By Paul R. Collier, III
A quartet of decisions by the Supreme Judicial Court rejected mortgage lending industry efforts to immunize itself from liability for predatory and reckless loan underwriting and unauthorized foreclosures. While the industry criticizes these decisions, it makes no real argument as to their doctrinal soundness. Instead, “setting blame aside,” the industry objects that these decisions provided no benefits to homeowners, and created “outright chaos” in the marketplace.
As to the first of these claims, the industry is being disingenuous at best, dissembling at worst. The claims and defenses based on the Supreme Judicial Court decisions have preserved literally thousands of homes in the Commonwealth. Yet, notwithstanding its professed concern for the welfare of struggling homeowners, lending industry voices in every fora have opposed mortgage modifications that reduce loan principal (and other homeowner relief measures) because of the “moral hazard” flowing from debt-buried homeowners escaping the consequences of their borrowing conduct. In truth, the industry seeks only to set aside its responsibility for the dire state of many under water U.S. homeowners.
As to the claim of “market chaos,” the evidence shows nothing of the sort. To the contrary, realty tracking services document increasing numbers of properties purchased at foreclosure sales, declines in bank-owned properties, and increases in “short sales” and other alternatives, both in Massachusetts and nationwide. The number of homes preserved, moreover, will only increase as a result of the Attorney General’s Home Corps grants providing legal representation to homeowners facing foreclosure.
The Past as Prologue
The Supreme Judicial Court presaged the housing market collapse in Commonwealth v. Fremont Inv. & Loan, 452 Mass. 733, 739 (2008), where the Court affirmed now-Supreme Judicial Court Justice Gants’ decision that origination of mortgage loans “doomed to foreclosure” violated the Consumer Protection Act. Judge Gants reached this conclusion after the Commonwealth’s Attorney General reviewed nearly two hundred sub-prime loans made by Fremont, and objected to foreclosure of most of those loans as predatory and unfair, or, as Judge Gants held in a related decision, “made with reckless disregard of the risks of foreclosure.” Predictably, securitized lenders’ “reckless” loan origination practices led inexorably to the “careless” foreclosure of those unsound mortgages; this explosion of securitized mortgage foreclosures drove the Supreme Judicial Court’s foreclosure trilogy: United States Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637 (2011), Bevilacqua v . Rodriguez, 460 Mass. 762 (2011), and Eaton v. Fannie Mae, 462 Mass. 569 (2012).
Before narrowing the discussion to decisional precedent, some context is merited. First, while predatory loans touched all races and all communities, sub-prime loans were overwhelmingly made to borrowers of color. Since the foreclosure crisis began, communities of color experienced nearly double the foreclosure rates of white communities, with all of the collateral damage which high-foreclosure communities face. Comparing 2004 and 2009 Census Bureau data, the financial fallout of the losses of family homes, and loss of value even where families preserved their homes, resulted in the greatest wealth disparity by race ever recorded, with the median net worth of black American families falling to one twentieth that of white families, median black net worth falling to $5,677, and one third of black American families with zero or negative net worth. http://www.pewsocialtrends.org/2011/07/26/wealth-gaps-rise-to-record-highs-between-whites-blacks-hispanics/
Ibanez, Bevilacqua, and Eaton
Ibanez was the first of the trilogy, where the securitized trustee foreclosed on a home despite not having title to the mortgage which provided the sole authority for the non-judicial foreclosure. By a back-dated assignment, the trustee admitted to acquiring the mortgage over a year after the foreclosure sale, and then sought a judicial declaration of valid, conveyable title. In support, the Real Estate Bar Association (REBA) asserted that “…it was the understanding of the conveyancing bar that it was acceptable practice for a noteholder to commence foreclosure proceedings with the understanding that the necessary confirming assignments could be obtained and later recorded.” The Ibanez Court rejected this “understanding,” observing that Massachusetts authority had been to the contrary for two centuries:
Recognizing the substantial power that the statutory scheme affords to a mortgage holder to foreclose without immediate judicial oversight, we adhere to the familiar rule that “one who sells under a power [of sale] must follow strictly its terms. If he fails to do so there is no valid execution of the power, and the sale is wholly void.” …
One of the terms of the power of sale that must be strictly adhered to is the restriction on who is entitled to foreclose. The “statutory power of sale” can be exercised by “the mortgagee or his executors, administrators, successors or assigns.” … Any effort to foreclose by a party lacking “jurisdiction and authority” to carry out a foreclosure under these statutes is void.
Ibanez, supra at 646-647. Holding the “retroactive” foreclosure sale void, the Ibanez ourt also declined the invitation to hold that the promissory note and the securitization documents gave the trustee sufficient “financial interests” and “indicia of ownership” to foreclose.
Bevilacqua followed Ibanez. There, both mortgage bankers and the title industry sought to launder properties foreclosed by non-mortgagees in violation of Ibanez by contending that the sale of such properties with void foreclosure titles created a valid title in subsequent purchasers. Bevilacqua, supra at 774 – 778. The Court disagreed:
[T]he key question in this regard is whether the transaction is void, in which case it is a nullity such that title never left possession of the original owner, or merely voidable in which case a bona fide purchaser may take good title…. Our recent decision in the case of U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 647 (2011), however, concluded that”[a]ny effort to foreclose by a party lacking ‘jurisdiction and authority’ to carry out a foreclosure under [the relevant] statutes is void.” We decline the invitation to revisit this issue.
Eaton closes the trilogy. In Eaton, the Supreme Judicial Court faced the obverse of the question presented in Ibanez – whether the holder of a mortgage assignment but not the debt could foreclose upon a property for non-payment of that debt. Here, both REBA and the title insurance industry contended that unity of mortgage title and note was not required for foreclosure. Again, this was a disingenuous position: although both had argued in Ibanez that noteholders could foreclose without assignment of the mortgage because the debt was the important issue, both argued in Eaton that the debt was wholly unnecessary to foreclosure.
Industry representatives grafted onto this argument the same, frantic “sky-is-falling” predictions asserted in Ibanez and Bevilaqua: that if the “unity” requirement was affirmed, then, because recording of notes in Registry or Land Court records was not a legal requirement, all record titles would be in question. This was puzzling, since in Ibanez the industry had vehemently argued that assignments of mortgages at the Registry historically were not, and should not be, required; but if unrecorded and unrecordable mortgage assignments posed no threat to title integrity, then why did unrecorded notes threaten civilization as we know it?
The Court affirmed the “Unity Rule,” holding that the term “mortgagee” meant a mortgagee who also holds the underlying mortgage note….” Yet, despite what the Court described as 150 years of precedent, the Court limited its holding to prospective application, “because of the fact that our recording system has never required mortgage notes to be recorded.” The Court explicitly suggested that non-recording issues be resolved by a title affidavit system, creating a Registry record for future foreclosure titles.
Back to the Future
Although the Legislature moved quickly to adopt the suggested affidavit system, there are several significant issues simmering in trial court proceedings. Some have come about as a result of legislative efforts to address predatory lending and foreclosure activities which have so tarnished a banking industry once perceived as more George Bailey than Gordon (“Greed is Good”) Gekko, while others are simply the latest strategies of a securitized finance sector determined to force foreclosed homeowners and invisible investors, rather than the banks and mortgage loan servicers, to pay the costs of its practices. Most importantly, after four years of over-patient state and federal governmental cajoling of securitized loan servicers to preserve families in their homes where a mortgage modification would produce more value than a sale by foreclosure, the Legislature has now made these mortgage modifications mandatory in G.L. c. 244 §§35A, 35B, and 35C. “An Act Preventing Unlawful and Unnecessary Foreclosures” compels loan servicers to do what sound business judgment (and basic humanity) could not. The industry should face close scrutiny to ensure that the statutorily-required “net worth” comparison between the “value” of affordable modifications (preserving the family’s home) and the value obtained from the foreclosure sale of that home bears more relationship to reality that their predatory lending “underwriting standards” did.
In that vein, contrary to their own entwined funding, purchasing and securitizing structures, securitized trustees and their servicers argue in the courts that their pre-ordained mortgage loan pipeline represents an arms-length, bona fide purchaser transaction. On that basis, the finance industry now argues that it should be immune from liability for the predatory practices of their originating assignors despite long-established precedent that assignees stand in the shoes of their assignors. These issues are currently on direct appellate review in the Supreme Judicial Court in Drakopoulos v. U.S. Bank, Trustee, SJC – 11271.
Similarly, the issue of whether only a mortgagee may undertake foreclosure-related action has arisen again, this time with regard to the G.L. c.. 183 §21 and c. 244 §35A requirements concerning exercise of the statutory and contractual powers of sale and mortgage acceleration. §35A has, since May 1, 2008, expressly commanded that only a “mortgagee” may accelerate a residential mortgage, and that the required notice “shall inform the mortgagor of… the name and address of the mortgagee or anyone holding thereunder….” Confronted with trustees and/or servicers sending these notices without any mortgage assignment, and even representing originators or servicers as the “mortgagee,” trial courts have differed both as to the meaning, and the effect of a breach of this provision.
Finally, industry counsel assail the Supreme Judicial Court decisions as “unnecessarily” and “ill-advisably” rejecting the industry’s lending and foreclosure practices which the Court – and many experienced Massachusetts conveyancers, including Judge Keith Long, the Land Court Judge deciding both Ibanez and Bevilacqua, andMass. Lawyer’s Weekly’s “Avuncular Adviser” – have characterized as surprisingly careless; instead, the industry practices should have been approved because they represented local practices. But our courts long ago recognized that an entire industry could choose expedience over due care, and that the judiciary was ill-advised to subordinate the public interest to private ordering. The T. J. Hooper, 60 F.2d 737 (2d Cir.N.Y. 1932). From unsound loan origination to false robo-signing of judicial documents to careless foreclosure of family homes, the securitization industry has shown, again and again, that expedience is king. Where the lending industry is seeking to dispossess families from their homes with no judicial oversight, surely requiring that lenders do so meticulously in compliance with the minimal requirements of the mortgage and the law is not too much to expect.
If the industry’s reckless underwriting and their careless foreclosures are any guide, there is indeed more to come.
Since 1977, Paul R. Collier, III has been a public interest lawyer, working as a legal services attorney, a Lecturer on Law in Advanced Civil Litigation and Trial Practice at Harvard Law School, and Director of Litigation and the Predatory Lending Project at the Wilmer/Hale Legal Services Center of the Harvard Law School. He practices in Cambridge, was counsel in Ibanez, and Amicus in Fremont, Bevilacqua, and Eaton.