Consumer Law - Mortgage Foreclosure - Massachusetts Supreme Judicial Court Unanimously Voids Foreclosure Sales Because Securitization Trusts Could Not Demonstrate Clear Chains of Title to Mortgages

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As a result of the ongoing foreclosure crisis, at least two million mortgage foreclosure cases have been brought before state and federal courts over the past five years, and approximately two million more such cases are still waiting to be heard.(1) These cases are forcing courts to examine how long-established principles of state property law apply to modern mortgage lending and securitization practices. Recently, in U.S. Bank National Ass'n v. Ibanez,(2) the Massachusetts Supreme Judicial Court voided two foreclosure sales by U.S. Bank and Wells Fargo(3) because the banks could not demonstrate that they were assigned the associated mortgages in writing prior to the foreclosure sales.(4) In reaching this conclusion, the court held that the possession of a promissory note secured by a mortgage is not sufficient to demonstrate authority to foreclose.(5) Some commentators have criticized this holding as a departure from the common law rule that the mortgage "follows the note,"(6) which they claim is codified in the Uniform Commercial Code.(7) However, a careful analysis reveals that Ibanez establishes that the mortgage follows the note as a security interest, but not as a real property interest. This holding, in turn, has important implications for foreclosure litigation in Massachusetts and possibly in several other states as well.

In 2005, Antonio Ibanez took out a mortgage loan to purchase a property in Springfield, Massachusetts.(8) The mortgage loan was secured by a mortgage to lender Rose Mortgage, Inc., which then assigned the mortgage to Option One Mortgage Corporation, which executed an assignment of the Ibanez mortgage "in blank" (that is, without naming an assignee).(9) Then, according to U.S. Bank, the Ibanez mortgage changed hands through a series of assignments and was ultimately pooled with over one thousand other mortgages and assigned to U.S. Bank.(10) At some point, U.S. Bank also came to hold the promissory note secured by the Ibanez mortgage.(11) When the assignment process was complete, "the Ibanez and other loans were pooled into a trust and converted into mortgage-backed securities that [could] be bought and sold by investors--a process known as securitization."(12) That same year, Mark and Tammy LaRace took out a loan secured by a property in Springfield, Massachusetts, and after a very similar series of transactions, Wells Fargo came to hold the LaRaces' promissory note and (allegedly) the mortgage securing it.(13)

In 2007, both Ibanez and the LaRaces defaulted on their mortgage loans, and U.S. Bank and Wells Fargo foreclosed on their properties.(14) The banks then purchased the properties at the resulting foreclosure sales.(15) It was undisputed that the banks held the Ibanez and LaRace promissory notes at the time of the foreclosure sales.(16) However, despite the banks' contentions that they were assigned the mortgages prior to the foreclosure sales, the banks were unable to produce written documentation demonstrating the assignments.(17) Nevertheless, the banks were able to demonstrate that after each foreclosure sale they were officially assigned the mortgages in writing.(18) The banks argued that the postsale assignments, together with the evidence they offered of presale assignments, established their authority to foreclose on the properties.(19)

In 2008, the banks brought separate actions in Massachusetts land court to quiet title to the Ibanez and LaRace properties, and the two cases were heard jointly.(20) The banks asserted in their complaints that they became the holders of the mortgages through the assignments executed after the foreclosure sales.(21) Neither Ibanez nor the LaRaces initially responded, and the banks moved for default judgment. …


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