Massachusetts Supreme Court Refutes Banks, Invalidates Foreclosures, in Landmark Ibanez Case.
January 7, 2010
In another blow to the banks, the Massachusetts Supreme Judicial Court (the SJC) released its eagerly awaited opinion in the case of U.S. Bank v. Antonio Ibanez. (The case was combined with a separate case presenting the same issue, Wells Fargo Bank, N.A. v. Mark A. Larace.)
In Ibanez, the SJC reviewed a lower court’s decision issued by Land Court Judge Keith C. Long, in which he invalidated two foreclosures because the banks did not hold valid assignments of the mortgages at the time they foreclosed.
The issue decided was whether a bank can foreclose without a valid assignment of a mortgage. The answer was a resounding “No.”
The banks, along with the bank-friendly Real Estate Bar of Massachusetts, have for years used the practice of “foreclose first, assign later.” The guidelines they have recommended stated that it is an acceptable practice to foreclose without having a valid assignment of a mortgage, so long as the mortgage is assigned sometime later. That is, a bank could foreclose on someone’s home even if they didn’t hold the mortgage.
Rejecting the banks’ argument that none of the bad foreclosures prior to this decision should be affected, the SJC wrote “The legal principles and requirements we set forth are well established in our case law and our statutes. All that has changed is the [banks’] apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.” In a separate statement, one judge wrote that “[w]hat is surprising about these cases is … the utter carelessness with which the [banks] documented title to their assets.” The SJC emphasized that not only is this the rule going forward, any previous foreclosures that did not comply with the foreclosure procedure are now invalid.
For better understanding, it is important to know that there are actually two documents involved in a mortgage, the promissory note and the mortgage. The promissory note is only for the loan of money that a homeowner took in order to purchase or refinance the house. (In fact, a bank could sue a delinquent homeowner on the note for money damages, but this almost never happens.) The mortgage is like a back-up in case the homeowner stops making payments on the note. Since the homeowner probably has no way of making up the payments, it would be pointless to sue them for the money owed. Instead, the mortgage says that if the note is in default, the bank has permission to sell the house to satisfy the monetary obligation.
The Ibanez decision also clarifies that banks must strictly comply with the foreclosure requirements set out by the Massachusetts Legislature in the foreclosure statute, M.G.L. c. 244, § 14. In Massachusetts, foreclosures do not need to be authorized by a judge because the state allows non-judicial foreclosures pursuant to another statute, M.G.L. c. 183, § 21. You can read a detailed explanation of Massachusetts foreclosure law and procedure.
What happened, however, because of the rampant securitization of mortgages in the 1990s and 2000s, is that the note became separated from the mortgage, leaving no one with the right to foreclose. In many states, the bank only needs to have possession of the promissory note to be able to foreclose. This is why many attorneys and homeowners are using the strategy of what many call “show me the note,” requesting that the bank provide the original note.
But in Massachusetts, the Ibanez decision clarifies that there are additional hurdles a bank must overcome in order to foreclose. Not only must it have the original note, it must also have an assignment of the homeowner’s mortgage. Although the assignment does not actually need to be recorded with the county registry of deeds, there still must be a written assignment that is dated prior to the time the bank started foreclosing. (To clarify, however, the foreclosing bank does not need to have an assignment of the promissory note; it only needs possession of it pursuant to the Uniform Commercial Code.)
What does this all mean? First, it means that the banks’ practice of back-dating mortgage assignments is officially ended. (After the original Ibanez decision, most banks stopped doing it anyway.)
It also means that homeowners in Massachusetts have another tool in their arsenal to stop a foreclosure. Not only does the bank need to show that it has the original note, it also has to show that it was assigned the mortgage before it initiated foreclosure proceedings.
Lastly, it reinforces the long-standing principle in Massachusetts that foreclosure is a strict process and that all the legal requirements must be complied with exactly. The foreclosing bank must “act in good faith and use reasonable diligence to protect the interests of the [homeowner].”
Foreclosure is an equitable proceeding, requiring fairness to homeowners at all stages of the process. Banks should not be permitted to disregard the law simply because it is their habit to do so (as the banks argued in the Ibanez case). There is an obligation to treat homeowners with respect and to protect their legal rights, no matter whether they are behind on their mortgages or current. This is merely an extension of the principle our country was founded on, equality before the law.
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If you are facing foreclosure, there are a number of ways to fight them if you engage a Massachusetts foreclosure lawyer, such as using the principles from the Ibanez decision, challenging predatory lending practices, non-compliance with the HAMP program, and numerous other methods. The worst thing you can do is nothing.