SJC upholds Ibanez

In a closely watched case, the Massachusetts Supreme Judicial Court has upheld a decision by the Land Court that invalidated two foreclosures because of missing assignments of mortgages. The companion cases involved home foreclosures in Springfield conducted by entities that had come into possession of the relevant promissory notes as part of a larger pool of mortgages that were repackaged and sold to investors. In both cases, the companion mortgages were not clearly assigned by the original lenders. When the entities claiming to be the present holders of the mortgage conducted foreclosure sales, there was no record that they were the legal holders of the mortgages. Both cases came to the Land Court via Petitions to Quiet (i.e., "Clear") Title brought by the lenders. Because the industry practice had been to not worry very much about assignments, no one involved expected the outcome to be anything but automatic in favor of the foreclosing lenders.

The trial judge thought otherwise. After trial and a subsequent hearing on a Motion to Vacate, Land Court Judge Keith Long ruled that neither lender had proven ownership of the mortgages that were foreclosed and that their titles were therefore defective. The lenders appealed and the Massachusetts Supreme Judicial Court allowed a Request for Direct Appellate Review. The case was argued before the SJC on October 7, 2010.

Today's decision, authored by Justice Gants, upholds the Land Court decision. The SJC makes clear that a recorded (at the registry of deeds) or even a recordable assignment is not required to effectively pass title. What is required is evidence of some writing or writings that establish a chain of ownership of the mortgage from the loan originator to the entity conduction the foreclosure. The opinion suggests that documents like the trust agreement between investors or the mortgage loan schedule offered by the banks as evidence of the assignment, may have been sufficient had they identified these particular mortgages with "adequate specificity." Such was not the case, however.

What are the implications of Ibanez? For every foreclosure (and for every post-foreclosure sale of a property)going back in time, the first step will be a search for pre-foreclosure assignments. If the assignments were on record and in the proper chronological sequence, then that should end the inquiry. If assignments are missing or if they are out of order, then I think that will qualify for a defect in the title. Whether that defect is curable is a question of fact in each case. Can the entity that conducted the foreclosure produce sufficient evidence to persuade a judge (or at least the next attorney rendering an opinion on the title) that the assignment was effectuated pre-foreclosure sale. If such evidence is not forthcoming, then the defective title remains.

I can't quantify how many foreclosures fall into this category, but given the shoddiness of the overall documents I saw being recorded throughout the recent housing boom, I suspect there are quite a few.