The creation and subsequent collapse of mortgage-backed securities had far reaching impacts on both the housing and stock markets. Not coincidentally, as reflected in numerous appellate decisions over the past three years, attempts to exercise the statutory right of sale with regard to such securitized loans have been complicated and led to fundamental changes in the mortgage foreclosure process in the Commonwealth. Experience has revealed that the assignment of securitized loans has been poorly documented and carried out with little concern for who maintained the interest in the underlying mortgage note secured by the mortgage. Prior to these cases, it had been accepted practice for foreclosing mortgagees to receive post-foreclosure assignments and to foreclose without a documented interest in the mortgage note. The Supreme Judicial Court (“SJC”) has now held that, to foreclose under G.L. c. 244 and G.L. c. 183, a foreclosing mortgagee must – at the time of notice and foreclosure – hold both the mortgage and the underlying note or act on behalf of the note holder. The foreclosure of many securitized mortgages failed to meet such requirements. While recent decisions of the SJC and Appeals Court have placed some outside limits on this rule, many titles have been clouded and remain clouded by these developments.
In U.S. Bank National Association v. Ibanez, the SJC held that, under the plain language of G.L. c. 183, § 21 and G.L. c. 244, § 14, a purported assignee of a mortgage could exercise the power of sale contained in the mortgage only if it possessed the mortgage at both the time of the notice of sale and the subsequent foreclosure sale. 458 Mass. 637, 648 (2011). U.S. Bank brought a quiet title action in Land Court pursuant to G.L. c. 240, § 6, seeking a declaration that it held title to certain land it bought back at its own foreclosure sale, alleging that it had become the holder of the subject mortgages by way of an assignment made after the foreclosure sale. Id. at 638-639. The Land Court entered judgment against U.S. Bank finding that a post-notice and post-foreclosure assignment resulted in an invalid foreclosure. Id. at 639.
The SJC affirmed and found that a mortgage that contains a power of sale permitting foreclosure refers to and incorporates the statutory requirements of G.L. c. 183, § 21 and G.L. c. 244, §§ 11-17C. The SJC concluded that a foreclosing mortgage holder must strictly follow the requirements of these statutes or any resulting sale will be “wholly void.”
The SJC held that post-notice, post-foreclosure mortgage assignments failed the strict adherence standard on two counts. First, pursuant to G.L. c. 183A, § 21 and G.L. c. 244, § 14, as relevant to the facts presented, the statutory power of sale can only be exercised by the mortgagee. Second, G.L. c. 244, § 14 provides that a statutory sale is ineffectual unless notice has been provided to the mortgagor and also published. Id. at 647. The SJC reasoned that because only the “present holder of the mortgage is authorized to foreclose” and “because the mortgagor is entitled to know who is foreclosing,” a notice lacking such accurate information is defective, and a foreclosure sale relying on such deficient notice is void. Id. at 648. Importantly, the SJC held that strict adherence to the statute does not require that an assignment be in recordable form at the time of the notice of sale or the foreclosure sale. Id. at 651.
The SJC rejected plaintiffs’ request to apply the decision prospectively, noting that prospective application is warranted only where a “significant change in the common law” is made. Ibanez, 458 Mass. at 654. Ibanez observed that the law had not changed as a result of the decision, rather “[a]ll that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.” Id. at 655.
In Bevilacqua v. Rodriguez, the SJC was presented with the question of whether a plaintiff has standing to maintain a try title action under G.L. c. 240, §§ 1-5 when he is in physical possession of property but his foreclosure deed is a nullity under the SJC’s holding in Ibanez. 460 Mass. 763 (2011). A try title action is fundamentally different from other civil actions involving disputed title. It allows a plaintiff – upon the satisfaction of jurisdictional prerequisites – to compel an adverse party either to abandon a claim to the plaintiff’s property or to bring an action to assert the claim in question. Id. at 766. Before an adverse party can be summoned and compelled to either disclaim or try its title, the plaintiff must establish two jurisdictional facts: (1) that it is a person in possession, and (2) that it holds a record title to the land in question. Id. at 766-767 (citing Blanchard v. Lowell, 177 Mass. 501, 504 (1901); Arnold v. Reed, 162 Mass. 438, 440-441 (1894)). Unlike a quiet title action, which requires a plaintiff to prove a sufficient title to succeed, a plaintiff in a try title action may defeat an adverse claim by default or by showing its title is superior to that of the respondents. Id. at 767 n.5.
Bevilacqua argued that the mortgage, which was purportedly foreclosed, constituted a cloud on the title he claimed to possess as the result of a void foreclosure sale. Id. at 765-766. The SJC held that Bevilacqua did not have standing to advance a try title action. Id. at 780. While the SJC accepted that Bevilacqua was “a person in possession,” it rejected his claim that a foreclosure deed from a defective foreclosure gave him the record title required by G.L. c. 240, § 1. Id. at 770.
The decision in Eaton v. Federal National Mortgage Association, which as discussed further below was given prospective application, addressed a question that was not presented in Bevilacqua: whether a mortgage holder may foreclose the equity of redemption without also holding the mortgage note or acting on behalf of the note holder. 462 Mass. 569 (2012). Eaton concluded that under G.L. c. 183, § 21 and G.L. c. 244, § 14, to be a “mortgagee authorized to foreclose pursuant to a power of sale, one must hold the mortgage and also hold the note or act on behalf of the note holder.” Id. at 571.
Eaton filed a complaint in Superior Court to enjoin a summary process eviction. Id. at 570-571. The trial court granted the plaintiff a preliminary injunction. Id. at 571. After a single justice of the Appeals Court denied a petition by the defendant and reported same to a full panel, the SJC transferred the case on its own motion.
The SJC observed that a real estate mortgage has two distinct but related aspects: (1) it is a transfer of title, and (2) it serves as security for an underlying obligation (and is defeasible when the debt is paid). Id. at 575. While the Court recognized that a mortgage and an underlying note can be separated or “split,” it found that in such circumstances the mortgage is a mere technical interest. Id. at 576. Relying upon its analysis in Ibanez, Eaton found that under Massachusetts common law, when a mortgage is split from the underlying note, “the holder of the mortgage holds the mortgage in trust for the purchaser of the note,” which purchaser has an equitable right to an assignment of the mortgage. Id. at 576-577 (quoting U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 652 (2011)). Eaton thus held that at common law, “a mortgagee possessing only the mortgage was without authority to foreclose . . . .” Id. at 577-578.
The defendant’s statutory arguments fared no better. Eaton held that a foreclosure sale conducted pursuant to a power of sale in a mortgage must comply with all applicable statutory provisions, including G.L. c. 183, § 21 and G.L. c. 244, § 14. Id. at 571, 579-581. G.L. c. 244, § 14 provides, in relevant part:
The mortgagee or person having his estate in the land mortgaged, or a person authorized by the power of sale, . . . may, upon breach of condition and without action, do all the acts authorized or required by the power.
Id. at 581 (emphasis in original). The SJC held that the term “mortgagee” in § 14 was ambiguous and concluded that the Legislature intended that a “mortgagee” must also hold the mortgage note. Id. at 581-582, 584. However, Eaton made clear that a foreclosing mortgagee need not have physical possession of the mortgage note to validly foreclose. Recognizing the application of general agency principles in this context, the SJC interpreted the statutes to permit “the authorized agent of the note holder, to stand ‘in the shoes’ of the ‘mortgagee’ as the term is used in these provisions.” Id. at 586.
In giving Eaton prospective application, the SJC considered several factors including the fact that the term “mortgagee” in the statute was ambiguous. Id. at 587. The Court also noted that Eaton’s ruling differed from prior interpretations which, if retroactive, could create difficulties in ascertaining the validity of certain titles. Id. at 588.
The scope of Eaton’s prospective application was recently clarified in Galiastro v. Mortgage Electronic Registration Systems, Inc., 467 Mass. 160 (2014). On direct appellate review to the SJC, the Galiastros argued that, because their appeal of the same issue was stayed pending the decision in Eaton, the Eaton decision should apply to their claims. Id. at 167. The SJC agreed, holding that the Eaton decision would apply to cases that were on appeal at the time Eaton was decided (June 22, 2012) and in which a party claimed a foreclosure sale was invalid because the holder of the mortgage did not hold the note.
As many post-foreclosure challenges to the validity of the foreclosure process arise in connection with summary process proceedings (Eaton among them), it is not surprising that the Housing Court has been confronted with these issues. But, as a court of limited jurisdiction, a preliminary issue was presented as to the scope of the Housing Court’s authority. In Bank of America, N.A. v. Rosa, the SJC held, inter alia, that the Housing Court has jurisdiction to consider defenses and counterclaims challenging a bank’s right to possession and title, including those premised upon the validity of a prior foreclosure sale. 466 Mass. 613, 615 (2013). The case did not, however, extend Housing Court authority to original actions to set aside a foreclosure. Id. at 624 n.10.
The SJC’s recent decision in U.S. Bank National Association v. Schumacher limits the Court’s broad holding in Eaton. 467 Mass. 421 (2014). Schumacher held that a mortgagee’s failure to provide notice of a ninety-day right to cure, as required by G.L. c. 244, § 35A, did not affect the validity of a foreclosure sale because § 35A is not part of the foreclosure process and, therefore, strict compliance was not required to validly foreclose. Id. at 422. The SJC rejected Schumacher’s attempt “to engraft” the requirements of § 35A onto the power of sale because it properly viewed § 35A as a mechanism that gives a mortgagor an opportunity to cure a payment default before the foreclosure process is commenced. Id. at 431. As the § 35A notice procedure was viewed as a “preforeclosure undertaking,” it is not one of the statutory requirements with which a mortgagee must strictly comply in exercising its statutory power of sale.
In a concurring opinion in Schumacher, Justice Gants provided guidance to homeowners facing foreclosure. Justice Gants opined that when a mortgage holder fails to provide notice pursuant to § 35A, a homeowner may file an equitable action in the Superior Court seeking to enjoin the foreclosure. In a post-foreclosure proceeding, Justice Gants suggested that while a violation of § 35A may not alone be relied upon to defeat an eviction, if a defendant can prove that the violation “rendered the foreclosure so fundamentally unfair,” it may be sufficient to set aside a foreclosure sale “for reasons other than failure to comply strictly with the power of sale provided in the mortgage.” Id. at 433 (Gants, J., concurring) (quoting Rosa, 466 Mass. at 624).
In the recent case of Sullivan v. Kondaur Capital Corporation, the Appeals Court had an opportunity to address two questions of first impression in this arena – one on standing and one regarding registered land – and a chance to rein in efforts to extend Ibanez and its progeny. 85 Mass. App. Ct. 202 (2014). The Sullivans owned registered land and executed a mortgage conveying legal title to MERS, which mortgage was thereafter filed for registration with the Land Court. The mortgage was assigned to Kondaur Capital, which also filed for Land Court registration. Kondaur Capital thereafter foreclosed and filed a summary process action in the District Court. The case for possession settled with the Sullivans reserving rights to challenge Kondaur Capital’s title, which they did by subsequently filing an action in the Superior Court based upon Ibanez. Because the dispute involved registered land, the case was transferred to the Land Court, which has exclusive jurisdiction of such claims. Id. at 204.
The Appeals Court first addressed Kondaur Capital’s argument that the Sullivans had no standing to challenge defects in the assignments to which they were not a party. While acknowledging that a party who does not benefit from a contract could not enforce it, the Court concluded that the plaintiffs were not attempting to enforce rights under the contract. Rather, the Court found the Sullivans were challenging Kondaur Capital’s claim that it owned the subject property which, but for the foreclosure, the Sullivans would still own. The Appeals Court held that, to protect its ownership interest, a property owner has standing to challenge the bank’s authority premised upon the validity of the assignment. Id. at 205-206.
Kondaur Capital also claimed that the plaintiffs were precluded from challenging the validity of its title because the mortgage had been registered with the Land Court, and a transfer certificate of title had issued in its name prior to the filing of plaintiffs’ action. The Court rejected the contention, noting that there are numerous exceptions to the conclusiveness of registration. The Appeals Court concluded that Kondaur Capital was not an innocent third-party purchaser but a mortgagee required to establish its title by reference to various instruments of assignment following the plaintiffs’ mortgage to MERS. The Court held that Kondaur Capital was “fairly charged” with knowledge of the deficiencies in its chain of title, and its certificate of title could be challenged based upon any break in that chain. Id. at 208.
The Appeals Court also rejected the argument that because MERS had no ownership interest in the underlying note, it could not assign the mortgage unless authorized by the debt’s owner. The Court noted that the Eaton decision was prospective and not available to the plaintiffs and, in any case, did not require that a mortgagee hold legal and equitable title at the time of an assignment of the mortgage. Id. at 208-210. The Court correctly observed that “nothing in Massachusetts law requires a foreclosing mortgagee to demonstrate that prior holders of the record legal interest in the mortgage also held the note at the time each assigned its interest in the mortgage . . . .” Id. at 210. In fact, as the Court noted, Eaton confirmed that a mortgage could be separated from the debt it secured and, even at the time of foreclosure, the mortgage holder simply needs to demonstrate it holds the note or acts as the note holder’s authorized agent. Sullivan, 85 Mass. App. Ct. at 210.
The Appeals Court ultimately found that the Sullivans’ challenge to the signature on the assignment to Kondaur Capital should have survived the motion to dismiss and remanded the case. The Court ruefully observed that the circumstance presented a further illustration of “the utter carelessness with which the [foreclosing lenders] documented the titles to their assets” described in the Ibanez concurrence. Id. (quoting U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 655 (2011) (Cordy, J., concurring)).
These cases have had a profound and immediate impact on the foreclosure process in the Commonwealth. Fortunately, the cases have provided direction with regard to how a mortgagee can both comply with the applicable statutes and demonstrate its compliance in the face of subsequent challenge. Unresolved at this stage, however, is how titles clouded by deficiencies in earlier foreclosures will be cleared – a remedy which now appears to be left to the Legislature. Unless and until some curative legislation is signed into law, the carelessness with which securitized mortgages were documented and tracked over the last decade will deprive thousands of innocent purchasers at foreclosure of good, clear and marketable titles to their homes and properties.
Thomas Moriarty is a partner in the firm of Marcus, Errico, Emmer & Brooks, P.C. and chair of its Litigation Department. He served as 2010 President of the Real Estate Bar Association, is a past co-chair of REBA’s Litigation Committee, and currently serves as Co-Chair of both the Residential Conveyancing and the Unauthorized Practice of Law Committees and as a member of the organization’s Board of Directors and its Executive Committee.
 The Ibanez mortgage, like many securitized mortgages, followed a complex and tortuous path of assignments ultimately reaching U.S. Bank. Ibanez, 458 Mass. at 641.
 Justice Cordy, in a concurring opinion, noted “that what is surprising about these cases” is not the statements of law “but rather the utter carelessness with which the plaintiff banks documented the titles to their assets.” Ibanez, 458 Mass. at 655 (Cordy, J., concurring).
 The Eaton Court analyzed G.L. c. 244, §§ 17B, 19, 20 & 23 in detail in reaching its holding regarding the meaning of the term “mortgagee” in § 14, noting the terms “holder of mortgage note” and “mortgagee” are used interchangeably. Eaton, 462 Mass. at 582. Additionally, the Court points to the same conflation of meanings in G.L. c. 183, §§ 20-21. Id. at 584 n.23.
 At all times relevant in Schumacher, G.L. c. 244, § 35A gave a mortgagor of residential real estate a ninety-day right to cure a payment default prior to the commencement of foreclosure and required a foreclosing mortgagee to provide notice of such right to the mortgagor. Schumacher, 467 Mass. at 430.
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.
By Richard A. Oetheimer and Diane C. Tillotson
From the perspective of conveyancing attorneys and national mortgage lenders and servicers, the recent foreclosure decisions from the Massachusetts Supreme Judicial Court (“SJC”) have been surprising and a bit puzzling. Surprising that in such a seemingly settled area of the law the standard foreclosure practices of Massachusetts counsel, in reliance on local title standards, would be found not to conform to state law. Puzzling because the decisions neither address nor resolve the root of the problems underlying the litigation. The decisions have also highlighted some relatively unique aspects of Massachusetts mortgage law.
In many if not most American jurisdictions, the mortgage is mere security for the note and follows the note as a matter of law. See Carpenter v. Longan, 83 U.S. 271 (1872). Although Massachusetts has recognized this principle, by holding that the mortgagee holds the mortgage in trust for the note holder, who is the beneficial owner of the mortgage, the SJC’s decision in U.S. Bank, N.A. v. Ibanez, 458 Mass. 637 (2011) held that only the mortgagee can foreclose and that a note holder requires an assignment of the mortgage to do so. In Eaton v. Federal National Mortgage Association, 462 Mass. 569 (2012), the SJC held that, prospectively, a mortgagee must either hold the note or be the authorized agent of the note holder in order to foreclose. Because, as a matter of practice, notes have never been recorded in Massachusetts, retroactive application of this holding would have produced disastrous results as it would have been impossible to determine the validity of any foreclosure of record. Prospective application of this rule, while manageable, places additional burdens on the lenders and conveyancers but does little to address the underlying consumer issues.
Eaton, Ibanez and Bevilacqua v. Rodriguez, 460 Mass. 762 (2011), share a common ancestry: each case arises from efforts by a party grappling with the consequences of the plummeting value of real estate during the recent economic downturn. In Ibanez, the central player was a bank foreclosing without a valid assignment of the mortgage at the time of the foreclosure. Bevilacqua involved a purchaser for value after a foreclosure sale looking to establish good title in light of Ibanez, and in Eaton, a homeowner sought to defend against eviction and stay in her home. While each of these cases continues to have a significant impact on foreclosure practice in Massachusetts, the “deficiencies” addressed by the SJC in those cases were not at the root of financial problems faced by the parties and the Court’s decisions do little to resolve those issues. Recognizing that the Court can decide only the issues in the litigation before it, it is nonetheless unsettling that the loss to the consumer parties would have occurred regardless whether the assignment in Ibanez was timely delivered and/or recorded or whether the note in Eaton was held by the foreclosing mortgagee.
The fact pattern underlying Eaton is not uncommon. In 2007, Henrietta Eaton refinanced the mortgage on her home in the Roslindale section of Boston, executing a promissory note and mortgage in favor of BankUnited, FSB. Although BankUnited was identified as the lender in the mortgage, Mortgage Electronic Registration System, Inc. (“MERS”) was named as mortgagee and as a result became the holder of legal title with the power of sale as nominee of BankUnited or its assignee. The mortgage gave MERS the right to foreclose and sell the property. Two years later, MERS assigned its interest in the mortgage to Green Tree Servicing, LLC (“Green Tree”) and when Eaton failed to make payments on the note, Green Tree foreclosed and was the highest bidder at the sale. Shortly thereafter, Green Tree assigned its rights to Fannie Mae which commenced a summary process action to evict Eaton from her home in early 2010.
Eaton defended the summary process action with a counterclaim asserting that the foreclosure was void because Green Tree did not hold the note at the time of the foreclosure. The Housing Court stayed the foreclosure proceeding to give Eaton the opportunity to seek relief in the Superior Court, the Supreme Judicial Court having not yet decided Bank of New York v. Bailey, 460 Mass. 327, 333-34 (2011), where it determined that the Housing Court had jurisdiction to adjudicate counterclaims alleging invalid foreclosure sales in summary process actions. Notably, while Eaton raised claims concerning the validity of the foreclosure, she never disputed that the arrearages were owed or claimed that the note had been paid. The Superior Court agreed with Eaton that the foreclosure sale was invalid. The SJC interpreted G.L. c. 244, § 14 to require a foreclosing “mortgagee” to be either the note holder or the authorized agent of the note holder, and remanded Eaton for further proceedings on the agency question. Responding to pleas from the conveyancing and lending bar, the Court, noting that “significant difficulties in ascertaining the validity of a particular title” would arise if its holding was not limited to prospective operation, limited its Eaton holding to mortgage foreclosures for which the notice of sale was given after June 22, 2012, the date of the opinion.
As noted above, the effect of the Ibanez and Eaton decisions is to introduce an element of uncertainty to legal titles. Massachusetts is a “title theory” of mortgages state where the granting of a mortgage vests legal title in the mortgagee regardless of the note holder’s identity. While payment of the underlying debt would certainly be a defense to foreclosure, as noted below, there is nothing to suggest that this is a problem. In addition, Eaton raises a question concerning those situations where a mortgage is used as security for something other than a debt, for example, as security for the performance of obligations under a settlement agreement. While this concern is not relevant in the consumer context, Eaton is not limited to consumer transactions. The Court in Eaton did avoid some of the adverse effects of its earlier Ibanez ruling by giving its decision only prospective effect. For this reason, any concern that Eaton does not resolve “foreclosures in the pipeline” is misplaced; the date of publication of the notice is the touchstone (just as in Ibanez). So long as the notice issued prior to the opinion, no relationship to the note need be shown. See e.g.; McKenna v. Wells Fargo Bank, 693 F.3d 207 (1st Cir. 2012).
Legislative response to Eaton was swift and in the summer of 2012, the General Court amended G.L., c. 244, § 14 and added §§ 35(B) and 35(C). The amendments, effective November 1, 2012, provide a solution for dealing with the impacts of Eaton for residential mortgages (and residential foreclosures) of one to four-family dwellings. Prior to the notice of foreclosure sale, the creditor/foreclosing mortgagee must certify compliance with the Eaton requirements and the certification must be based on a review of the creditor’s business records and provides “conclusive evidence in favor of an arms-length third-party purchaser for value, at or subsequent to the resulting foreclosure sale” that the requirements have been met. Lenders may not pass on the cost of preparing these affidavits or any curative actions taken in response to Eaton to third parties. The Real Estate Bar Association of Massachusetts (“REBA”) has recently promulgated a form of affidavit meeting the requirements of Section 35(C).
The legislative response, while welcome, did not resolve all open issues. For example, the four-month gap relating to notices published between the June 22, 2012 date of decision and the November 1, 2012 effective date is not addressed, nor are mortgages related to commercial or other properties or large residential complexes. Presumably, affidavits meeting the requirements of Section 35(C) coupled with documentary evidence sufficient to satisfy the title insurance industry will satisfy the conveyancing bar’s need for the requisite certainty in certifying titles, albeit without the protection provided by Section 35(C) for residential properties. Conveyancers will need to ensure that the affidavits are executed by persons with appropriate authority and are duly recorded with the foreclosure documents. Certifying title to any property with a foreclosure in the chain of title will impose added burdens on the lender and conveyancing attorney and create additional caseload for the state’s housing courts as the “Eaton or Ibanez defense” will likely be raised in numerous summary process actions.
Whether they are right or wrong in their construction of Chapter 244, as a matter of public policy were the Court’s decisions necessary or advisable? Did the problems identified in those cases need to be addressed? Consumer law advocates have argued that securitization of loans resulted in fragmentation of interests that makes it impossible for a mortgagor to challenge authority to foreclose or to seek relief from the mortgage debt. But this argument does not withstand scrutiny.
What consumer law advocates are really lamenting is the institutionalization of the mortgage market in recent decades. For most borrowers, the era of calling George Bailey at the neighborhood Building & Loan to work out their financial difficulties is long past. These market forces were in place with the rise of the secondary mortgage market long before securitization.
When mortgages are securitized, the identity of the trustee, who holds the notes in a pool for the benefit of the certificate holders (the investors) is of little to no practical benefit to borrowers. Under the contractual documents governing the securitization, responsibility for the relationship with borrowers resides in the loan servicers. Federal law in the form of the RESPA statute, 12 U.S.C. §§ 2601 et seq., ensures that borrowers know who is servicing their loan, and where they are to send their loan payments. Generally it is the servicer who controls the foreclosure decision and process.
Some consumer advocates view it as problematic that the legal and equitable ownership and foreclosing authority are not united in a single party. But has this posed a real-world problem? Have borrowers been foreclosed who were not genuinely in default? No one is suggesting any pattern of this; in Ibanez,Justice Cordy’s concurrence noted there was no dispute that the mortgagors were in default and subject to foreclosure. Is there any evidence of strangers to the mortgage debt foreclosing? Again, no: in Ibanez the plaintiffs were the securitization trusts; and in Eaton it was the mortgage servicer. Have any mortgagors had creditors make competing claims to their loan debt? Once again, the answer is no; there is no evidence anyone has paid or been called upon to pay twice due to securitization.
In sum, the Court’s recent decisions have had the consequence of causing confusion in the marketplace, slowing the foreclosure process and complicating resale of properties. Questions of affixing blame for the sharp decline in housing prices and the resulting increase in foreclosures aside, it is natural to feel empathy for those at risk of losing their homes, and understandable to want to help them. Recent Massachusetts legislation is designed to do so by affording opportunities to certain borrowers to be considered for loan modifications. But at the same time there is a consensus among experts that an efficient foreclosure process is also a necessary component of stabilizing housing prices. It is hoped that the recent legislation passed in response to Ibanez and Eaton will have the effect of providing what the SJC in Bevilacqua believed it could not: good title to innocent third-party purchasers.
Richard A. Oetheimer is a partner at Goodwin Procter LLP. He participated as Amicus in Eaton on behalf of the Mortgage Bankers Association, and has represented mortgage lenders and servicers in foreclosure-related litigation. The views expressed herein are his own and not the views or positions of his clients.
Diane C. Tillotson is a partner at Hemenway & Barnes LLP who specializes in real estate permitting and litigation. She is a former President of both the Real Estate Bar Association and the Abstract Club and participated in the submission of the Amicus brief in Eaton filed on behalf of those associations. The views expressed herein are her own.