Banks lose important ruling on foreclosures
Top Massachusetts court voids foreclosures on two homes
In a decision that may affect foreclosures nationwide, Massachusetts' highest court voided the seizure of two homes by Wells Fargo & Co and US Bancorp after the banks failed to show they held the mortgages at the time they foreclosed.
Bank shares fell, dragging down the broader U.S. stock market, after the Supreme Judicial Court of Massachusetts on Friday issued its decision, which upheld a lower court ruling.
The unanimous decision is among the earliest to address the validity of foreclosures done without proper documentation. That issue last year prompted an uproar that led lenders such as Bank of America Corp, JPMorgan Chase & Co and Ally Financial Inc to temporarily stop seizing homes.
"A ruling like this will slow down the foreclosure process" for banks, said Marty Mosby, an analyst at Guggenheim Securities. "They're going to have to be really precise and get everything in order. It doesn't leave a lot of wiggle room."
Wells Fargo and U.S. Bancorp lacked authority to foreclose after having "failed to make the required showing that they were the holders of the mortgages at the time of foreclosure," Justice Ralph Gants wrote for the Massachusetts court.
In a concurring opinion, Justice Robert Cordy lambasted "the utter carelessness" that the banks demonstrated in documenting their right to own the properties.
Courts in other U.S. states are considering similar cases, and all 50 state attorneys general are examining whether lenders are forcing people out of their homes improperly.
Friday's ruling "will be certainly cited as persuasive authority by anybody in a similar scenario who's trying to hold onto his home," said Robert Nislick, a real estate lawyer at Marcus, Errico, Emmer & Brooks PC in Braintree, Massachusetts.
Analysts said the decision may also threaten banks' ability to package mortgages into securities, and may raise the specter that loans transferred improperly will need to be bought back.
"What they were doing was peddling these mortgages and leaving the paperwork behind," said Michael Pill, a partner at Green, Miles, Lipton & Fitz-Gibbon LLP in Northampton, Massachusetts, who represents homeowners and is not involved in the case.
A spokeswoman for San Francisco-based Wells Fargo, Teri Schrettenbrunner, had no immediate comment on the decision.
U.S. Bancorp spokesman Steve Dale said the decision has no financial impact on the Minneapolis-based bank, which has "no responsibility" for the terms or means of transfer of mortgages used in the securitization trusts it oversees as trustee.
In the Massachusetts case, U.S. Bancorp and Wells Fargo had said they controlled through different trusts the respective mortgages of Antonio Ibanez and the married couple Mark and Tammy LaRace, who lost their homes to foreclosure in 2007.
The banks bought the Springfield, Massachusetts, homes in foreclosure, and sought court orders confirming they had title. A lower court judge ruled against them in March 2009, and Friday's decision upheld this ruling.
Massachusetts is one of 27 U.S. states that do not require court approval to foreclose.
"It is the first time the supreme court of a state has looked straight at securitization practices and told the industry, you are not immune from state statutes and homeowner protections," Paul Collier, a lawyer for Ibanez, said in an interview.
The Supreme Judicial Court also rejected the banks' request that the ruling apply only in the future, leaving homeowners who had already been foreclosed upon without a remedy.
"I'm ecstatic," Glenn Russell, a lawyer for the LaRaces, said in an interview. "The fact the decision applies retroactively could mean thousands of homeowners can seek recovery for homes wrongfully foreclosed upon."
Russell said the LaRaces moved back to their home after the 2009 ruling, while Collier said Ibanez has not. "U.S. Bancorp will have to compensate him in exchange for the deed, or will have to walk away," Collier said.
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