By Richard D. Vetstein, ESQ
Barely 24 hours old - the Massachusetts Supreme Judicial Court's U.S. Bank v. Ibanez decision is already a huge national story. CNN-Money calls it a "beat down" of the big banks. Reuters says its a "catastrophe risk" for banks. The Huffington Post claims there's some Obama Administration-Bank of America conspiracy in play. The ruling has spooked investors, as bank stocks were down in reaction to the ruling. (Update: 1.9.11) In obvious reaction to the ruling, a coalition of seven major public pension systems called on
the boards of directors of Bank of America, Citigroup, JP Morgan Chase,
and Wells Fargo to immediately undertake independent examinations of
the banks' mortgage and foreclosure practices.
The case certainly has national implications as the SJC is the first
state supreme court to weigh in on this particular issue, and the
majority of states have laws similar to Massachusetts' regarding the
assignment of mortgages, such as California and Georgia. Other courts
across the country will likely be influenced by the ruling, and the SJC
is widely regarded as one of the most respected state supreme courts in
the country.
But is the Ibanez ruling really the next Foreclosure Apocalypse?
That remains to be seen. But the answer to the question will likely rest with what has transpired under little-known, complex mortgage securitization pooling and servicing agreements,
known as PSA's. These complex agreements may unlock the key to who, if
anyone, owns these non-performing mortgage loans and has the legal right
to foreclose.
The Ibanez Fact Pattern: Mortgage Assignments In Blank, A Common Practice
On December 1, 2005, Antonio Ibanez took out a $103,500 loan for the
purchase of property at 20 Crosby Street in Springfield, MA secured by a
mortgage to the lender, Rose Mortgage, Inc. The mortgage was recorded
in the county registry of deeds the following day. Several days later,
Rose Mortgage executed an assignment of this mortgage in blank, that is,
an assignment that did not specify the name of the assignee. The blank
space in the assignment was at some point stamped with the name of
Option One Mortgage Corporation (Option One) as the assignee, and that
assignment was recorded in the registry of deeds on June 7, 2006. Before
the recording, on January 23, 2006, Option One also executed an
assignment of the Ibanez mortgage in blank.
Option One then assigned the Ibanez mortgage to Lehman Brothers Bank,
FSB, which assigned it to Lehman Brothers Holdings Inc., which then
assigned it to the Structured Asset Securities Corporation, which then
assigned the mortgage, pooled with approximately 1,220 other mortgage
loans, to U.S. Bank, as trustee for the Structured Asset Securities
Corporation Mortgage Pass-Through Certificates, Series 2006-Z. With this
last assignment, the Ibanez and other loans were pooled into a trust
and converted into a mortgage-backed securities pool that was bought and
sold by investors.
On April 17, 2007, U.S. Bank started a foreclosure proceeding in
Massachusetts state court. Although Massachusetts requires foreclosing
lenders to follow the Soldier's and Sailor's Servicemember's Act to
ensure the debtor is not in the military, it is considered a
non-judicial foreclosure state. In the foreclosure complaint, U.S. Bank
represented that it was the "owner (or assignee) and holder" of the
Ibanez mortgage. At the foreclosure sale on July 5, 2007, the Ibanez
property was purchased by U.S. Bank, as trustee for the securitization
trust, for $94,350, a value significantly less than the outstanding debt
and the estimated market value of the property.
On September 2, 2008-14 months after the foreclosure sale was
completed - U.S. Bank obtained an assignment of the Ibanez mortgage.
The major problem was that as the time U.S. Bank initiated the
foreclosure proceeding, it did not possess (and could not produce
evidence of) a legally effective mortgage assignment evidencing that it
held the Ibanez mortgage.
Securitized Pooling and Servicing Agreements
Almost all sub-prime mortgages and millions of conventional mortgages
originated before the mortgage meltdown in 2008 were packaged in
securitized mortgage securities and sold off to Wall Street investors. Securitized
mortgages currently comprise over half, or $8.9 trillion, of the $14.2
trillion in total U.S. mortgage debt outstanding.
Pooling and Servicing Agreements are part of the complex mortgage securitization lending agreements. As one securitization expert explains,
a Pooling and Servicing Agreement is the legal document creating a
residential mortgage backed securitized trust. The PSA also establishes
some mandatory rules and procedures for the sales and transfers of the
mortgages and mortgage notes from the originators to the securitized
trusts which hold the millions of bundles of mortgage loans.
Here is a sample Pooling and Servicing Agreement. Quite complex, as you can see. Most PSA's are supposed to be filed with the SEC by law. Here's a guide to find your loan in a securitized PSA using the SEC system.
The Ibanez Ruling
The Ibanez ruling clearly invalidates a common practice in
the sub-prime mortgage securitization industry of assigning the
mortgage in blank and not recording it until after the foreclosure
process has started. The Court held that there must be evidence of a
valid assignment of the mortgage at the time the foreclosure process
starts which would establish the current ownership of the mortgage.
Left open by the Court was what evidence would suffice to establish such ownership, specifically referencing PSA's:
"We do not suggest that an assignment must be in
recordable form at the time of the notice of sale or the subsequent
foreclosure sale, although recording is likely the better practice. Where
a pool of mortgages is assigned to a securitized trust, the
executed agreement that assigns the pool of mortgages, with a
schedule of the pooled mortgage loans that clearly and specifically
identifies the mortgage at issue as among those assigned, may
suffice to establish the trustee as the mortgage holder. However,
there must be proof that the assignment was made by a party that
itself held the mortgage."
This language opens the door for Massachusetts foreclosing lenders
to move ahead with foreclosures and cure title defects by using PSA's
to prove proper assignment of the mortgage loans. That is, if they can
produce proper documentation that the defaulting mortgage was actually
transferred into the pool and assigned to the end-holder before the
initiation of foreclosure proceedings. Whether lenders can do this is
another story.
Have Lenders Complied With The PSA's?
The major problem for banks is mounting evidence is that originating
lenders like Countrywide and Bank of America never transferred a vast
number of loans into the securitized trusts in the first place. Josh
Rosner, a well respected financial analyst, issued a client advisory
in October, advising of widespread violations of pooling and servicing
agreements on mortgages. Mr. Rosner counseled that although PSA's
require transfer of the promissory notes into the securitized trusts,
that hardly ever occurred in the white hot run-up of securitized loans
in the last decade. He also says that the mortgage assignments which
must accompany each note are routinely ignored or left blank. (This was
the major problem in the Ibanez case).
Mr. Rosner said:
"We believe nearly every single loan transferred was
transferred to (securitized trusts) in "blank" name. That is to say the
actual loans were apparently not, as of either the cut-off or closing
dates, assigned to the (securitized trusts) as required by the PSA."
Mr. Rosner concludes in this chilling statement:
There have been a large numbers of foreclosure
proceedings where, because of improper assignments, the trust has been
unable to demonstrate the right to foreclose. It is thus that we raised
concern about the transfer "in blank name." We do believe it likely the
rush to move large volumes of loans may well have resulted in
operational failures in the "true sale" process by some selling firms
and trustees. Were this "missing assignment" problem, which we are
witnessing in individual foreclosure proceedings, to be found to have
resulted from widespread failure of issuers and trusts to properly
transfer rights there would be appear to be a strong legal basis for the
calling into question securitizations.
Mr. Rosner's theory has been born out in court testimony. In a New
Jersey bankruptcy case, a senior Bank of America manager admitted that Countrywide Loans routinely failed to transfer promissory notes as part of the securitization process. Countrywide, of course, went under but not after originating billions in loans.
But no one really has a handle on how widespread these irregularities are.
Apocalypse Now?
If, in fact, there exists widespread legal failure of securitized
mortgage pools, as Mr. Rosner, theorizes, then we are possibly facing
the Apocalypse Scenario, calling into question the legal and financial soundness of a large portion of the U.S. securitized mortgage market. Securitized mortgages comprise over half, or $8.9 trillion, of the $14.2 trillion in total U.S. mortgage debt outstanding.
"It may mean investors who think they bought mortgage- backed securities bought securities that aren't backed by anything," said Kurt
Eggert, a professor at Chapman University School of Law in Orange,
California. Well, that's already happened. Check out this lawsuit by MBIA Insurance against Credit Suisse 0ver a bad securitization loan deal.
Before the Ibanez ruling came down Bloomberg News
said the best scenario is that the disputes are deemed as legal
technicalities, which would cause a one-year delay in foreclosures. In
the medium case, years of litigation will ensue. In the worst case, the
problem becomes systemic, causing "the mortgage market to grind to a
halt as title insurers refuse to insure mortgages involving existing
homes."
Well, we now know from the Ibanez decision that this is hardly a "legal technicality." So we are in the medium or worst case scenarios.
For those thousands (or millions?) of defaulted loans which were
"assigned in blank," I'm simply not sure if or how mortgage lenders are
going to be able to cure the title defects they created. It's going to
take some major effort and creative lawyering, that's for sure.
Rather scary, huh?
Don't Believe The Hype?
Not all investment analysts, however, expect financial chaos. The
controversy may cause a six-month delay in foreclosures and "have a
muted effect on valuation" of about $154 billion of mortgage-backed
securities, Laurie Goodman, senior managing director of Amherst
Securities Group LP in New York, wrote in a note to investors.
"Servicers will incur high costs both from re-processing loans that are
in the process of foreclosure as well as from defending themselves in
litigations," Goodman wrote. "And investors definitely need to question
the cash flows they are receiving on private-label MBS, to ascertain
that they are not paying for expenses that rightfully belong to
servicers."
How many pools of mortgage loans are affected by the "assignment in
blank" and related irregularities in the servicing pools? I haven't been
able to find any firm data.
For the sake of our economy, I hope that this mess can be fixed at minimal cost to taxpayers and distressed homeowners alike!
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Mr. Vetstein has represented clients in hundreds of lawsuits and disputes involving business, real estate, construction, condominium, zoning, environmental, banking and financial services, employment, and personal injury law.
In real estate matters, Mr. Vetstein handles residential and commercial transactions and closings. In land use, zoning, and licensing matters, Mr. Vetstein offers his clients an inside perspective as a former board member of the Sudbury Zoning Board of Appeals. Mr. Vetstein has an active real estate litigation practice, and was a former outside claims counsel for a national title company.
Drawing on his own business degree and experience, Mr. Vetstein assists his business clients with new business start ups, acquisitions, sales, contract, employment issues, trademarks, and succession planning. Mr. Vetstein also litigates, arbitrates and mediates a wide variety of commercial disputes.