U.S. Bank v. 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.