"Now that the Massachusetts Supreme Court has upheld a lower court's ruling that
Wells Fargo and U.S. Bancorp did not have the proper paperwork to foreclose on
two homes, the question is what that means for the broader mortgage market and
the future of millions of foreclosures in or about to be in process? Not only
does this decision affect individual foreclosures, but it throws into question
the entire mortgage securitization process. We've spent a lot of time on this
blog discussing the process of how loans were divided, mixed, bundled and sold
over and over during the heat and height of the housing boom. The issue in
contest over foreclosures now lies with the 'note,' or the IOU on the mortgage.
The mortgage is the security that says the house is the collateral. Ownership of
the note is critical because that note must be transferred when the mortgage is
traded around.
During securitization a process called 'endorsements in blank' are used, so that
mortgages can be transferred quickly. But you still need that note when you
foreclose. 'This is really about endorsed/assigned in blank,' says JT Smith of
Aristar Funding. 'Judges didn’t understand and transfer taxes were not paid.
This is going to get very ugly. The mortgages became like bearer bonds in that
whoever had possession of original wet copy was the owner, and if you didn’t
have that you could not foreclose. Then if you did why didn’t you pay transfer
taxes?' It's exactly what Prof. Adam Levitin told me way back in October: 'The
mortgage is still owed, but there's going to be a problem figuring out who
actually holds the mortgage, and they would be the ones bringing the
foreclosure.
You have a trust that has been getting payments from borrowers for years that it
has no right to receive. So you might see borrowers suing the trusts saying give
me my money back, you're stealing my money. You're going to then have trusts
that don't have any assets that have been issuing securities that say they're
backed by a whole bunch of assets, and you're going to have investors suing the
trustees for failing to inspect the collateral files, which the trustees say
they're going to do, and you're going to have trustees suing the securitization
sponsors for violating their representations and warrantees about what they were
transferring.'"
So now what? 95% of troubled borrowers currently do not contest their
foreclosures, Paul Miller of FBR tells me. He sees this less about the specific
case as the perception of this case: 'If you see more and more of these
headlines, many people might look at this and say 'I can get my house free and
clear if I just contest the foreclosure and get a favorable judge that sides on
my side. All of the sudden I have a free mortgage.' That’s not what’s going to
happen in this case,' Miller said in an interview. He believes these two homes
will eventually go to foreclosure. In fact, this Massachusetts case may not be
exactly as the headlines are screaming. The American Securitization Forum,
immediately after the ruling, put out a statement saying, 'The ASF is pleased
the Court validated the use of the conveyance language in securitization
documents as being sufficient to prove transfers of mortgages under unique
aspects of Massachusetts law. Importantly, unlike the lower co
urt, tithe Court also said assignments of mortgage can be executed in blank, as
long as a complete chain of transfers can be shown through the applicable deal
documents.'
ASF says those documents were not introduced in the lower court and that the
lower court would have ruled otherwise if they had. 'The ASF is confident
securitization transfers are valid and fully enforceable,' concludes the ASF's
Executive Director, Tom Deutsch. That remains to be seen, as lawsuits abound
over this very issue all over the country. Clearly investors didn't like the
ruling, as they sent shares of bank stocks into a despair spiral. This may be
the final Massachusetts court ruling, but it will not be the final word in this
chapter of the foreclosure mess."
