Posted on Friday, January 7, 2011
Currently winding its way through the Massachusetts Supreme Court — a little court case that could end up having big consequences for mortgage securitisations.
It’s called the ‘Ibanez case’ and here’s the story.
In late 2005, Antonio Ibanez gets a $103,500 adjustable-rate mortgage loan on a Springfield, Massachusetts property from Rose Mortgage Inc. Rose then sells the loan to Option One Mortgage Co., which then passes it to Lehman Brothers Bank, which then sends it to Lehman Brothers Holdings. Lehman Bros Holdings then sends it to its Structured Asset Securities Corp. to be pooled with other loans and assigned to US Bank, acting as trustee for Structured Asset Securities Corp. Mortgage Loan Trust 2006Z.
In other words, the Ibanez mortgage gets pooled and securitised into a typical run-of-the-mill subprime Residential Mortgage-Backed Security (RMBS).
Meanwhile, in the same town, Mark and Tammy LaRace get a $129,000 mortgage from Option One. That loan is sold to Bank of America, which then sells it to Asset-Backed Funding Corp. which then pools and assigns the loan to Wells Fargo, who is trustee for ABFC 2005-OPTI — another RMBS.
Fast forward two years and both Ibanez and the LaRaces have stopped paying their mortgages and are being foreclosed on by the trustees. Sale notices are published in the Boston Globe, the properties go to auction and are subsequently bought by the trustees US Bank and Wells Fargo in the summer and fall of 2007.
And then there’s the first court case
At some point in the foreclosure process, there’s doubt about whether the Boston Globe advertisements (as opposed to say, a Springfield-based paper) satisfy foreclosure notice requirements in the state of Massachusetts.
The two trustee banks go to the Massachusetts Land Court in the fall of 2008 to debate this — when suddenly, Massachusetts Land Court Judge Keith C. Long orders US Bank and Wells Fargo to prove they had the right to foreclose in the first place.
Here’s what happens next:
The Land Court then proceeded to find that (1) neither Appellant had a valid assignment of mortgage at the time of publication of the notices or at the time of the foreclosure sale, (21 the foreclosure notices failed to identify the “holder” of the mortgage, and ( 3 ) the notices were deficient under Mass. Gen. L. ch. 244, 5 14. [A592-93]. Put another way, the Land Court held that Appellants lacked authority as assignees to conduct the subject: foreclosures.
The judge promptly voids the foreclosure sales and dismisses the Land Court case.
A semi-technical explainer here
US Bank and Wells promptly and unsurprisingly disputed the finding — which is the stuff now going to the MA Supreme Court. It’s also where things get tricky.
One of the problems with the originate-to-distribute mortgage model so prevalent in the years before the financial crisis is that it tends to complicate things. It generates lots of paperwork, lots of bureacratic process and costs — while amplifying the cast of characters involved. In just these two loans you have eight financial entities involved and something like seven (supposed) changes of ownership before foreclosure.
And in each part of the originate-to-distribute process you have to have the right documents to demonstrate that the mortgage ‘note’ is properly transferred, and in the correct order too. According to Judge Long, US Bank and Wells weren’t the actual holders of the mortgage note when they auctioned off the Ibanez and LaRace houses.
What’s more, in both cases, there’s a wider issue about something called ‘endorsement in blank.’ In both cases Option One ‘endorsed’ (transferred) the mortgage note using something like “Pay to the order of _____, without recourse.” It didn’t explicitly name who it was assigning the note to — something Judge Long thought didn’t square with Massachusetts law. Or, in detail:
These blank mortgage assignments were never recorded and they were not legally recordable. G.L. c. 183, § 6C (for a mortgage or assignment of a mortgage to be recordable in Massachusetts, the mortgage or assignment must “contain or have endorsed upon it the residence and post office address of the mortgagee or assignee if said mortgagee or assignee is a natural person, or a business address, mail address or post office address of the mortgagee or assignee if the mortgagee or assignee is not a natural person”).
If the mortgage notes were never properly transferred, then at the time of the 2007 foreclosures it was Option One that had the right to foreclose, not US Bank or Wells.
When securitisation standards meet real estate law
Anyway, the wider issue is that these ‘endorsements in blank’ are actually pretty standard practice in mortgage securitisations. You can read a pretty detailed article about them here. A Massachusetts Supreme Court Ruling upholding Judge Long’s decision could make uncomfortable reading for quite a few securitisation players — and the banks who might then be required to buyback improperly-assigned loans — though there’s some debate as to whether it would have much impact outside of the state.
Still though, we’ll be watching. And we guess many others will be too.
Posted by Tracy Alloway