Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB!

The day after I posted “As
JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It
Was Not Obvious Years Ago That This Industry May Become The “New”
Tobacco Companies” wherein I made clear my opinion that the legal
and litigation risks that the banking industry faces is woefully
underestimated, the Massachusetts Land Court Decision that invalidates foreclosures based on post sale assignments
was up held by the Massachusetts Supreme Court. This is permanent, and
precedent setting, absolutely justifies and vindicates my post from the
day before, which also contained links to other posts which any declared
sensational just a few days before, ex., The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf
2008! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. This is a very big deal since it actually
unravels many thousands of foreclosures and sets precedent to be
examined across the country (all 50 state’s attorney generals are
looking into fraudclosure issues) that will really cause material damage
to the banks that are pursuing (have pursued) said foreclosures. As
reported in the Massachusetts Law Blog:

Breaking News (1.7.11): Mass. Supreme Court Upholds Ibanez Ruling, Thousands of Foreclosures Affected

Update (2/25/10)–Mass. High Court May Take Ibanez Case

Breaking News (10/14/09)–Land Court Reaffirms Ruling Invalidating Thousands of Foreclosures. Click here for the updated post.

None of this is the fault of
the [debtor], yet the [debtor] suffers due to fewer (or no) bids in
competition with the foreclosing institution. Only the foreclosing
party is advantaged by the clouded title at the time of auction. It can
bid a lower price, hold the property in inventory, and put together
the proper documents any time it chooses. And who can say that problems
won’t be encountered during this process?… Massachusetts Land Court Judge Keith C. Long

“[W]hat is surprising about
these cases is … the utter carelessness with which the plaintiff
banks documented the titles to their assets.” –Justice Robert Cordy,
Massachusetts Supreme Judicial Court

Today, the Massachusetts Supreme
Judicial Court (SJC) ruled against foreclosing lenders and those who
purchased foreclosed properties in Massachusetts in the controversial U.S. Bank v. Ibanez case…

… For those new to the case, the
problem the Court dealt with in this case is the validity of
foreclosures when the mortgages are part of securitized mortgage
lending pools. When mortgages were bundled and packaged to Wall Street
investors, the ownership of mortgage loans were divided and freely
transferred numerous times on the lenders’ books. But the mortgage
loan documentation actually on file at the Registry of Deeds often
lagged far behind.

In the Ibanez case, the mortgage assignment, which was executed in blank, was not recorded until over
a year after the foreclosure process had started. This was a fairly
common practice in Massachusetts, and I suspect across the U.S. Mr.
Ibanez, the distressed homeowner, challenged the validity of the
foreclosure, arguing that U.S. Bank had no standing to foreclose
because it lacked any evidence of ownership of the mortgage and the loan at the time it started the foreclosure.

Mr. Ibanez won his case in the lower court in 2009, and due to the importance of the issue, the Massachusetts Supreme Judicial Court took the case on direct appeal.

The SJC Ruling: Lenders Must Prove Ownership When They Foreclose

The SJC’s ruling can be summed up by Justice Cordy’s concurring opinion:

“The type of sophisticated transactions
leading up to the accumulation of the notes and mortgages in question
in these cases and their securitization, and, ultimately the sale of
mortgaged-backed securities, are not barred nor even burdened by the
requirements of Massachusetts law. The plaintiff banks, who brought
these cases to clear the titles that they acquired at their own
foreclosure sales, have simply failed to prove that the underlying
assignments of the mortgages that they allege (and would have) entitled
them to foreclose ever existed in any legally cognizable form before
they exercised the power of sale that accompanies those assignments. The
court’s opinion clearly states that such assignments do not need to be
in recordable form or recorded before the foreclosure, but they do
have to have been effectuated.”

The Court’s ruling appears rather
elementary: you need to own the mortgage before you can foreclose. But
it’s become much more complicated with the proliferation of mortgage
backed securities (MBS’s) –which constitute 60% or more of the entire
U.S. mortgage market. The Court has held unequivocally that the common
industry practice of assigning a mortgage “in blank” — meaning
without specifying to whom the mortgage would be assigned until after
the fact — does not constitute a proper assignment, at least in
Massachusetts.

This is a very interesting development, and I would like to make note
that the buck stops here since this is Supreme Court. I normally do not
excerpt or quote this much of another blog or news source, but since
the content is legal in matter and this particular blog (Massachusetts
attorney) appears to have put a strong legal analysis on the topic,  I
will continue. I urge others to visit the Massachusetts Law Blog for more info. Back to his write-up…

• Despite pleas from innocent buyers of foreclosed properties and my own predictions, the decision was applied retroactively, so this will hurt Massachusetts homeowners who bought defective foreclosure properties.
• If you own a foreclosed home with an “Ibanez” title issue, I’m afraid to say that you do not own your home anymore. The previous owner who was foreclosed upon owns it again. This is a mess.
• The opinion is a scathing indictment of the securitized mortgage
  lending system and its non-compliance with Massachusetts foreclosure
  law. Justice Cordy, a former big firm corporate lawyer, chastised
  lenders and their Wall Street lawyers for “the utter carelessness with
  which the plaintiff banks documented the titles to their assets.”
• If you purchased a foreclosure property with an “Ibanez” title
  defect, and you do not have title insurance, you are in trouble. You may
  not be able to sell or refinance your home for quite a long time, if
  ever. Recourse would be against the foreclosing banks, the foreclosing attorneys.
  Or you could attempt to get a deed from the previous owner. Re-doing
  the original foreclosure is also an option but with complications.
• If you purchased a foreclosure property and you have an owner’s
  title insurance policy, you have a potential claim against the title
  policy. Contact our office for legal assistance.

Here he puts in some self promotion, but hey… I’m one to talk. I
actually appreciate the legal analysis and am glad to have him offer
services in the arena.

• The decision carved out some room so that mortgages with
  compliant securitization documents may be able to survive the ruling.
  This will shake out in the months to come. A major problem with this
  case was that the lenders weren’t able to produce the schedules of the
  securitization documents showing that the two mortgages in question
  were part of the securitization pool. Why, I have no idea.
• The decision, however, may not prove to be anywhere near the
  Apocalypse it’s been hyped to be. The Court said that “[w]here a pool
  of mortgages is assigned to a securitized trust, the executed
  agreement that assigns the pool of mortgages, with a schedule of the
  pooled mortgage loans that clearly and specifically identifies the
  mortgage at issue as among those assigned, may suffice to establish
  the trustee as the mortgage holder. However, there must be proof that
  the assignment was made by a party that itself held the mortgage.”
  This opens the door for foreclosing lenders to prove ownership with
  proper documents. Furthermore, since the Land Court’s decision in 2009,
  many lenders have already re-done foreclosures and title insurance
  companies have taken other steps to cure the title defects.

I am not a lawyer and this is not my purview, but things may not be
quite that simple. The securititized trust documents themselves have
timing issues that may come into play. See the email chain conversation
below for more on this topic.

• The ruling may be limited only to Massachusetts and states
  operating under a non-judicial foreclosure and “title theory” laws. The
  Court was careful to point out that Massachusetts requires very strict
  compliance with its foreclosure laws. The reason for that is
  Massachusetts is a non-judicial foreclosure state–meaning lenders don’t
  need a court order to foreclose–and that the state operates under the
  “title theory” which is a fancy way of saying that the bank is really
  the legal owner of your house.
• Watch for class actions against foreclosing lenders, the
  attorneys who drafted the securitization loan documents and foreclosing
  attorneys. Investors of mortgage backed securities (MBS) will also be
  exploring their legal options against the trusts and servicers of the
  mortgage pools.

It appears as if he contradicted his statement above. I can
practically guaranteed that this significantly increases the risk.
volume and velocity of litigation. Think about it. If you were a REMIC
investors, would you be sitting pat, or calling your attorney.

• The banking sector has already dropped some 5% today (1.7.11),
  showing that this ruling has sufficiently spooked investors. (But
  Merrill Lynch just went on a buying spree on the banking sector–showing
  that the real experts are betting that this decision and others which
  will follow will not substantially affect banks’ profitability).

I have absolutely no idea what he means by Merrill Lynch going on a
buying spree – actually using their (BofA’s) balance sheet? I seriously
doubt so. I also take umbrage to the assertion that Merrill Lynch
constitutes a “real expert”(s) in terms of mortgage and real estate
valuation and risk assessment, since they “experted” themselves into a
near collapse over these very same assets.

Interested parties may download the actual ruling here: Ibanez-Case-JAN-2011. I
actually engaged in an interesting email exhange with a BoomBustBlogger
over this fraudclosure issue, and would like to share the email chain
with the blog.

10/21/10

Reggie,

You see that the various large shoes
we were discussing have begun dropping.  Multi-billion dollar demands
by non-agency bondholders for putbacks, and now the government is being
forced to take action.  I read elsewhere that a group of hedge funds is
organizing for a similar demand.  I view with interest the tiny levels
at which the banks are reserving against these events in comparison with
the present (and probable future) size of the put-back demands.  Again,
this is only ONE tentacle of the monster.

So far, the putback demands appear
to be merely rep and warranty driven, i.e, the failing loans do not meet
the underwriting requirements as represented in the prospectus.  This
does not implicate the REMICs’ tax-exempt status.  However, as claims
for wrongful foreclosure based on the failure of loans to be properly
deposited into trust are proved true — or as the same facts are brought
to light by 50 state attorneys general — it will be implicated.  This
may produce a larger wave of claims by bondholders, both because of the
loss of tax structure as represented and warranted, and because the
knowing failure to properly deposit the loans (which will be inferred
from the systematic extent of the failure) may support securities fraud
claims.  I will be very interested to see how you quantify the size of
the problem for the banks.

1/1/10

Reggie:

… I assume you saw stories on the
Mass. Court ruling in Ibanez.  The obvious question was, “Why didn’t
they just back up and start over after getting the assignments done
correctly?”  The answer:  They had no choice but to either litigate the
homeowners into submission or pay the homeowners to go away.  They chose
the former strategy and it failed.  Why did they have those choices? 
As you and I discussed awhile back:  the REMIC.  If the loans were not
originally assigned to the trust by the deadline, the REMIC lost its
special tax status, and the banks were forced into the argument that an
after-the-fact assignment had the effect of an original timely
assignment (so that, getting a state court to bite on this, they could
then go argue the same point to the IRS, i.e., “no harm no foul”).  The
Mass. Court, to its credit, saw through the bullshit and upheld the rule
of law.

The implications of this for
the REMICs (actually, the banks that created and sold them) and
homeowners going forward are huge.  Homeowners can now see the light,
and if there’s any question about the ownership of the loan, stick a hot
poker in that issue (demand proof of ownership, either directly before
litigation or in discovery when litigation has started) until the banks
cry uncle, meaning pay through the nose to buy off the homeowners and
save the REMIC’s tax status.  The banks face the prospect of
enormously increased costs, for any of: (a) litigation expenses as this
issue becomes harder fought by the homeowners; (b) increased settlement
costs as homeowners realize their advantage and demand more pounds of
bank flesh to go away; or (c) payments to REMIC investors for losses
caused by the banks’ failure to properly assign the loans in the first
place. Who’s going to suffer the worst?

Again, JPM et. al. have been much too optimistic in reserving for these occurrences, as clearly detailed in my post As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. The legal costs looked bad before this decision, as stated in As
JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It
Was Not Obvious Years Ago That This Industry May Become The “New”
Tobacco Companies and it simply looks much worse now. To think, so called experts wonder why I am bearish on JP Morgan and the big banks…

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… There is no chance for appeal in
the Mass case; the decision came from the state’s highest court.  This
quote from the court illustrates that this was not rocket science; the
banks’ lawyers never should have taken the risk of the appeal rather
than settling and leaving the record with an unreported trial court
decision of much less import:

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

… I agree with everything in your post [“As
JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It
Was Not Obvious Years Ago That This Industry May Become The “New”
Tobacco Companies”].  I noted someone’s comment about BAC’s
settlement with Fannie and Freddie (paying about 2 cents on the dollar
to eliminate hundreds of billions of putback claims, a bailout in
disguise for which somebody should go to jail).  Otherwise, I think the
banks differ from the tobacco companies in a couple major respects: (a)
they don’t sell an addictive product which may be somewhat economically
insensitive; and (b) they don’t have access to overseas growth like the
tobaccos do.  By failing to adequately reserve and kicking the can,
they’re making the end only that much bloodier (or betting on TARP II,
III and IV, which may not be a bad bet).

Actually, the banks did have an overseas growth model, the
sales of securitized products. One would have thought that that model
had come to an end due to the crash and burn effect, alas it has not and
the reason is because the banks due sell what appears to be an
addictive product.

1. The reach for unrealistically high yields in the case of yield hungry institutional investors such as pension funds. As stated Reggie Middleton vs Goldman Sachs, part 1, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and “Blog vs. Broker, whom do you trust!”,
   Goldman’s peddling of products often spells doom for the consumer
   (client) and bonus for the producer (Goldman). Goldman is now
   underwriting CMBS under a broad fund our $19 billion bonus pool “buy”
   recommendation in the CRE REIT space  reference Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off .Now,
   after all of the evidence that I have presented against the CRE
   space, who do you think would be better for clients net worth,
   Reggie’s BoomBustBlog or Goldman? There is also the most recent
   evidence from just last week: Morgan Stanley Jingle Mail: Loses Properties To John Paulson Investment Consortium & Itself.
2. The satisfaction of the get rich quick(er) urges to be had in their
   retail, HNW and UHNW clients. A perfect example is the Facebook
   offering, of which I am preparing an extra special analysis for my
   blog’s subscribers to be released in a day or two wherein I will show
   how those Goldman clients are throwing their money into the Goldman
   bonus pool/Facebook working capital fund abyss – that is if I haven’t
   demonstrated such already:
   • • Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
       
     • Here’s
       A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores
       The SEC & Peddles Private Shares To The Public Without Full
       Disclosure
     • The
       Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug
       The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our
       Models

Now, back to the email exchange…

The limiting factors on the homeowner
side are: (a) an imbalance of knowledge of their options as compared to
the banks; and (b) an imbalance of resources ($) to pay lawyers to
fight the banks.  Although I think the internet and its democratic
access to information changes the equation for the first issue, it’s
still like retailers selling gift cards – they make money because they
know a large percentage of people will stick the card in the drawer and
forget about it, and in doing so will have given the retailers free
money.  Many homeowners who are in position to challenge a foreclosure,
and thereby squeeze a bunch of money out of the banks, never will.  The
$64 question is, how many will?

I have a very strong feeling that many distressed homeowners that
read BoomBustBlog can be considered to be amongst that educated elite.

Now there’s a state appellate court
decision for every other state appellate court to look to for guidance. 
Stupid.  This is like a case I had in federal court several years ago
against the U.S. gov’t.  We obtained a ruling imposing estoppel against
the gov’t – which is nearly impossible to get.  The gov’t did NOT appeal
that decision, only the decision granting us fees (which it lost).  It
avoided an appeal for the same reason – it did not want a X^th circuit decision upholding estoppel against it sitting out there for the rest of the world to model from.

The only logic that I see in the bank’s decision to litigate was that
if you pay off one homeowner, you create a pattern where you will end
up having to pay off others until it get’s to the point where you will
have to litigate the issue to its ultimate conclusion anyway. Hard to
say which route would have been more efficient and cheaper, but I do
know that this is far from a desirable outcome for the banking industry.

Comments

[PicassoInActions]

What will happened  if the big US banks will fall?

Just curious from rational point of view. What will be the damages and to who? ( in reality)

[Drag Racer]

If TPTB want the TBTF to be SOL then the FRN goes AWOL. If not then you will see a big rug with many sweepers.

I don't have the answer to their timeline or how comfortable they are at pushing the 'end game' through right now.

?!? Giffords may know.

[Dr. Porkchop]

They did fail. What you're looking at currently is a re-animated corpse.

[Iam_Silverman]

"What will happened  if the big US banks will fall?"

Well, technically the big banks cannot fail.  It has been codified in law now (Dodd/Frank).  Large banks will be declared to be "systematically important" (or, Too Big To Fail), and the Federal Reserve Bank will oversee the orderly "redistribution" of their assets and liabilities - after they have been bailed out (again), of course.

So, what will "happened"?  Nothing, we the Taxpayer will be saddled with even more debt issued to make the bankers whole and "protect the system".  It will be one more opportunity for Ben Bernanke to become Times "Man Of The Year"!

[DrLamer]

the orderly "redistribution" of their assets and liabilities

puts THE SEMI-PRIVATE Federal Reserve Bank - higher than the Massachusetts Supreme Court.

If so, why not FED to CANCEL this recent uncomfortable ruling?

[Iam_Silverman]

"If so, why not FED to CANCEL this recent uncomfortable ruling?"

No need to.  If they assume the "liabilities" (i.e. putbacks) then they will have the paper to build an ownership case on at a later date.  They have the time to fix these "administrative errors", don't they?  No pressure to turn an immediate profit in order to justify overly-large bonus pools, is there?

Think about this - how many of those homes bought by private buyers at the foreclosure auctions now have a mortgage?  Who is the buyer of 90% of all mortgages right now?  Right, the GSE's - and they are now owned by the government.  Would the government kick out a current payer to put a freeloader back in his previous home?  Don't think so.  Besides, the IRS will hound any of those freeloaders attempting to get their (unlawfully foreclosed-on) homes back.  One arm of the government helps the other.

[DrLamer]

But,... but... (...pretending to be amuzed and scared...) this is a SOCIALIZM, isn't it!?

[TBT or not TBT]

And so much for the Constitution, which explicitly addresses bankruptcy.

[unununium]

Damages will be to the taxpayer, of course.  Or more accurately, dollar-holders, since the bailout/nationalization will debase the dollar supremely.

[Sudden Debt]

Our grandchildren will hate US so much. They'll remember us all as the bastards that fucked it all up.

[The Navigator]

I'm hoping to leave mine some ag & au to offset that hate - and maybe a 2nd passport to afford choices.

[ElvisDog]

But I'm sure they'll enjoy the pictures we took on our European and Caribbean vacations (paid for with money borrowed from them).