The highest court in Massachusetts ruled against U.S. Bancorp and Wells Fargo & Co. Friday in a pivotal mortgage foreclosure case that could spark more turmoil and uncertainty in a housing market already mired in depression.
The Supreme Judicial Court affirmed a lower court judge's ruling invalidating two mortgage foreclosure sales because the banks, in their capacity as trustees for mortgage securities, did not prove that they actually owned the mortgages at the time of foreclosure.
The decision, which highlights the failure of financial firms to adhere to the rules that govern mortgage-backed securities, is likely to lead more borrowers to sue bank servicers and trustees for wrongful foreclosures. It's unclear what the ruling means for people who were forced from their homes after defaulting on their loans or for those who purchased houses in foreclosure sales.
"There are now thousands of these homes that have been purchased through foreclosures handled in a very similar fashion where the titles are defective," said Ward P. Graham, a Massachusetts title attorney who co-authored a friend-of-the-court brief in the case on behalf of the Real Estate Bar Association for Massachusetts, Inc.
Last fall, the banking industry's foreclosure machine came under intense scrutiny with revelations that low-level employees called "robo signers" powered through hundreds of foreclosure affidavits a day without verifying a single sentence. At the time, analysts warned that the banks' allegedly fraudulent document procedures could imperil their ability to prove that they owned the mortgages. The Massachusetts ruling stokes those concerns.
"This decision is going to raise serious problems in hundreds of thousands of foreclosure cases," said homeowner-defense attorney Thomas Cox, a Maine attorney who was one of the first to put the robo signing scandal in the national spotlight. "It has the potential to require that foreclosures be done over, and I think there's going to be significant turmoil nationally. There's going to be major uncertainty."
In the Massachusetts case, the Supreme Judicial Court found that the banks, who were not the original mortgagees, did not show that they held the mortgages at the time of foreclosure. As a result, the court found, the banks did not demonstrate that the foreclosure sales were valid.
The banks argued that the securitization documents they submitted were sufficient to prove they owned the mortgages before the publication of the notices of sale and the foreclosure sales. Wells Fargo said in a statement Friday that as trustee of a securitized pool of loans, it expected those servicing the loans to abide by all applicable state laws, including those governing foreclosure sales. The San Francisco bank was a trustee of the securitized trust in question. American Home Mortgage Servicing Inc., was the servicer.
In a separate statement U.S. Bancorp said the judgment has no financial impact on the company. "The issues addressed by the court revolved around the process of servicing the loan on behalf of the securitization trust, which was performed in this case by the servicer, American Home Mortgage," the bank, which is based in Minneapolis, said. It later issued another statement saying that as a trustee of the securitization trust that it has no responsibility for the terms of the underlying mortgage, foreclosure procedure, the conduct of the servicer, the process by which the mortgage is transferred to the trust, or the sufficiency of the mortgage documentation."
American Home Mortgage Servicing, which is based in Coppell, Texas, said in a statement that the "decision is of limited applicability because it is based on law that is unique and specific to Massachusetts. The decision does not extend to foreclosures in other states."
Attorney Paul Collier III, who represents Antonio Ibanez, one of the homeowners in the case, said the ruling affects thousands of mortgages in Massachusetts and could have a far-reaching impact on the nation's banking industry.
"For homeowners and foreclosures in general, it means that any mortgage foreclosure which was initiated by a securitized trust at a time when the trust had not obtained a mortgage assignment which gave it the lawful right to do so is void. Those homeowners, like Mr. Ibanez, still own the property," Collier said.
It's up to lawmakers to take action to remove the uncertainty over mortgages raised by the decision, said Massachusetts Secretary of State William Galvin. Without legislative action, the court's ruling will have a "chilling effect" on the real estate market, he said.
The broader implications of the case sent bank stocks lower, with Wells Fargo stock falling 65 cents, or 2 percent, to close at $31.50. It earlier traded as low as $30.64.
Stock in U.S. Bancorp slid 20 cents to close at $26.09, after dropping as much as 2.4 percent after the ruling.