In what could become a major decision for homeowners trying to keep their homes from going into foreclosure, and maybe even those trying to win their former houses back, a Massachusetts judge decided this week that banks must actually prove they own a mortgage before they can foreclose on it.
And if a bank does foreclose on the basis of shoddy paperwork, the whole process is legally invalid, as if the sale did not happen. Which could mean that former homeowners may be able to reclaim their lost houses.
Selling a house the bank cannot prove it owns makes the sale “void,” according to a decision by Massachusetts Supreme Court Judge Ralph D. Gants. That means the banks in the case, U.S. Bancorp and Wells Fargo, had no legal right to foreclose on the two homeowners who brought the case.
“This is the first court to say directly, ‘it doesn’t matter if there are large dollars involved or if it is convenient to ignore governing laws. You are bound to the laws just like the rest of us are,'” said Paul Collier III, a lawyer who represented the homeowners, told American Banker. Collier did not return our calls seeking comment.
The reasoning behind the decision is layered in the complexities of the mortgage securitization process, but it could have big implications. On July 5, 2007, U.S. Bank foreclosed on the mortgage of Antonio Ibanez, and bought his house in Springfield, Mass., at auction. The same day, Wells Fargo foreclosed on Mark and Tammy LaRace.
The problem: Neither bank had the documents to prove that it owned either loan, and thus had the power to foreclose. What each one had instead were hundreds of pages of documents showing how the mortgages passed from the original mortgage broker all the way to the bank investors who eventually came to own them.
In the case of Antonio Ibanez, the process looked like this: His mortgage for $103,500 on a house at 20 Crosby Street in Springfield, Mass., originally came from Rose Mortgage, Inc. Several days later, Rose Mortgage passed the mortgage on to Option One Mortgage Corporation, which passed it to Lehman Brothers Bank, which passed it to Lehman Brothers Holdings Inc., which passed it to Structured Asset Securities Corporation, which finally packaged it together with 1,220 other mortgages and sold them all to a trust owned by U.S. Bank.
At each point in that six-step process, both parties had to sign an “assignment letter” to document the sale from one owner to the next. Some of the assignment letters controlling the transfer of the Ibanez mortgage were done “in blank,” which means the line where the new owner’s name should have appeared as left blank.
Other letters are simply missing.
“U.S. Bank did not provide the judge with any mortgage schedule identifying the Ibanez loan as among the mortgages that were assigned in the trust agreement,” Judge Gants wrote in his decision. A similar breakdown in the documentation process prevented Wells Fargo from proving that it owned the mortgage on the LaRace house.
The decision strikes a major blow to the central argument by banks and the securitization industry in such cases, that contracts passing mortgages from one owner to the next show the general intent of everyone involved, and are enough to prove ownership. We called the American Securitization Forum for comment, but they did not respond.
Wells Fargo’s stock price dropped $1.10, or 3.4%, after the decision was reported. US Bancorp’s stock fell 28 cents, or 1.1%. Both banks released statements disagreeing with the decision, saying that the documentation failures affected the parties that came before them in the securitization process.
“The issues addressed by the court revolved around the process of servicing the loan on behalf of the securitization trust, which was performed in this case by the servicer, American Home Mortgage,” US Bancorp said.
Image: Taber Andrew Bain, via Flickr.com