• Massachusetts Supreme Court Upholds Securitization Conveyance Practices Relating to Assignments of Mortgages
  • January 14, 2011 | Authors: Mark W. Harris; Michael D. Jewesson; Patrick C. Sargent
  • Law Firm: Andrews Kurth LLP - Dallas Office
  • On January 7, 2011, in a widely followed case with serious implications for the mortgage and securitization industry, the Massachusetts Supreme Judicial Court validated the securitization industry’s customary practice of utilizing mortgage assignments executed “in blank” in connection with transfers of mortgage loans from originators to securitization trustees and affirmed that confirmatory assignments of mortgage need not be in recordable form or recorded prior to notice of foreclosure and sale. Because the Massachusetts Supreme Court ultimately ruled on different grounds that Wells Fargo Bank, National Association and U.S. Bank National Association, in their capacities as securitization trustees, did not make the required showings that they were the holders of mortgages related to homes upon which they foreclosed in Massachusetts, the general media has, in our view, incorrectly characterized this decision as a major defeat for banks and investors. While the Massachusetts Supreme Court ruling has left the two trustee banks without clear title to the homes that secured the mortgage loans purportedly held by the securitization trusts, participants in mortgage-backed securitizations can take comfort in the fact that the Massachusetts Supreme Court was unwilling to invalidate the industry standard mortgage loan transfer process in these transactions.

    History

    Wells Fargo and U.S. Bank (together, the “Banks”) foreclosed on two separate properties of two different mortgagor homeowners, Ibanez and LaRace, on July 5, 2007, in the town of Springfield, Massachusetts. In September and October of 2008, the Banks brought separate actions in a Massachusetts court (the “Land Court”) to establish that they had clear title in their respective foreclosed and purchased property. In those actions, both Banks acknowledged that they had foreclosed on and sold the properties prior to executing and recording in the registry of deeds confirmatory assignments of the mortgages to the Banks (such recordable assignment document generally referred to as an “Assignment of Mortgage”).

    In March of 2009, a judgment was entered by the Land Court ruling that the foreclosure sales were invalid and that the Banks failed to make the required showing that they were the holders of the related mortgages at the time of the foreclosure sale. Notably, the Land Court indicated that the failure of the Banks to have Assignments of Mortgage in recordable form reflecting the Banks as assignees prior to the foreclosures was one of the reasons for dismissal of the Banks’ claims to clear title.

    Both mortgage loans followed similar and familiar paths from origination to securitization. The Ibanez mortgage was originated by a small mortgage company and was recorded with the registry of deeds the following day. It was assigned a few days thereafter to Option One Mortgage Corporation, which recorded an Assignment of Mortgage reflecting Option One as the new mortgagee. The LaRace mortgage was originated by Option One and was recorded with the registry of deeds on the same day. In both cases, after recordation of its mortgage interest, Option One executed Assignments of Mortgage “in blank” and assigned the mortgage notes together with its interest in the related mortgages to Lehman Brothers and Bank of America, respectively. Both Lehman Brothers and Bank of America further assigned the notes and mortgages to special-purpose finance subsidiaries for further assignment to the Banks as trustees for two different securitizations, in each case without recordation of new Assignments of Mortgages with the registry of deeds reflecting the names of the subsequent assignees.  

    The Ibanez foreclosure commenced with a complaint to foreclose on the mortgaged property in April of 2007. In that complaint U.S. Bank represented that it was the “owner (or assignee) and holder” of the Ibanez mortgage. A judgment was issued in June of 2007 permitting the foreclosure and U.S. Bank held the foreclosure sale on July 5, 2007, at which sale U.S. Bank, as trustee, purchased the foreclosed property. The foreclosure deed was not recorded until May of 2008 and not until September 2008 was a confirmatory Assignment of Mortgage put into recordable form reflecting U.S. Bank as assignee and filed with the registry of deeds.

    The LaRace foreclosure followed a similar path. A complaint to foreclose was filed in April of 2007 in which Wells Fargo represented that it was the “owner (or assignee) and holder” of the LaRace mortgage, and a judgment was issued in July of 2007 permitting Wells Fargo to commence with the foreclosure and sale, which took place a couple of days after the judgment with a sale to Wells Fargo, as trustee. The foreclosure deed was recorded in May of 2008 and within a few days the confirmatory Assignment of Mortgage was put in recordable form reflecting Wells Fargo as the assignee and filed with the registry of deeds.

    Significantly, the courts’ records reflected inadequate documentation of the transfers of the Ibanez and LaRace loans from Option One to the intermediate assignor/assignees and finally to the Banks. In the Ibanez case, U.S. Bank was unable to produce for the Land Court the necessary agreements or schedules to those agreements pursuant to which the Ibanez loan was assigned from prior holders to U.S. Bank as trustee. In the LaRace case, Wells Fargo was unable to produce to the satisfaction of the Land Court a schedule to the pooling and servicing agreement pursuant to which it acquired the LaRace loan that adequately identified the LaRace loan. As in the Ibanez case, the Land Court also ruled that there was a lack of evidence in the record to reflect that the LaRace loan had been properly assigned from Option One to the subsequent intermediate holders of the LaRace loan, including the entity that assigned such loan to Wells Fargo prior to the notice of foreclosure and sale. 

    The Massachusetts Supreme Court’s Decision

    The Massachusetts Supreme Court noted that because Massachusetts law permits non-judicial foreclosure by a mortgage holder, a foreclosing mortgage holder must strictly follow the requirements of Massachusetts law governing foreclosure. One of the requirements of the foreclosure law that must be strictly observed is that the “statutory power of sale” can only be exercised by “the mortgagee or his executors, administrators, successors or assigns.” Any attempt to foreclose by any other party renders the foreclosure sale void.

    In both foreclosures, the Massachusetts Supreme Court found that the Banks were unable to establish that they owned the mortgage loans at the time of notice of foreclosure and sale because the Banks were unable to produce executed agreements and schedules to those agreements reflecting a clear chain-of-title of the mortgage loans from Option One to the Banks. Notably, the Massachusetts Supreme Court ruled that a post-foreclosure assignment is not able to cure a failure to own the mortgage loan at the time of notice of foreclosure and sale.

    More significantly, the Massachusetts Supreme Court stated that its ruling should not be read as an invalidation of the commonly held practice of executing Assignments of Mortgage “in blank,” which securitization participants have viewed as an acceptable practice so long as a complete chain-of-title (or assignment) from the mortgage holder of record to the trustee can be established. Further, the Massachusetts Supreme Court held that an Assignment of Mortgage does not have to be in recordable form or recorded at the time of the notice of sale or at the time of the subsequent foreclosure sale, so long as the assignment itself was made prior to notice of foreclosure and sale. Customarily, the in blank Assignment of Mortgage remains in the loan files held by the securitization custodian until it becomes necessary to register a sale of the related foreclosed property to the trustee, at which time the Assignment of Mortgage is completed by filling in the blank with the foreclosing party’s name and registered with the appropriate land recordation office.

    While the Massachusetts Supreme Court’s ruling did not invalidate a fundamental tenet of securitization, it did reiterate that it is critical that the foreclosing party have ownership of the loan at the time of notice of foreclosure and sale. In addition, the foreclosing party should be able to prove such ownership through production of executed assignment agreements (and schedules thereto) entered into prior to the foreclosure evidencing a complete chain-of-title from the party reflected on the recorded mortgage to the foreclosing party. As a result, the securitization industry should view the ruling as a lesson learned regarding the requirements for documentation of assignments and proof of ownership of mortgages in Massachusetts rather than a condemnation of customary securitization conveyance practices.