Can Banks Foreclose on Mortgages They Do Not Own?

“The record in this case reflects how mortgage lending changed in recent years and how the industry failed to ensure that its new business model conformed to state law. . . Having profited greatly from practices regarding the assignment and securitization of mortgages not grounded in the law, it is reasonable for them to bear the cost of failing to ensure that such practices conformed to Massachusetts law.”

-Massachusetts Attorney General Martha Coakley wrote in a brief supporting the borrowers.

U.S. Bank National Association (Trustee for Structured Asset Securities CorpMortgage Pass Through Certificate series 2006-Z vs Antonio Ibanez

Wells Fargo (As Trustee for ABFC 2005-OPT 1 TRUST, ABFC ASSET BACKED CERTIFICATES SERIES 2005-OPT 1) vs Mark and Tammy Larace


Bloomberg is closely following a Massachusetts Supreme court case. At stake is whether several specific foreclosures in Massachusetts should be voided “because securitization-industry practices violate real- estate law governing how mortgages may be transferred.

There are several issues in the case: The technical one is whether a mortgage can be transferred without naming the recipient, as is commonly done in securitizations. But the more important issue applies to mortgage rights — do they “detach” from the promissory note when that note is sold? Asked more plainly, must someone asserting the right to foreclose actually own that Note?

This is more than a technical issue; at risk is whether we, as a nation, are going to allow corporate entities to violate existing law, or even worse, attempt to create their own, extra-legal, non democratic policies.

In the current case, a mortgage that was sold and resold ultimately was purchased at auction. (Complicating the case was the paucity of bidders for the mortgage — the buyers were the only bidders, and they “substantial discount” paid for the notes). The key legal issue is whether the banks had the right to foreclose without the mortgage notes — a violation of State law.

In March 2009, a lower court ruled they didn’t. The court cited “Published notices listing U.S. Bank and Wells Fargo as the foreclosing parties when they weren’t the actual mortgage holders at the time of the 2007 foreclosure auction. Massachusetts state law requires foreclosing parties to actually be the mortgage holder. According to the evidence at trial, the Ibanez mortgage was transferred to U.S. Bank 14 months after the foreclosure auction, and the LaRace mortgage was transferred to Wells Fargo 10 months after.

If upheld, an undetermined number of homeowners may be able to “invalidate some foreclosures and force loan originators to buy back mortgages wrongly transferred into loan pools.

Bloomberg quoted law professor Kurt Eggert of the Chapman University School of Law in Orange, California. He noted “It ties into a theme nationally. The broader theme is the argument that efficiency of transfer is more important than real-property law.

Way back when I was a law student, it always stuck me as odd that efficiency arguments could somehow trump legislation passed by elected state legislators. Somehow, an efficiency was insinuated into legal cases. Not efficiency of Judicial resources mind you, but economic efficiency. Blame Gary Becker and the Chicago school of economics for wedging this extra-constitutional economics arguments into jurisprudence via a back door. It always sounded not only false to me, but a treasonous violation of the US Constitution that Judges are sworn to uphold. An economic theory, not part of the constitution, and not passed by any elected body, somehow was superior to democratically passed laws. Some jurists who were proponents of this economic efficiency school of thought, such as Richard Posner, appear to be backing away from those views. (See Posner’s 2009 book, A Failure of Capitalism).


The Ibanez brief is posted in Think Tank


Foreclosures May Be Undone by State Ruling on Mortgage Transfer
Thom Weidlich
Bloomberg, Jan. 6 2011

See also:
Land Court opinion and order (PDF)

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