Case Summary: U.S. Bank v. Ibanez (458 Mass. 637)

The Massachusetts Foreclosure Blog presents cases summaries on the major Massachusetts foreclosure law cases.  The post discusses the seminal decision of U.S. Bank v. Ibanez.

Ibanez was the first Supreme Judicial Court decision of the recent foreclosure crisis.  Up to Ibanez, foreclosure law had been mostly left alone by Massachusetts courts, with no significant decisions in the past century.  Ibanez not only sent shockwaves through Massachusetts but also drew national attention as well.

Ibanez started as a case where two foreclosing entities—after performing non-judicial foreclosures—went to Land Court in an attempt to quiet title to their respective properties.  In short, these foreclosing entities were asking the Court to declare they were the rightful and true owners of the properties. Simple enough?

Not so, said the Supreme Judicial Court, who heard these cases on appeal.  The SJC held that these foreclosing entities were not the rightful owner of these properties because they failed to properly follow Massachusetts foreclosure law.  Why?  These entities did not hold the respective mortgages of these properties at the time of the foreclosure, meaning they were not the “mortgagee” under G.L. 244 § 14.

To understand these, we need to take a step back.  In the old days, when you bought a home, you took out a mortgage that belonged to the local bank.  The mortgage stayed with this bank, where you made your payments until the debt was satisfied.

Times have changed.  Today, many mortgages are “securitized.”  Securitization is a complicated financial process where financial debts are “pooled” into investments, shares of which are sold to investors.  Think of it like a baker who combines different ingredients into a cake and sells slices of the combined, finished product for profit.

In Ibanez,  the underlining mortgages had been securitized.  Unfortunately for the foreclosing entities, these financial institutions didn’t do their paperwork and did not have proper assignment of the mortgages as of the time of foreclosure.  As a result, the underlining foreclosures were void.

So, what are the take home lessons of Ibanez?

    • To do a foreclosure, a foreclosing entity must have record assignment of the mortgage. Paperwork needs to be checked carefully to see if this important requirement in satisfied.
    • The Supreme Judicial reaffirmed the long-standing requirement of “strict compliance” for non-judicial foreclosures.  While this has been part of Massachusetts caselaw for over a century, Ibnanez made it clear that this high level of review continues to exist in reviewing the validity of foreclosures.
    • Challenging a foreclosures does not require a showing of “prejudice” to the mortgagor.  In other words, a foreclosure can be defective even if the defect or error had no impact on the mortgagor.
    • Ibanez is applies to all Massachusetts foreclosures, even those happening years ago.  This is of particular concern to homeowners who have purchased foreclosed properties and title insurance companies who have insured such properties.  No easy solution exists for fixing these “Ibanez” issues.

Types of MA Foreclosures

Massachusetts has three types of foreclosures:

  1. Judicial Foreclosure:  The least common type of foreclosure in Massachusetts, a mortgagee can go to court and get an order allowing it foreclosure.  Doesn’t happen very often.
  2. Foreclosure by Entry:  A foreclosure by entry is when a mortgagee makes an “open and peaceful” entry on the premises and records a certificate in the land records.  The mortgagor has three years from the date of recording to oppose it, or foreclosure loses the right to challenge foreclosure.  Foreclosure by entry serves as a backup option for mortgagee; many times a mortgagee will start a foreclosure by entry at the same time if begins a non-judicial foreclosure.  If, for any reason the non-judicial foreclosure is unsuccessful, the mortgagee can rely on the foreclosure by entry (assuming the mortgagor fails to oppose the entry).  More on this to come . . .
  3. Non-Judicial Foreclosure:  A non-judicial foreclosure, as known as a foreclosure by power of sale, is the most common type of foreclosure in Massachusetts.  A non-judicial foreclosure has extensive notice requirements and procedural requirements, including publication in a local newspaper and a public foreclosure auction.

The Myths of Foreclosure Defense

In the world of foreclosure defense, many myths exist.  Thanks to the email and the Internet, it’s easy to get the wrong information about this important area of law.  The Massachusetts Foreclosure Law Blog presents the top 3 myths about foreclosure defense:

1.  “With all the fraud by big banks and lawsuits against financial institutions, fighting a foreclosure is breeze.”

THE TRUTH:  Foreclosure defense is tricky, technical work.  While there are many stories about fraud in the foreclosure process, proving fraud is tough.  In fact, most successful defenses to foreclosures involve “devil in the detail” arguments, and few about actual fraud.  I have a little doubt that fraud and other shenanigans does occur by foreclosing entities, but successful defenses often require much less obvious—and much more boring—arguments.

2.  “Fighting a foreclosure means I’ll get a free home.”

THE TRUTH:  While it is possible to fight a foreclosure, it is much, much more difficult to fight a mortgage.  In short, while you may be able to beat foreclosure, the mortgage still exists, and the mortgagee can, and almost certainty will, begin a new foreclosure if the existing foreclosure is void. This will take time (2-3 years by my estimate under the current laws).  So, while fighting a foreclosure ensures you more time, it does solve the underlining problem on its own.  Rather, fighting a foreclosure opens the door to a possible settlement with your lender or possible help from state/federal programs aimed at keeping people in their homes.

2.  “Fighting a foreclosure is always the best thing to do when faced with an eviction notice from the bank.”

THE TRUTH:  The decision on whether to fight a foreclosure is not always a legal one.  You should consult a financial adviser who can discuss the financial implications of a foreclosure defense.  While a lawyer can tell you whether the foreclosure can be beat, a financial adviser can discuss with whether such a strategy is in your long-term, financial interest.