U.S. Bancorp and Wells Fargo & Co. lost a foreclosure case in Massachusetts's highest court that will guide lower courts in that state and may influence others in the clash between bank practices and state real-estate law. The ruling drove down bank stocks.
The state Supreme Judicial Court today upheld a judge's decision saying two foreclosures were invalid because the banks didn't prove they owned the mortgages, which he said were transferred into two mortgage-backed trusts without the recipients' being named.
Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co., called the decision "a landmark ruling" showing that at least in Massachusetts a mortgage "must name the assignee to be valid."
"This is likely to open the floodgates to more suits in Massachusetts and strengthens cases in other states," Rosner said.
"We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure," Justice Ralph D. Gants wrote for a unanimous court.
Wells Fargo, the fourth-largest U.S. lender by assets, fell 65 cents, or 2 percent, to $31.50 at 4:15 p.m. in New York Stock Exchange composite trading. U.S. Bancorp, the fifth-largest U.S. bank by deposits, declined 20 cents, or 0.8 percent, to $26.09.
BANK INDEX DROP
The 24-company KBW Bank Index fell as much as 2.4 percent after the decision was handed down.
Claims of wrongdoing by banks and loan servicers triggered a 50-state investigation last year into whether hundreds of thousands of foreclosures were properly documented as the housing market collapsed.
Although the decision was issued by a Massachusetts state court, it will be used by homeowners in foreclosure cases in other states, said Matthew Weidner, a St. Petersburg, Florida, lawyer who represents such homeowners.
"This is a very detailed, very specific indictment of an entire industry's practices and procedures, and it's an indictment that is going to send shockwaves throughout the entire mortgage, foreclosure, real-estate servicing industry," he said.
The nationwide probe came after JPMorgan Chase & Co. and Ally Financial Inc. said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America Corp. froze U.S. foreclosures.
"This judgment has no financial impact on U.S. Bancorp," Teri Charest, a spokeswoman for the Minneapolis-based bank, said in an e-mailed statement. "Our role in this case is solely as trustee concerning a mortgage owned by a securitization trust" and the bank had no responsibility for transferring the loans.
Wells Fargo said in a statement that, as trustee, it had no role in originating or servicing the loans.
"Wells Fargo believes the court's ruling does not prevent foreclosures on loans in securitizations," it said. "The court simply set forth a standard legal process that mortgage servicers must follow in Massachusetts."
"The SJC's ruling effectively rejected many grounds for the lower court's decisions, and generally represents a good result for the mortgage-loan securitization industry," Texas-based American Home Mortgage Servicing Inc., the mortgage servicer on the trusts, said in a statement. "The SJC's decision confirms that the securitization processes currently in place in the secondary mortgage market are sound, and can and do validly transfer mortgages for foreclosure purpose."
'UNIQUE AND SPECIFIC'
American Home Mortgage added: "The SJC's decision is of limited applicability because it is based on law that is unique and specific to Massachusetts."
The Massachusetts cases started in 2005 when Rose Mortgage Inc. lent Antonio Ibanez $103,500 and Option One Mortgage Corp. lent Mark and Tammy LaRace $129,000, according to the banks' brief to the high court. Ibanez and the LaRaces stopped paying on their adjustable-rate subprime mortgage loans and were foreclosed on in 2007.
By that time, U.S. Bancorp and Wells Fargo & Co. said they controlled the loans, which had been subsumed in mortgage-backed trusts. The banks bought the homes in foreclosure auctions in July 2007.
In March 2009, Massachusetts Land Court Judge Keith C. Long voided the foreclosures, finding that the mortgage transfers were done months after the house sales and so U.S. Bancorp and Wells Fargo didn't own them.
In October of that year, Long declined the banks' request to abandon that ruling after they argued the documents that bundled together the mortgages had transferred those instruments to them.
Long found that Option One Mortgage Corp., which early in the "chain of title" owned the mortgages, erred in assigning the mortgages without naming who they were transferred to, so- called blank assignments.
"We have long held that a conveyance of real property, such as a mortgage, that does not name the assignee conveys nothing and is void," the Supreme Judicial Court said today.
Tom Deutsch, executive director of the American Securitization Forum, an industry lobbying group, said in a statement that today's decision, unlike Long's, holds that "assignments of mortgage can be executed in blank, as long as a complete chain of transfers can be shown through the applicable deal documents."
Deutsche said that because the deal documents with the loan schedules weren't introduced as evidence in the Ibanez and LaRace cases, "the court ruled that an otherwise valid confirmatory assignment was not sufficient to prove right to foreclose."
Deutsche added that his group was "pleased the court validated the use of the conveyance language in securitization documents as being sufficient to prove transfers of mortgages under the unique aspects of Massachusetts law." He added: "The ASF is confident securitization transfers are valid and fully enforceable."
The banks argued, as does the securitization industry, that the right to a mortgage follows the sale of the promissory note it secures, and since they held the notes, they should be deemed to have the right to the mortgage.
The court disagreed.
"In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage," Gants wrote.
A holder of the note in that case could file a lawsuit to obtain the mortgage, the court said. Otherwise, the mortgage holder remains unchanged, which is why the banks didn't have the right to foreclose in the two cases, according to the opinion.
"The question about ownership is certainly a big one for the banks, and any time you have a case that sets a precedent, there is the possibility that other states and a federal court will be influenced by that," said Michael Nix, who helps manage about $900 million at Greenwood Capital Inc., in Greenwood, South Carolina.
He said he sold his Bank of America stake in the last week for Citigroup shares because of BofA's foreclosures and mortgage issues.
Bill Halldin, a spokesman for Bank of America, declined to comment.
"This decision affirms our belief that the onus should be on the banks and other holders of notes to follow proper procedures before initiating foreclosure on any Massachusetts homeowner," state Attorney General Martha Coakley said in an e- mailed statement. Coakley filed a friend-of-the-court brief on behalf of the borrowers.
Bank stocks got hit in the market today because investors don't fully understand the ruling and it looks as though it may preclude banks from foreclosing on delinquent borrowers, said Paul Miller, a bank analyst for FBR Capital Markets in Arlington, Virginia, and former examiner for the Federal Reserve Bank of Philadelphia.
"I don't think that's the case at all," Miller said, adding that the decision will probably slow down the process. "Any time you bring into question the foreclosure process, it will be negative for the banks."
"It definitely puts into question some of the foreclosure practices of the transfer of notes," Miller said. "The banks are going to feel some pain until we get a better, clearer picture of what's happened."
The high court said that documents properly transferring a mortgage, along with a schedule of the pooled loans clearly identifying it as one of those assigned, "may suffice to be proof that the assignment was made by a party that itself held the mortgage."
"However, there must be proof that the assignment was made by a party that itself held the mortgage," the court said. U.S. Bancorp and Wells Fargo didn't supply the proof in this case, it said.
The court rejected the banks' request to apply the decision only to future foreclosures if they lost. It does that when it makes a big change in the law, which it didn't do here, it said.
"All that has changed is the plaintiffs' apparent failure to abide by those principles and requirements" in the law "in the rush to sell mortgage-backed securities," Gants wrote.
Thomas Mitchell, an analyst at Miller Tabak & Co., said today in a note that "we do not see this type of decision as representing a major financial event" for banks. Lenders will already have taken 85 percent to 90 percent of their losses on the loans by the time of a foreclosure, he said.
"In most cases, we believe, the lender will end up retaining significant legal rights once the paperwork is properly amended," Mitchell wrote.
In a concurring opinion, Justice Robert J. Cordy said he was struck by "the utter carelessness with which the plaintiff banks documented the titles to their assets."
He said the court's decision didn't address, because it wasn't raised in the case, what effect that conduct would have on "a bona fide third-party purchaser" who relied on the methods the banks used and may now not have clear title to their homes.
Anthony Laura, who heads mortgage-banking litigation at Patton Boggs LLP in Newark, New Jersey, said those homeowners' titles might be challenged, which would force lenders "into battle on two fronts -- one with those who lost their property to foreclosure and one with those who acquired their property after foreclosure."
The case is U.S. Bank v. Ibanez, 10694, Supreme Judicial Court of Massachusetts (Boston). The lower-court cases are U.S. Bank National Association v. Ibanez, 08-Misc-384283, and Wells Fargo Bank NA v. LaRace, 08-Misc-386755, Commonwealth of Massachusetts, Trial Court, Land Court Department (Boston).