The Massachusetts Supreme Court recently issued a ruling that calls into question a lender's ability to foreclose on securitized mortgages in certain circumstances. In a decision on combined cases involving U.S. Bank and Wells Fargo Bank, the Court invalidated two foreclosure sales because the foreclosing banks could not prove that they held the underlying mortgages at the time of the foreclosure sales on the properties due to faulty paperwork.

Case History

On July 5, 2007, U.S. Bank, in its capacity as a trustee for a pool of securitized residential mortgage loans, foreclosed on a mortgage given by Antonio Ibanez and purchased the real property subject to the Ibanez mortgage at the foreclosure sale. On the same day, Wells Fargo Bank, also in its capacity as a trustee for a pool of securitized residential mortgage loans, foreclosed on the mortgage of Mark and Tammy LaRace  and purchased the real property subject to the LaRace mortgage at the foreclosure sale. In September and October of 2008, each of U.S. Bank and Wells Fargo, respectively, brought an action seeking a declaration that title was vested in the plaintiff trustee in fee simple.  

Each case was heard by the applicable Massachusetts Land Court and, in each case, judgment was entered against the plaintiff trustee. The Land Courts ruled that the foreclosure sales were invalid because the mortgage assignments to the plaintiff trustees had occurred only after the foreclosure sales and thus the plaintiff trustees had no interest in the mortgages being foreclosed upon at the time of publication of the notices of sale or at the time of the foreclosure sales.

The Massachusetts Supreme Court heard the combined cases on appeal and affirmed the Land Courts’ decisions.

Massachusetts Supreme Court Decision

In the case of the Ibanez mortgage, U.S. Bank claimed that through a series of assignments, the Ibanez mortgage was eventually assigned to U.S. Bank pursuant to a  Trust Agreement. The Trust Agreement was described in a private placement memorandum (the “PPM”) issued in connection with a pool of residential mortgage loans into which the Ibanez loan was sold. The court found that the PPM described the Trust Agreement as an agreement intended to be executed in the future, so it only furnished evidence of an intent to assign certain mortgages to U.S. Bank, not proof of their actual assignment. Further, the court found that the last assignment of record of the Ibanez mortgage at the time of the foreclosure sale was to one of the intermediary assignees, not U.S. Bank, and therefore U.S. Bank did not have the authority to foreclose on the Ibanez mortgage because it was not the mortgage holder at the time of the foreclosure. In fact, it was not until more than one year after the foreclosure sale that an assignment of the Ibanez mortgage to U.S. Bank was recorded.

In the case of the LaRace mortgage, Wells Fargo presented to the court a pooling and servicing agreement (“PSA”) by and among Asset Backed Funding Corporation (“ABFC”), as depositor, Option One, as servicer, and Wells Fargo, as trustee, pursuant to which ABFC assigned its interest in certain mortgage loans to Wells Fargo. The court found that the schedule of loans being assigned pursuant to the PSA failed to identify with adequate specificity the LaRace mortgage, as it did not include property addresses, names of mortgagors or any number that corresponded to the loan number or servicing number of the LaRace mortgage. Further, the court found that there was no evidence that ABFC ever held the LaRace mortgage that it was purportedly assigning pursuant to the PSA. In fact, there was no evidence of an assignment to ABFC from the original mortgagee. Ten months after the foreclosure sale, the original mortgagee executed an assignment to Wells Fargo, but with an effective date predating the foreclosure sale.

The Massachusetts Supreme Court affirmed the decisions of the Land Court that neither U.S. Bank nor Wells Fargo had demonstrated that they were the holders of the Ibanez and LaRace mortgages at the time of the foreclosure sales on these properties, and therefore the banks had failed to demonstrate that they acquired fee simple title to these properties by purchasing them at the foreclosure sale.

Analysis

While each of the Ibanez and LaRace cases deal with residential mortgages and the foreclosing entity exercising its rights by power of sale pursuant to Massachusetts law, the same principals and findings could be to commercial mortgage loans, in Massachusetts and other jurisdictions. The securitization of commercial mortgages is common practice, and it seems likely that the identified shortcomings in residential mortgage foreclosures will eventually find their way into the commercial real estate lending marketplace. In the case of any foreclosure proceeding, prior to issuing a notice of sale or taking any other foreclosure action, the foreclosing entity should confirm that it is the present mortgage holder, whether by assignment or otherwise, and has the authority under applicable law to foreclose on the mortgage. It should also be noted that merely taking an assignment of debt without a valid written assignment of the mortgage underlying the debt may, as in Massachusetts, only give the assignee an equitable right to obtain an assignment of the mortgage. Further, while a prior assignment of a mortgage that was defective at the time or was not recorded may be confirmed by a written assignment post-foreclosure, a post-foreclosure assignment of mortgage with an earlier effective date cannot be used as a “confirmatory” assignment or relied upon to create a valid pre-foreclosure assignment where such a pre-foreclosure assignment did not, in fact, occur.

The case is U.S. Bank National Association, trustee v. Ibanez