The Massachusetts Supreme Judicial Court issued a new foreclosure decision yesterday in the case of HSBC Bank vs. Matt. But the SJC stated emphatically that it was not a foreclosure case. Except it was. The following is my explanation of the case and its significance. It’s a long explanation, but that’s the law. While it may seem like a narrow topic, mortgage foreclosures have had a profound effect on our economy and our lives, so it might be worth reading. The full decision is available here and my analysis follows:

As far back as the Civil War, Massachusetts has provided additional procedural protections to homeowners serving on active duty in the military when it comes to mortgage foreclosures. The home of a soldier can still be foreclosed upon, but only after a court ensures the soldier has ample right to respond. During World War Two, the Federal government extended that right to all servicemembers with the Soldiers and Sailors Civil Relief Act of 1942. Updated versions of that law continue in effect today but are administered by each state on a state-by-state basis.

In Massachusetts, compliance with the Servicemembers Civil Relief Act as its now called, involves a judicial proceeding brought by a creditor seeking to foreclose a mortgage. The sole issue in the case is whether the homeowner/lender or someone else with an interest in the case is serving in the military. (In most other states, compliance with this law is non-judicial; usually the creditor signs an affidavit stating the debtor is not serving in the military).

Most of the Massachusetts cases are filed in Land Court. After the complaint is filed by the creditor, the court issues an Order of Notice designed to inform the debtor of the pendency of the suit and inviting an answer if the debtor is in the military service. There are three methods by which the debtor is to be informed: a copy of the notice is served on the debtor either by a process server or by certified mail; a copy of the notice is published one time in a local newspaper; and a copy of the notice is recorded at the registry of deeds.

In this decision, the SJC was emphatic that the Servicemembers lawsuit is not part of the foreclosure process. While that is technically correct, the only reason a Servicemembers lawsuit would be filed would be as a precondition to foreclosure. So, entities like the Warren Group which is frequently quoted in the mainstream media in foreclosure stories, routinely tracks the filing of new Servicemember cases and announces the totals as “new foreclosure filings.” Similarly at the registry of deeds, we count the number of Orders of Notice recorded and give that total as “new foreclosures.” We all use this language as shorthand for the lengthy technical explanation offered above.

Which brings us to yesterday’s decision. Jodi Matt was a homeowner who fell behind on her mortgage and faced foreclosure. When she received her Order of Notice, she filed an answer to it with the Land Court even though she was not in the military. Her answer asserted that the plaintiff, HSBC Bank, was not the actual holder of the mortgage and therefore had no right to commence this proceeding. The Land Court judge ruled that because Matt was not in the military, she had no standing in the case. The judge entered judgment for the bank even though the bank had not yet been assigned the mortgage in question, reasoning that the bank was in the process of obtaining that mortgage and therefore had standing to prosecute this claim.

The SCJ disagreed with the Land Court judge regarding the rights of the bank, holding that an entity that files a complaint to foreclose a mortgage under Servicemembers must already hold that mortgage at the time the complaint is filed. Because a non-holder of a mortgage has no standing under Servicemembers, this issue goes to the subject matter jurisdiction of the court, thus it is in issue that must determined by the judge even if it is not raised by the parties to the suit. The SJC also stated unequivocally, that only homeowners currently on active duty in the military have any standing to file an answer in a Servicemembers case and that non-military homeowners are barred from filing an answer (and by extension raising ancillary issues about the propriety of the foreclosure) in such a proceeding.

The SJC did not state whether this decision would apply retroactively which is a big deal since lenders (I suspect) have routinely filed Servicemembers actions prior to receiving the mortgage by assignment. This would have no direct effect on an already-conducted foreclosure (unlike previous SJC decisions which would require foreclosure do-overs) however this case might void the prior Servicemembers action meaning the former homeowner could potentially have rights in the property provided he or she had been serving in the military. There is a fairly routine procedure to extinguish such rights after the fact (a Petition in the Land Court), but I suspect there will be a flood of these petitions filed after this case, so the process of adjudicating them will take time.

In summary, the two takeaways from this case are (1) homeowners facing foreclosure may not use the Servicemembers action to assert any defenses unless they are in the military; and (2) lenders seeking foreclosure of a mortgage must already have ownership of that mortgage before commencing any proceeding on the foreclosure, which is as it should be even though the banking and mortgage industry had grown used to shortcutting around such rules.