Tangled Mortgage Web Prompts Massachusetts Court to Thwart Foreclosures

Published January 7, 2011

Friday’s ruling by the Massachusetts Supreme Judicial Court invalidating two single mortgage foreclosures offers a glimpse into the internal chaos infecting the entire mortgage-backed securities industry, which led to the 2008 TARP bailout by U.S. taxpayers.

The court ruled Friday foreclosures by two banks, each on a single mortgage, were invalid because neither bank owned its respective mortgage at the time of foreclosure.
Foreclosures in Massachusetts do not need judicial approval, unlike those in about 23 other states. Instead, foreclosures take place under the mortgage terms, outside of court.

US Bancorp and Wells Fargo & Co. had each foreclosed on one property in Massachusetts before effective assignments of the mortgages had taken place. The banks sought court approval to clarify the foreclosures were nevertheless valid.

This was not new law, the court noted in invalidating them.

‘Failure to Abide by Requirements’
 “The legal principles and requirements we set forth are well established in our case law and our statutes,” the court said. “All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.”

One judge added in a separate opinion, “I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets.”

Here is the story of one of these mortgages, the one held (eventually) by U.S. Bank, as told to the court by that bank:

On December 1, 2005, Antonio Ibanez borrowed $103,500 from Rose Mortgage, Inc., securing the loan with property in Springfield, Massachusetts. Rose assigned the mortgage to Option One. Option One supposedly then assigned the mortgage to Lehman Brothers Bank, FSB, which assigned the mortgage to Lehman Brothers Holdings, Inc., which assigned the mortgage to Structured Asset Securities Corporation (a wholly owned subsidiary of Lehman Commercial Paper Inc., which is in turn a wholly owned subsidiary of Lehman Brothers Holdings Inc.).

Structured Asset Securities Corporation bundled the mortgage with about 1,220 other mortgages and transferred them to U.S. Bank under a trust agreement supposedly dated December 1, 2006. The bundled mortgages were said to be listed on an attachment to the trust agreement, but U.S. Bank couldn’t produce to the court either the trust agreement or the attachment. U.S. Bank then securitized the bundled mortgages and sold them to investors.

On July 5, 2007, U.S. Bank foreclosed on the Ibanez loan and purchased the property for $94,350. Almost a year later, in 2008, U.S. Bank recorded its foreclosure deed.

Mortgage Not Actually Assigned
Also in 2008, it turned out Option One might not have actually assigned the mortgage to Lehman Brothers Bank, FSB, in the first place (even though the mortgage was thereafter assigned at least three more times in the chain of Lehman entities). This Option One assignment seems not to have happened because on September 11, 2008, American Home Mortgage Servicing, Inc. (identifying itself as a successor to Option One) recorded a written assignment to U.S. Bank as trustee signed nine days earlier.

So all of the prior assignments were evidently invalid, and it seems U.S. Bank discovered this sometime in 2008 and tried to fix it with the American Home Mortgage Servicing, Inc. assignment that year – a year after U.S. Bank had foreclosed on the Ibanez property.

The Supreme Court didn’t even try to figure out how or why this happened. The only important point for its decision was that U.S. Bank without a doubt did not own the Ibanez mortgage when it foreclosed on it.

The Ibanez mortgage is only one of a multitude of securitized mortgages — there are about $8.9 trillion in U.S. mortgage-related securities — which involve millions of mortgages. The ownership of each one of these mortgages must be clarified on Wall Street because lenders must, as the Massachusetts court held, follow the rule of law.

Maureen Martin, J.D. ([email protected]) is senior fellow for legal affairs at The Heartland Institute.