The day after I posted "As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies" wherein I made clear my opinion that the legal and litigation risks that the banking industry faces is woefully underestimated, the Massachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifies and vindicates my post from the day before, which also contained links to other posts which any declared sensational just a few days before, ex., The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. This is a very big deal since it actually unravels many thousands of foreclosures and sets precedent to be examined across the country (all 50 state's attorney generals are looking into fraudclosure issues) that will really cause material damage to the banks that are pursuing (have pursued) said foreclosures. As reported in the Massachusetts Law Blog:

Breaking News (1.7.11): Mass. Supreme Court Upholds Ibanez Ruling, Thousands of Foreclosures Affected

Update (2/25/10) - Mass. High Court May Take Ibanez Case

Breaking News (10/14/09) - Land Court Reaffirms Ruling Invalidating Thousands of Foreclosures. Click here for the updated post.

None of this is the fault of the [debtor], yet the [debtor] suffers due to fewer (or no) bids in competition with the foreclosing institution. Only the foreclosing party is advantaged by the clouded title at the time of auction. It can bid a lower price, hold the property in inventory, and put together the proper documents any time it chooses. And who can say that problems won't be encountered during this process?... Massachusetts Land Court Judge Keith C. Long

"[W]hat is surprising about these cases is ... the utter carelessness with which the plaintiff banks documented the titles to their assets." -Justice Robert Cordy, Massachusetts Supreme Judicial Court

Today, the Massachusetts Supreme Judicial Court (SJC) ruled against foreclosing lenders and those who purchased foreclosed properties in Massachusetts in the controversial U.S. Bank v. Ibanez case...

... For those new to the case, the problem the Court dealt with in this case is the validity of foreclosures when the mortgages are part of securitized mortgage lending pools. When mortgages were bundled and packaged to Wall Street investors, the ownership of mortgage loans were divided and freely transferred numerous times on the lenders' books. But the mortgage loan documentation actually on file at the Registry of Deeds often lagged far behind.

In the Ibanez case, the mortgage assignment, which was executed in blank, was not recorded until over a year after the foreclosure process had started. This was a fairly common practice in Massachusetts, and I suspect across the U.S. Mr. Ibanez, the distressed homeowner, challenged the validity of the foreclosure, arguing that U.S. Bank had no standing to foreclose because it lacked any evidence of ownership of the mortgage and the loan at the time it started the foreclosure.

Mr. Ibanez won his case in the lower court in 2009, and due to the importance of the issue, the Massachusetts Supreme Judicial Court took the case on direct appeal.

The SJC Ruling: Lenders Must Prove Ownership When They Foreclose

The SJC's ruling can be summed up by Justice Cordy's concurring opinion:

"The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court's opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated."

The Court's ruling appears rather elementary: you need to own the mortgage before you can foreclose. But it's become much more complicated with the proliferation of mortgage backed securities (MBS's) -which constitute 60% or more of the entire U.S. mortgage market. The Court has held unequivocally that the common industry practice of assigning a mortgage "in blank" -- meaning without specifying to whom the mortgage would be assigned until after the fact -- does not constitute a proper assignment, at least in Massachusetts.

This is a very interesting development, and I would like to make note that the buck stops here since this is Supreme Court. I normally do not excerpt or quote this much of another blog or news source, but since the content is legal in matter and this particular blog (Massachusetts attorney) appears to have put a strong legal analysis on the topic, I will continue. I urge others to visit the Massachusetts Law Blog for more info. Back to his write-up...

• Despite pleas from innocent buyers of foreclosed properties and my own predictions, the decision was applied retroactively, so this will hurt Massachusetts homeowners who bought defective foreclosure properties.

• If you own a foreclosed home with an "Ibanez" title issue, I'm afraid to say that you do not own your home anymore. The previous owner who was foreclosed upon owns it again. This is a mess.

• The opinion is a scathing indictment of the securitized mortgage lending system and its non-compliance with Massachusetts foreclosure law. Justice Cordy, a former big firm corporate lawyer, chastised lenders and their Wall Street lawyers for "the utter carelessness with which the plaintiff banks documented the titles to their assets."

• If you purchased a foreclosure property with an "Ibanez" title defect, and you do not have title insurance, you are in trouble. You may not be able to sell or refinance your home for quite a long time, if ever. Recourse would be against the foreclosing banks, the foreclosing attorneys. Or you could attempt to get a deed from the previous owner. Re-doing the original foreclosure is also an option but with complications.

• If you purchased a foreclosure property and you have an owner's title insurance policy, you have a potential claim against the title policy. Contact our office for legal assistance.

Here he puts in some self promotion, but hey... I'm one to talk. I actually appreciate the legal analysis and am glad to have him offer services in the arena.

• The decision carved out some room so that mortgages with compliant securitization documents may be able to survive the ruling. This will shake out in the months to come. A major problem with this case was that the lenders weren't able to produce the schedules of the securitization documents showing that the two mortgages in question were part of the securitization pool. Why, I have no idea.

• The decision, however, may not prove to be anywhere near the Apocalypse it's been hyped to be. The Court said that "[w]here a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder. However, there must be proof that the assignment was made by a party that itself held the mortgage." This opens the door for foreclosing lenders to prove ownership with proper documents. Furthermore, since the Land Court's decision in 2009, many lenders have already re-done foreclosures and title insurance companies have taken other steps to cure the title defects.

I am not a lawyer and this is not my purview, but things may not be quite that simple. The securitized trust documents themselves have timing issues that may come into play. See the email chain conversation below for more on this topic.

• The ruling may be limited only to Massachusetts and states operating under a non-judicial foreclosure and "title theory" laws. The Court was careful to point out that Massachusetts requires very strict compliance with its foreclosure laws. The reason for that is Massachusetts is a non-judicial foreclosure state-meaning lenders don't need a court order to foreclose-and that the state operates under the "title theory" which is a fancy way of saying that the bank is really the legal owner of your house.

• Watch for class actions against foreclosing lenders, the attorneys who drafted the securitization loan documents and foreclosing attorneys. Investors of mortgage backed securities (MBS) will also be exploring their legal options against the trusts and servicers of the mortgage pools.

It appears as if he contradicted his statement above. I can practically guaranteed that this significantly increases the risk. volume and velocity of litigation. Think about it. If you were a REMIC investors, would you be sitting pat, or calling your attorney.

• The banking sector has already dropped some 5% today (1.7.11), showing that this ruling has sufficiently spooked investors. (But Merrill Lynch just went on a buying spree on the banking sector-showing that the real experts are betting that this decision and others which will follow will not substantially affect banks' profitability).

I have absolutely no idea what he means by Merrill Lynch going on a buying spree - actually using their (BofA's) balance sheet? I seriously doubt so. I also take umbrage to the assertion that Merrill Lynch constitutes a "real expert"(s) in terms of mortgage and real estate valuation and risk assessment, since they "experted" themselves into a near collapse over these very same assets.

Interested parties may download the actual ruling here: Ibanez-Case-JAN-2011. I actually engaged in an interesting email exhange with a BoomBustBlogger over this fraudclosure issue, and would like to share the email chain with the blog.

10/21/10

Reggie,

You see that the various large shoes we were discussing have begun dropping. Multi-billion dollar demands by non-agency bondholders for putbacks, and now the government is being forced to take action. I read elsewhere that a group of hedge funds is organizing for a similar demand. I view with interest the tiny levels at which the banks are reserving against these events in comparison with the present (and probable future) size of the put-back demands. Again, this is only ONE tentacle of the monster.

So far, the putback demands appear to be merely rep and warranty driven, i.e, the failing loans do not meet the underwriting requirements as represented in the prospectus. This does not implicate the REMICs' tax-exempt status. However, as claims for wrongful foreclosure based on the failure of loans to be properly deposited into trust are proved true -- or as the same facts are brought to light by 50 state attorneys general -- it will be implicated. This may produce a larger wave of claims by bondholders, both because of the loss of tax structure as represented and warranted, and because the knowing failure to properly deposit the loans (which will be inferred from the systematic extent of the failure) may support securities fraud claims. I will be very interested to see how you quantify the size of the problem for the banks.

1/1/10

Reggie:

... I assume you saw stories on the Mass. Court ruling in Ibanez. The obvious question was, "Why didn't they just back up and start over after getting the assignments done correctly?" The answer: They had no choice but to either litigate the homeowners into submission or pay the homeowners to go away. They chose the former strategy and it failed. Why did they have those choices? As you and I discussed awhile back: the REMIC. If the loans were not originally assigned to the trust by the deadline, the REMIC lost its special tax status, and the banks were forced into the argument that an after-the-fact assignment had the effect of an original timely assignment (so that, getting a state court to bite on this, they could then go argue the same point to the IRS, i.e., "no harm no foul"). The Mass. Court, to its credit, saw through the bullshit and upheld the rule of law.

The implications of this for the REMICs (actually, the banks that created and sold them) and homeowners going forward are huge. Homeowners can now see the light, and if there's any question about the ownership of the loan, stick a hot poker in that issue (demand proof of ownership, either directly before litigation or in discovery when litigation has started) until the banks cry uncle, meaning pay through the nose to buy off the homeowners and save the REMIC's tax status. The banks face the prospect of enormously increased costs, for any of: (a) litigation expenses as this issue becomes harder fought by the homeowners; (b) increased settlement costs as homeowners realize their advantage and demand more pounds of bank flesh to go away; or (c) payments to REMIC investors for losses caused by the banks' failure to properly assign the loans in the first place. Who's going to suffer the worst?

Again, JPM et. al. have been much too optimistic in reserving for these occurrences, as clearly detailed in my post As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. The legal costs looked bad before this decision, as stated in As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies and it simply looks much worse now. To think, so called experts wonder why I am bearish on JP Morgan and the big banks...

... There is no chance for appeal in the Mass case; the decision came from the state's highest court. This quote from the court illustrates that this was not rocket science; the banks' lawyers never should have taken the risk of the appeal rather than settling and leaving the record with an unreported trial court decision of much less import:

"The legal principles and requirements we set forth are well established in our case law and our statutes. All that has changed in the plaintiffs' apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities."

... I agree with everything in your post ["As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies"]. I noted someone's comment about BAC's settlement with Fannie and Freddie (paying about 2 cents on the dollar to eliminate hundreds of billions of putback claims, a bailout in disguise for which somebody should go to jail). Otherwise, I think the banks differ from the tobacco companies in a couple major respects: (a) they don't sell an addictive product which may be somewhat economically insensitive; and (b) they don't have access to overseas growth like the tobaccos do. By failing to adequately reserve and kicking the can, they're making the end only that much bloodier (or betting on TARP II, III and IV, which may not be a bad bet).

Actually, the banks did have an overseas growth model, the sales of securitized products. One would have thought that that model had come to an end due to the crash and burn effect, alas it has not and the reason is because the banks due sell what appears to be an addictive product.

1. The reach for unrealistically high yields in the case of yield hungry institutional investors such as pension funds. As stated Reggie Middleton vs Goldman Sachs, part 1, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and "Blog vs. Broker, whom do you trust!," Goldman's peddling of products often spells doom for the consumer (client) and bonus for the producer (Goldman). Goldman is now underwriting CMBS under a broad fund our $19 billion bonus pool "buy" recommendation in the CRE REIT space reference Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off. Now, after all of the evidence that I have presented against the CRE space, who do you think would be better for clients net worth, Reggie's BoomBustBlog or Goldman? There is also the most recent evidence from just last week: Morgan Stanley Jingle Mail: Loses Properties To John Paulson Investment Consortium & Itself.

2. The satisfaction of the get rich quick(er) urges to be had in their retail, HNW and UHNW clients. A perfect example is the Facebook offering, of which I am preparing an extra special analysis for my blog's subscribers to be released in a day or two wherein I will show how those Goldman clients are throwing their money into the Goldman bonus pool/Facebook working capital fund abyss - that is if I haven't demonstrated such already:

   • Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
   • Here's A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
   • The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman's Facebook Fund Marketing Brochure Into Our Models

Now, back to the email exchange...

The limiting factors on the homeowner side are: (a) an imbalance of knowledge of their options as compared to the banks; and (b) an imbalance of resources ($) to pay lawyers to fight the banks. Although I think the internet and its democratic access to information changes the equation for the first issue, it's still like retailers selling gift cards - they make money because they know a large percentage of people will stick the card in the drawer and forget about it, and in doing so will have given the retailers free money. Many homeowners who are in position to challenge a foreclosure, and thereby squeeze a bunch of money out of the banks, never will. The $64 question is, how many will?

I have a very strong feeling that many distressed homeowners that read BoomBustBlog can be considered to be amongst that educated elite.

Now there's a state appellate court decision for every other state appellate court to look to for guidance. Stupid. This is like a case I had in federal court several years ago against the U.S. gov't. We obtained a ruling imposing estoppel against the gov't - which is nearly impossible to get. The gov't did NOT appeal that decision, only the decision granting us fees (which it lost). It avoided an appeal for the same reason - it did not want a Xth circuit decision upholding estoppel against it sitting out there for the rest of the world to model from.

The only logic that I see in the bank's decision to litigate was that if you pay off one homeowner, you create a pattern where you will end up having to pay off others until it get's to the point where you will have to litigate the issue to its ultimate conclusion anyway. Hard to say which route would have been more efficient and cheaper, but I do know that this is far from a desirable outcome for the banking industry.