters.  Opinions on the significance of the decision run the gamut from potentially apocalyptic to a positive development for mortgage lenders.  I tend to line up with those who see the decision as important within Massachusetts (though not as damaging as some believe), but with little significance beyond our borders, for several reasons:

  • as the SJC noted, its decision is based on the language of the key Massachusetts statutes; other states’ statutes may provide more room for banks to argue that their documented entitlement to an assignment of the mortgage is sufficient to foreclose
  • the SJC took pains to point out that mortgage assignments don’t have to be recorded (or even in recordable form) prior to foreclosure; they simply must be effectuated by that time
  • Massachusetts is one of 27 states with a non-judicial foreclosure process; in states with a judicial process, the foreclosing party receives the court’s blessing in advance, making a successful post-foreclosure challenge less likely 

Beyond its short-term effect as yet another “wake-up call” for lenders to be more exacting as they move through the foreclosure process, and for borrowers in foreclosure to more carefully scrutinize the foreclosing party’s authority to proceed, I don’t see Ibanez having much impact nationally.  Within Massachusetts, I expect lenders will make sure their paperwork is in order – and their assignments are in hand – before proceeding with any future foreclosures.  As to already-completed foreclosures, we may well see a wave of litigation challenging their validity, though the level of investigation required to figure out which foreclosures are actually vulnerable should keep that wave from reaching tsunami proportions.  The wave will crest and eventually subside, with lenders, owners of mortgage-backed securities and title insurers all paying a price, but with no one drowning – at least not because of Ibanez.