The Massachusetts Supreme Court on Friday upheld a lower court ruling voiding two foreclosures because the banks failed to show the proper paperwork to prove they owned the loans — a decision that challenges the way mortgages were bundled and sold around the world.
Shares of Wells Fargo and U.S. Bancorp — the banks involved in the case — as well as those of other banks fell after the announcement of the decision.
The Massachusetts court is the highest to ruled on this issue and the decision has the potential to invalidate tens of thousands of foreclosures across the state. It provides more ammunition to borrowers in other states who could push the case to the U.S. Supreme Court. If the nation's highest court rules that these transfers are not legal, the multitrillion-dollar mortgage-backed securitization industry could face huge liability.
The closely-watched decision involves two foreclosures: that of Antonio Ibanez and Mark and Tammy LaRace and whether U.S. Bancorp and Wells Fargo, respectively, had proper legal standing to take back the homes after the borrowers missed their payments.
After examining the paperwork filed by the banks, a lower court judge, the Massachusetts Land Court's Keith Long, said he had determined that the mortgage "note" that proves who the owner is had not been properly transferred when the banks auctioned off houses.
Long's decision hits on one of the most sensitive issues related to how mortgages were securitized: something called "endorsements in blank." In the rush to aggregate and sell and then resell mortgages, many of the mortgages documents were transferred without explicitly naming who the note was being sold to.
The financial services industry has argued that this practice is legally valid but Long ruled, "These blank mortgage assignments were never recorded and they were not legally recordable."
The banks had appealed Long's decision, arguing that they had clear title to the properties. But Massachusetts Supreme Court Justice Ralph Gants wrote that the court agreed that the banks "failed to make the required showing that they were the holders of the mortgages at the time of foreclosure."
The case is "enough to put serious cloud on title through the whole system and that's a problem," Adam Levitin, a professor at Georgetown University, said in an interview before the decision was issued.
Accusation that lenders improperly prepared paperwork for foreclosure cases and may have even engaged in fraud triggered outrage in late 2010. A federal inquiry into the matter is under way as is a separate 50-state investigation. The uproar began when Countrywide Financial said in late September that it had found some "technical" errors in its foreclosure documents and that it would stop foreclosure sales in 23 states to fix them. Numerous other banks, including Bank of America, JPMorgan, and Wells Fargo, subsequently froze some foreclosures after admitting to similar problems.
U.S. Bancorp spokeswoman Teri Charest said the judgment "has no financial impact" on the company and that its role in the case was as a trustee for a securitization trust. Wells Fargo representatives did not immediately respond to a request for comment.
