In a recent decision that has already received national publicity, the Massachusetts Supreme Judicial Court has become the first state high court to rule that mortgages securing loans that are pooled into a trust and converted into mortgage-backed securities must be specifically assigned to the foreclosing lender before the foreclosure is commenced. A discussion of the case — U.S. Bank National Association, trustee v. Antonio Ibanez (and a consolidated case, Wells Fargo Bank, N.A., as trustee v. LaRace) — follows.
In the U.S. Bank case, the underlying loan had been assigned to a securitization trust for which U.S. Bank was a trustee, but the mortgage securing the loan had not been assigned in any of four transactions that had occurred since the last assignment was recorded. The servicer of the trust foreclosed on the mortgage in 2007, and the foreclosure was not opposed by the borrower. The securitization trust then purchased the property at the foreclosure sale. More than a year after the foreclosure sale, and more than five months after the foreclosure deed was recorded, the record-holder of the mortgage assigned the mortgage to the trust.
The facts in the Wells Fargo case were similar. The trusts then brought actions in the Massachusetts Land Court for declaratory judgments that the mortgagors’ titles had been extinguished, and that they held title to the foreclosed properties. That Court disagreed, finding that the foreclosure sales were invalid, and the Supreme Judicial Court affirmed those judgments.
Massachusetts is not a state that requires judicial authorization to foreclose a mortgage. However, there is a statutory power of sale that requires strict compliance with its terms. One of those terms is that only the holder of the mortgage may commence a foreclosure.
The trusts claimed that the securitization documents they submitted to the Court made them the holders of the mortgages that they had foreclosed. However, the Court disagreed. None of the securitization documents contained any grant of the mortgages from the prior recorded holders to the trusts. Massachusetts law allows for the separate assignment of a note from the mortgage that secures the note. The Court held that in these cases, while the notes had been assigned, the mortgages had not been assigned.
The Court stated that an assignment of a mortgage need not be in recordable form prior to commencement of a foreclosure proceeding, but there must be proof that the mortgage was assigned to the foreclosing entity by the prior holder of the mortgage. That proof was lacking here.
Many other states have similar laws that govern non-judicial foreclosures, and a very large number of mortgage loans in virtually all states have been securitized. Therefore, this decision is going to be of interest to all lenders faced with the foreclosure of mortgages securing loans that were pooled into a trust and converted into mortgage-backed securities, to subsequent owners of foreclosed properties, and to the title insurance companies who have insured titles after such foreclosures have taken place.
It appears from the facts of the case that, as trustee, neither U.S. Bank nor Wells Fargo took any actions related to these mortgages and had no responsibility for the terms of the underlying mortgage, foreclosure procedure, the conduct of the servicer, the process by which the mortgage is transferred to the trust, or the sufficiency of the mortgage documentation. All challenged actions were taken by the trusts themselves.