Compliance and Foreclosures in Massachusetts

Compliance and Foreclosures in Massachusetts

Why is the foreclosure machinery of our nation's largest banks grinding to a halt? Failure to follow the legal rules. In other words: Compliance Failure.

The latest comes from my home state of Massachusetts. The state's highest court ruled that two foreclosures were invalid because they were not properly assigned to the foreclosing party.

The theory of simply trading mortgage notes ran into the reality of real estate law. The foreclosure process and laws are different in every state. There are 23 states that require approval of a court to get a foreclosure order. These have been labeled the "judicial states." The remaining states do not require court action. In non-judicial states, banks aren't required to submit anything to the court until they are sued by a homeowner seeking to stop a foreclosure.

These homeowners sued because the assignments to the foreclosing lender were missing at the time of foreclosure. The financial institutions finally sorted out the mess and executed the assignments after the foreclosure sale.

We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure. As a result, they did not demonstrate that the foreclosure sales were valid to convey title to the subject properties, and their requests for a declaration of clear title were properly denied.

The decision does not seem to extinguish the mortgage debt, it merely invalidates the foreclosure process. There is some doctrine that the mortgage follows the note. That seems to be brushed aside when it comes to the foreclosure process.

I don't think it's the lenders who are the ultimately the losers in this case. Now that the assignments are in order, they can go back and re-start the foreclosure process. For sure they are losing money. But it's not the nuclear effect of having to walk with empty hands.

The group with the problem are the people who bought foreclosed property from lenders. If an assignment is missing, the foreclosure is improper and the lender never obtained good title to the property. That means there was no transfer to the purchaser. If that person did not purchase an owner's policy of title insurance, they are in trouble. At best, they will have trouble refinancing the home and selling at home. At worst, the original property owner is going to come back for the property.


For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.