Friday, January 7, 2011

If this were only a hand slap...Banks lose in court and stock market

Today, the Massachusetts Supreme Judicial Court issued an opinion on a case involving mortgage backed securities, trust funds, foreclosure, lying, fraud, coercion, and all around baddy-bad-bad badness.

Two banks, US Bank and Wells Fargo, were the banks that purportedly held the mortgages on two homes belonging to the Ibanez family and the LaRace family.  The problem on the Ibanez home, which is the headliner property in the opinion that can be found as a slip opinion here, U.S. BANK NATIONAL ASSOCIATION, trustee  vs. Antonio IBANEZ, is that US Bank didn't finish most of its documentation of owning the home until after the foreclosure process had occurred.  In fact, if it hadn't been for Mr. Ibanez being a service member, this case may have never even happened because Massachusetts is a nonjudicial foreclosure state like Washington.

Because Mr. Ibanez was a service member, the foreclosure had to proceed through the courts, and a challenge was issued against US Bank as to its ownership.  See, the note had passed from an originator to Option One Morgtgage Corp, a record holder, to Lehman Brothers Bank, FSB (now defunct) to Lehman Brothers Holdings Inc. who sold it to structured Asset Securiteis Corporation which deposited the note with US Bank National Association as the trustee for a MBS trust.  If you lost count, that was 8 different entities holding the note, supposedly.  The note was usually passed
"in blank" which means that the new holder's information wasn't filled out.  Crazy!

US Bank bought the Ibanez property for well below market value and also well below par value of the loan and asked the court to quiet title.  The court ruled against the Bank and held that the foreclosure sale was invalid because the mortgage had not been properly assigned. A motion to vacate the judgment was denied and the decision was appealed.

The bank had the authority to exercise the power of sale contained in the Ibanez and LaRace mortgages only if they were the assignees of the mortgages at the time of the notice of sale and the subsequent foreclosure sale. However, mortgage loans that are pooled together in a trust and converted into mortgage-backed securities, the underlying promissory notes serve as financial instruments generating a potential income stream for investors, but the mortgages securing these notes are still legal title to someone's home or farm and had to be treated as such.
U.S. Bank argued that it was assigned the mortgage under the trust agreement described in the PPM, but it did not submit a copy of this trust agreement to the judge. The PPM, however, described the trust agreement as an agreement to be executed in the future, so it only furnished evidence of an intent to assign mortgages to U.S. Bank, not proof of their actual assignment. Even if there were an executed trust agreement with language of present assignment, U.S. Bank did not produce the schedule of loans and mortgages that was an exhibit to that agreement, so it failed to show that the Ibanez mortgage was among the mortgages to be assigned by that agreement.

The court concluded that  the banks were not holders of the mortgages at the time of foreclosure and thus did not obtain title at the foreclosure sale.  What does this mean for the homeowners.  Well, a person that gives a mortgage is called a mortgagor and holds superior title to everyone except the mortgagee (the person receiving the mortgage and usually the one lending money), so the houses must revert to the Mortgagor, the homeowner.

There is no question that the homeowner defaulted.  The issue really was whether the banks had the right to do what they did.  In a concurring opinion, Judge Cordy stated "what is surprising about these cases is not the statement of principles... but rather the utter carelessness with with the plaintiff banks documented the titles to their assets."  This carelessness is where homeowners can forestall the process because the banks have to prove that their title is superior and they have the right to foreclose.  The unfortunate issue though, is that the only way to do that is to get into a legal battle in nonjudicial foreclosure states like Washington.

My offices are preparing a number of complaints against MBS  trust held mortgages as an effort to restrain a nonjudicial foreclosure.  Certainly there is risk in this activity, but at the same time, the ability to hold title to your property and live in it until the bank can establish its superior title is very powerful.

What does this mean for the overall economy?  Well, this could be catastrophic.  In a Reuter's article that I read, the ticker down the side showed the major banks shedding percentage points today on the news. The banks are going to the cleaners over this, the only way to prevent this type of opinion from destroying our title system is to have a legislative forgiveness passed on the MBS community.  The only way for that to come about though is for some chaotic repentance in the courts first.

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