US Bank v Ibanez: More chaos in housing

The Massachusetts Supreme Judicial Court issued a much anticipated decision today that, while properly decided, will result in further damage to our country’s already injured housing market. Here are the facts of US Bank v Ibanez: In December 2005, Antonio Ibanez borrowed $103,000 from Rose Mortgage Company to finance the purchase of a home in Springfield. The loan was secured by a mortgage on the home.

Almost immediately, Rose Mortgage injected Ibanez’s promissory note and mortgage into the national securitization stream, transferring it to Option One which transferred it to Lehman Brothers which transferred it to Structured Asset Securities Corporation which transferred it along with 1200 other mortgages to US Bank as trustee for a pool of mortgage-backed securities that were sold to investors. As was the prevailing practice in the lending industry at the time, the legal documents needed to properly effectuate all of these transfers were either incomplete, inaccurate, or non-existent.

In the meantime, Mr. Ibanez defaulted on his loan and US Bank foreclosed, purchasing the property for itself at the auction. When US Bank sought to sell the property to a third party, the various assignment documents tracing ownership of the mortgage from Rose to US Bank were nowhere to be found. US Bank filed a petition in the Land Court requesting the judge to rule that US Bank had good title to the property. The Land Court judge disagreed, ruling that because US Bank was unable to document its status as holder of the mortgage, its foreclosure was invalid. US Bank appealed to the Massachusetts Appeals Court but recognizing the far-reaching implications of this case, the Supreme Judicial Court agreed to decide the matter immediately.

In affirming the decision of the Land Court, the SJC held that an assignment of some type must have been in existence before a foreclosure may be conducted. Unfortunately, the practice in the national lending industry during this past real estate bubble was so shoddy and so contrary to nearly 350 years of real estate practice, that problems of this type might exist in a majority of all foreclosures (and this case does apply retroactively to foreclosures already conducted).

In spite of this, I don’t think the result is as apocalyptic as many may portray it although it still presents a substantial glitch in the land records system. Certainly the most prudent course for any future foreclosure is to be sure the proper assignments in their traditional form are completed and recorded in the proper sequence – that’s the only way to “foreclose” an endless stream of questions and doubts from future attorneys who are assessing the state of the title. But that’s not what the SJC ruling requires which is a good thing since so many parties to the securitization chain either no longer exist or exist only as a different corporate entity. If the original lender no longer exists, how can it produce a valid assignment if one didn’t exist before its demise?

What the SJC requires is sufficient evidence that the assignment was completed before the assignment actually took place. That evidence must be a writing, signed by the party doing the transfer and adequately describe the mortgage being transferred. What might satisfy that evidentiary requirement is almost limitless. It might be an email or a cover letter or a computer printout. So the first problem is one of evidence. Who has custody of all of this documentation (in both paper and electronic form) and who can find it? As the whole robo-signing controversy shows, this industry paid little attention to the details of documenting these transactions so trying to reconstruct what was shoddy documentation in the first places is a big obstacle.

The second big issue is who is to be the judge of this evidence? For every non-traditional assignment (meaning anything that is not the written, signed, notarized document recorded at the registry of deeds) someone has to determine whether the evidence presented is sufficient. Does it have to be a judge? Or will the title insurers come to some type of consensus on what constitutes adequate proof – will an affidavit by an attorney attaching copies of email, printouts, etc, that establish the chain of ownership of the mortgage that all then gets recorded at the registry of deeds be sufficient?

Until these and other questions are resolved, thousands of properties that have foreclosures in their past but were now thought to have passed cleanly to a new homeowner will re-emerge, zombie-like, as problem properties once again.