Richard Vetstein is a nationally recognized real estate attorney,  frequently quoted in the media.  He was recently named one of Inman News’ 100 Most Influential in Real Estate. Mr. Vetstein is the founder of the Vetstein Law Group and TitleHub Closing Services LLC. The  former outside claims counsel for a national title company, he has an active real estate litigation practice. He blogs at massrealestatelawblog.com

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Post image for Apocalypse Now? Will The Massachusetts Ibanez Case Unravel Widespread Irregularities In The Residential Securitized Mortgage Market?

Barely 24 hours old — the Massachusetts Supreme Judicial Court’s U.S. Bank v. Ibanez decision is already a huge national story. CNN-Money calls it a “beat down” of the big banks. Reuters says its a “catastrophe risk” for banks. The Huffington Post claims there’s some Obama Administration-Bank of America conspiracy in play. The ruling has spooked investors, as bank stocks were down in reaction to the ruling. (Update: 1.9.11) In obvious reaction to the ruling, a coalition of seven major public pension systems called on the boards of directors of Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo to immediately undertake independent examinations of the banks’ mortgage and foreclosure practices.

The case certainly has national implications as the SJC is the first state supreme court to weigh in on this particular issue, and the majority of states have laws similar to Massachusetts’ regarding the assignment of mortgages, such as California and Georgia. Other courts across the country will likely be influenced by the ruling, and the SJC is widely regarded as one of the most respected state supreme courts in the country.

But is the Ibanez ruling really the next Foreclosure Apocalypse?

That remains to be seen. But the answer to the question will likely rest with what has transpired under little-known, complex mortgage securitization pooling and servicing agreements, known as PSA’s. These complex agreements may unlock the key to who, if anyone, owns these non-performing mortgage loans and has the legal right to foreclose.

The Ibanez Fact Pattern: Mortgage Assignments In Blank, A Common Practice

On December 1, 2005, Antonio Ibanez took out a $103,500 loan for the purchase of property at 20 Crosby Street in Springfield, MA secured by a mortgage to the lender, Rose Mortgage, Inc. The mortgage was recorded in the county registry of deeds the following day. Several days later, Rose Mortgage executed an assignment of this mortgage in blank, that is, an assignment that did not specify the name of the assignee. The blank space in the assignment was at some point stamped with the name of Option One Mortgage Corporation (Option One) as the assignee, and that assignment was recorded in the registry of deeds on June 7, 2006. Before the recording, on January 23, 2006, Option One also executed an assignment of the Ibanez mortgage in blank.

Option One then assigned the Ibanez mortgage to Lehman Brothers Bank, FSB, which assigned it to Lehman Brothers Holdings Inc., which then assigned it to the Structured Asset Securities Corporation, which then assigned the mortgage, pooled with approximately 1,220 other mortgage loans, to U.S. Bank, as trustee for the Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2006-Z. With this last assignment, the Ibanez and other loans were pooled into a trust and converted into a mortgage-backed securities pool that was bought and sold by investors.

On April 17, 2007, U.S. Bank started a foreclosure proceeding in Massachusetts state court. Although Massachusetts requires foreclosing lenders to follow the Soldier’s and Sailor’s Servicemember’s Act to ensure the debtor is not in the military, it is considered a non-judicial foreclosure state. In the foreclosure complaint, U.S. Bank represented that it was the “owner (or assignee) and holder” of the Ibanez mortgage. At the foreclosure sale on July 5, 2007, the Ibanez property was purchased by U.S. Bank, as trustee for the securitization trust, for $94,350, a value significantly less than the outstanding debt and the estimated market value of the property.

On September 2, 2008–14 months after the foreclosure sale was completed – U.S. Bank obtained an assignment of the Ibanez mortgage.

The major problem was that as the time U.S. Bank initiated the foreclosure proceeding, it did not possess (and could not produce evidence of) a legally effective mortgage assignment evidencing that it held the Ibanez mortgage.

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Securitized Pooling and Servicing Agreements

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Almost all sub-prime mortgages and millions of conventional mortgages originated before the mortgage meltdown in 2008 were packaged in securitized mortgage securities and sold off to Wall Street investors. Securitized mortgages currently comprise over half, or $8.9 trillion, of the $14.2 trillion in total U.S. mortgage debt outstanding.

Pooling and Servicing Agreements are part of the complex mortgage securitization lending agreements. As one securitization expert explains, a Pooling and Servicing Agreement is the legal document creating a residential mortgage backed securitized trust. The PSA also establishes some mandatory rules and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the securitized trusts which hold the millions of bundles of mortgage loans.

Here is a sample Pooling and Servicing Agreement. Quite complex, as you can see. Most PSA’s are supposed to be filed with the SEC by law. Here’s a guide to find your loan in a securitized PSA using the SEC system.

The Ibanez Ruling

The Ibanez ruling clearly invalidates a common practice in the sub-prime mortgage securitization industry of assigning the mortgage in blank and not recording it until after the foreclosure process has started. The Court held that there must be evidence of a valid assignment of the mortgage at the time the foreclosure process starts which would establish the current ownership of the mortgage.

Left open by the Court was what evidence would suffice to establish such ownership, specifically referencing PSA’s:

“We do not suggest that an assignment must be in recordable form at the time of the notice of sale or the subsequent foreclosure sale, although recording is likely the better practice. Where a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder. However, there must be proof that the assignment was made by a party that itself held the mortgage.”

This language opens the door for Massachusetts foreclosing lenders to move ahead with foreclosures and cure title defects by using PSA’s to prove proper assignment of the mortgage loans. That is, if they can produce proper documentation that the defaulting mortgage was actually transferred into the pool and assigned to the end-holder before the initiation of foreclosure proceedings. Whether lenders can do this is another story.

Have Lenders Complied With The PSA’s?

The major problem for banks is mounting evidence is that originating lenders like Countrywide and Bank of America never transferred a vast number of loans into the securitized trusts in the first place. Josh Rosner, a well respected financial analyst, issued a client advisory in October, advising of widespread violations of pooling and servicing agreements on mortgages. Mr. Rosner counseled that although PSA’s require transfer of the promissory notes into the securitized trusts, that hardly ever occurred in the white hot run-up of securitized loans in the last decade. He also says that the mortgage assignments which must accompany each note are routinely ignored or left blank. (This was the major problem in the Ibanez case).

Mr. Rosner said:

“We believe nearly every single loan transferred was transferred to (securitized trusts) in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the (securitized trusts) as required by the PSA.”

Mr. Rosner concludes in this chilling statement:

There have been a large numbers of foreclosure proceedings where, because of improper assignments, the trust has been unable to demonstrate the right to foreclose. It is thus that we raised concern about the transfer “in blank name.” We do believe it likely the rush to move large volumes of loans may well have resulted in operational failures in the “true sale” process by some selling firms and trustees. Were this “missing assignment” problem, which we are witnessing in individual foreclosure proceedings, to be found to have resulted from widespread failure of issuers and trusts to properly transfer rights there would be appear to be a strong legal basis for the calling into question securitizations.

Mr. Rosner’s theory has been born out in court testimony. In a New Jersey bankruptcy case, a senior Bank of America manager admitted that Countrywide Loans routinely failed to transfer promissory notes as part of the securitization process. Countrywide, of course, went under but not after originating billions in loans.

But no one really has a handle on how widespread these irregularities are.

Apocalypse Now?

If, in fact, there exists widespread legal failure of securitized mortgage pools, as Mr. Rosner, theorizes, then we are possibly facing the Apocalypse Scenario, calling into question the legal and financial soundness of a large portion of the U.S. securitized mortgage market. Securitized mortgages comprise over half, or $8.9 trillion, of the $14.2 trillion in total U.S. mortgage debt outstanding.

“It may mean investors who think they bought mortgage- backed securities bought securities that aren’t backed by anything,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California. Well, that’s already happened. Check out this lawsuit by MBIA Insurance against Credit Suisse 0ver a bad securitization loan deal.

Before the Ibanez ruling came down Bloomberg News said the best scenario is that the disputes are deemed as legal technicalities, which would cause a one-year delay in foreclosures. In the medium case, years of litigation will ensue. In the worst case, the problem becomes systemic, causing “the mortgage market to grind to a halt as title insurers refuse to insure mortgages involving existing homes.”

Well, we now know from the Ibanez decision that this is hardly a “legal technicality.” So we are in the medium or worst case scenarios.

For those thousands (or millions?) of defaulted loans which were “assigned in blank,” I’m simply not sure if or how mortgage lenders are going to be able to cure the title defects they created. It’s going to take some major effort and creative lawyering, that’s for sure.

Rather scary, huh?

Don’t Believe The Hype?

Not all investment analysts, however, expect financial chaos. The controversy may cause a six-month delay in foreclosures and “have a muted effect on valuation” of about $154 billion of mortgage-backed securities, Laurie Goodman, senior managing director of Amherst Securities Group LP in New York, wrote in a note to investors. “Servicers will incur high costs both from re-processing loans that are in the process of foreclosure as well as from defending themselves in litigations,” Goodman wrote. “And investors definitely need to question the cash flows they are receiving on private-label MBS, to ascertain that they are not paying for expenses that rightfully belong to servicers.”

How many pools of mortgage loans are affected by the “assignment in blank” and related irregularities in the servicing pools? I haven’t been able to find any firm data.

For the sake of our economy, I hope that this mess can be fixed at minimal cost to taxpayers and distressed homeowners alike!

Category: Real Estate, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

14 Responses to “Apocalypse Now? Will The Massachusetts Ibanez Case Unravel Widespread Irregularities In The Residential Securitized Mortgage Market?”

  1. [...] var __halnet_pub = "hgn.tbp"; var __halnet_sz = "728×90"; (window.location == "http://www.ritholtz.com/blog/") ? __halnet_pub_kvs = ";section=homepage;" : __halnet_pub_kvs = ";;"; // var __halnet_zone = "ROS"; « Apocalypse Now? Will The Massachusetts Ibanez Case Unravel Widespread Irregularities In The Resident… [...]

  2. rktbrkr says:

    “The banks’ boards cannot continue to pretend the foreclosure mess is the result of technical glitches and paperwork errors,” (NYC)Comptroller Liu said. ” There is a fundamental problem in their procedures that endangers not just homeowners, but shareholders, and local economies. Given the risks involved, only a swift and unbiased audit can reassure shareholders that the pension funds of 700,000 working and retired New Yorkers are in safe hands. The boards of directors have no time to waste.”

    An internal directed independent audit of an important issue is the ultimate oxymoron.The issue is too important for the banks to allow an unbiased audit, what would happen to valuations of everything related to these mortgage financings if they found fundamental flaws that would be difficult or impossible to correct? The banks have claimed their independent reviews have only found paperwork errors, how can they do another independent review that reaches a different conclusion? Impossible, like Moynihan said the banks will fight this on a case by case basis, releasing an army of lawyers to fight for them (unless they can get Turbo Tim to do their bidding). This will be more difficult for the banks to fix because they will be dealing with court systems in all 50 states. They will be facing state foreclosure moritoria like the last depression in the 30s.

    “The wheels of justice grind slowly but exceedingly fine”.

  3. If the securitization problems do in fact represent “Apocalypse Now”, then the residential real estate market is f$cked. Which is sort of what I hope. But I bet it will all be papered over. Besides, securitization, outside of the GSE’s these days, is already f$cked. What will be the impact on the GSE’s is the $64,000 question. Their securitization practices set the industry standard, no doubt more or less followed in this particular case. And just remember, the government demonstrated throughout the financial crisis that it cares very little what its own laws say. Or, more pointedly, it decided on its own whim, what laws mean. It feels like Alice must have felt in Wonderland.

  4. Let’s say the blank assignment issue is a widespread issue (btw, the ASF basically said if these people used MERS they wouldn’t have had this issue and reading the judgements I think entities like MERS actually gained from the ruling). For it to become systemic everyone has to start contesting things in court en masse. That isn’t going to happen. The vast majority of foreclosures go uncontested, the vast majority of investors aren’t suing their servicers, etc. It’ll just be another slow bleed issue, it’ll cost billions of dollars, but at the end of the day it’s just a manageable process issue (essentially, “what Amherst said”).

  5. ewmayer says:

    Regarding Mr. Vetstein’s last comment,the problem is that the U.S. government has shown over and over during the past 3 years that its priority is “fixing” such such issues at minimal cost to the perpetrators, that is Wall Street and the big banks.

  6. [...] How big a deal is the Ibanez-Massachusetts mortgage ruling?  (NetNet, Big Picture) [...]

  7. MinnItMan says:

    The Ibanez decision is a consoldated appeal of to MA Land Court losses by the lenders on quiet title cases. It’s not clear that there was any appearance at the lower stage by the homeowners. In fact, the MLC seemed to rule sua sponte (on its own motion) that USBank and Wells weren’t entitled to quiet title.

    From what I can tell, USBank and Wells did the quiet title actions because they couldn’t sell these as REO because the foreclosure record created uninsurable deals (and I’ve seen 3 of the big 4 TI’s bulletins saying as much).

    The problems for the banks on these two deals were pretty extreme, and I don’t think this decision was a very close call – as far as I can tell, since the decision was unanamous, it may not even end up being published (slip opinions where I am tell you, not sure what MA’s practice is).

    My $.02 is that Ibanez is not inconsistent with a pro-MERS rule in MA, at least on these issues. The facts in these cases are interesting because they are pretty old school subprime procedures from when it used to be called B-C lending. Actually, the facts demonstrate one major reason why MERS was established.

  8. manifoldsrme says:

    Can someone please answer this question? What of the people like me who bought less house than we could afford, and will pay it off in around 20 years. Steady job, good savings etc. Is there going to be a deed for our house when we complete the payoff? I am reading that in many cases the originator of the loans is long since closed up and the “paperwork” is long gone and was not brought forward to whoever the loan was sold too. Are millions of people going to pay off or sell their house in the next 10-25 years and there will be no “original deed” to be sent? Then what? This terrifes me. That I do everything right, make all the payments, and then have no proof the house is actually mine. Should I be concerned or is there nothing to worry about? In my eyes the whole “securitazation” thing is complete and utter bullshlt and completely illegal. Just another scam by bankers and wall street with no morales or ethics only staring at dollar signs and nothing else. They can’t die a painful or slow enough death for me.

  9. manifoldsrme,

    You already own the home, your name is already on the deed. The mortgage is a lien on your title (your ownership) but if it was all worse case scenario and you have a clouded title and couldn’t get in touch with the lienholder for whatever reason, there are court actions that can be taken to get a lien release. But you are on the deed and the owner.

  10. Jimmy Doolittle says:

    To manifoldsrme says:

    “Is there going to be a deed for our house when we complete the payoff?”

    Not an original. We are screwed.

    In Nov, 2010, I paid off two mortgages, from proceeds of selling a company.

    One of them was pre-MERS, through a credit union. Got the original wet deed (original signatures) back in less than 2 weeks, stamped paid in full. Got the full reconveyance paperwork back from the county recorder shortly after, listing myself as the sole owner. This one in CA no less.

    Second house was in ID, got securitzed through MERS. A 2007 purchase. I paid the payoff amount to the Servicing company, ASC. Here’s status of what transpired after:
    1) ASC did promptly refund and stop my escrow accounts. that was first and only unsolicted response from them after paying off the loan. The letter they send with the refund said, ‘we are sending this because, either: a) you paid off loan, b) you refinanced, or c) you’ve sold the property
    2) After waiting 4 weeks further, I called them up to inquire – where is my wet copy deed, to be returned to me with PAID IN FULL stamped on it, similar to the practice done on my other house? Also, I haven’t gotten any letter from you confirming the loan has been paid off.
    3) ASC replied – we don’t have the original, don’t you have the original? (someone without a clue). Also, we will send you a payoff letter, sorry.
    4) I asked what do you have? – reply: copies. My response: send me a copy of everything you have, with PAID IN FULL stamped all over them. and yeah, send me the payoff letter.
    5) ASC did send a payoff letter, and did send a copy of their copy of the deed, no PAID IN FULL stamps on it.
    6) Several weeks further, I get a copy of the County Recorder Reconveyance, via ASC, showing I am sole owner.
    7) I have not gotten the copy of County Recorder Reconveyance back from the County themselves. I still have that bit of closure to go through.

    My concerns from this are:
    A) I have no confidence that the entities that held the mortgage prior to, (GMAC), or after MERS registry, (HSBC, as a securitzed investor), don’t have similar copies of my deed, with no knowledge of the PAID IN FULL status.
    B) No trace of the original wet deed, so I have only the County Record of Reconveyance (I’m sure they’d be happy to take someone else’s recording fee, and record again that someone owns my note).
    C) I have no confidence that these things couldn’t get tied up when a title search happens if I ever decide to sell. Which I don’t.
    D) My most solid assurance is through the firm of Winchester and Remington.

  11. andrewp111 says:

    This is probably an expensive muddled mess, dragging on for a decade, but is no apocylapse. Yes, the banks are going to have to eat losses on properties that they can’t foreclose on or can’t sell. But, if there are millions of such properties, it is useful to note that no one else can sell them either without a clear, insurable title. This mess could pull millions of houses that should be sold in foreclosure off the market for at least the next 5-10 years. And this will have the effect of supporting house prices by keeping excess supply off the market – which is probably a blessing in disguise to the banks. The alternative is a dumping of foreclosed houses onto the market and a housing price crash which puts more mortgages underwater, causing more strategic defaults, etc.. in a positive feedback loop. A decade long muddled mess is much better for the banks than a crash. And, whomever has physical possession of these houses can rent them out, since you don’t need a clear title to rent something, physical posseassion is sufficient.

  12. bluebox says:

    Found link through Jim Sinclair’s MineSet blog:

    http://agonist.org/numerian/20110107/implications_of_the_ibanez_case_ruling

    “With increasing desperation, banks along with their enablers in Washington are going to try to jerry-rig a way out of this problem. Unfortunately for the banks, ex post facto laws are strictly forbidden by the Constitution, which is now being treated with new-found reverence by the Congress. It may be impossible to construct a law that solves problems like this that already exist. Perhaps the banks will get lucky, and some courts will begin to find in their favor, though that is certainly not the trend at the moment. Maybe the US Supreme Court will accept the banks’ argument that the securitization process in itself established a valid foreclosure claim even though mortgages were not properly assigned as required by state laws. This, however, would require the Supreme Court to make up a legal doctrine out of the blue (as the banks have done), thereby overturning all state laws and court rulings going back well over 100 years. Only a Supreme Court bought and paid for by bank lobbyists, and willing to prostitute itself publicly to its paymasters, would issue such a ruling.”

    I’m betting on something just shy of Apocalypse.

  13. OlderThanDirt says:

    First, I’ve actually read Ibanez. Here’s what I see:

    (a) US Bank & Wells Fargo are #4 & #5 in size right now. So this case generalizes in important ways.

    (b) It took quite a while (something like 14 or 15 months in Ibanez’ case) but the banks eventually did get their assignments from Option One, the last recorded and valid title holder to both of the mortages in question. As at least one commentator has pointed out, Option One had no legal obligation to supply USB or Wells with an assignment upon request (they sold the mtges/notes to other, intermediate parties, who were the only ones with the right to *demand* vailid assignments from Option One), so the banks may have had to cough up some cash out of pocket to obtain their assignments, but eventually the documents were tendered. Sigh of relief…well, maybe not quite so fast.

    (c) In Ibanez’ case the intermediary party was Lehman Bros. In other words Option One sold the paper to Lehman, who quickly resold it along to their structured financing vehicle, the securitized pool. After 14 months Option One has now tendered an assignment of the mortgage to…US Bank, the pool trustee who stands at the end of the long line of paper transfers. But wait a minute. Lehman is in bankruptcy. The proper chain of title would have been for Option One to have made their assignment to *Lehman Bros.,* (to whom OptOne supposedly sold the mortgage), then Lehman would have made the next assignment down the line, and so on until eventually title to the paper reached US Bank. But the moment the paper hit Lehman’s books it would have become embroiled in Lehman’s bankruptcy, as an asset in the bankruptcy. What does Lehman’s bankruptcy trustee think about all this? Not to mention Lehman’s creditors. Why did US Bank get preferential treatment–repatriation of a valuable Lehman asset–ahead of all of Lehman’s other outstanding creditors? What will the Lehman bankruptcy judge say? This is cleanup problem #1. It is technical, but not small.

    (c) Option One eventually tendered an assignment of Ibanez’ mortgage upon request for same by USB. Setting aside the problem in (b) above of skipping over critical links in the title chain, how did Option One even know that USB had any rightful claim to the paper? Presumably USB asserted that it did. It might have even submitted some sort of document formally making such a claim. But remember, USB tried that same tactic with the Mass Land Court and with the Mass SJC, asserting forcefully that it held valid title or right to title. The Mass courts gave USB at least three separate opportunities to bring forth competent evidence to back up their claim. In the end USB couldn’t supply the evidence. What then was/is the validity of Option One’s assignment? They handed over title to a party who couldn’t prove–has been declared by the highest court in the state that they cannot prove–entitlement to it. Maybe I should have called up and asked Option One to send *me* the title. Or send it to my aunt Fanny. Transferring title to a party who couldn’t prove they had a right to it was a species of negligence on Option One’s part. This is cleanup problem #2. Even more technical, but possibly even larger than cleanup problem #1.

    (d) Now we come to the fun part. Every commentator I have read has used some synonym for “sloppy” in explaining away the astonishing apparent carelessness with which these financial giants passed around people’s mortages like baseball trading cards. Maybe it was just plain sloppiness, away up there in NYC, where people sit high up in those confangled skyscraper towers with their hushpuppies up on their desks listening to the screen door slam, sweating and swatting flies. Right. Oh, they were in a hurry, I hear, rushing around. That’s surely an unusual circumstance up there in the city of the New York Minute. When push came to shove and Wells Fargo had to supply the court with actual documentary evidence that they owned this mortgage they produced a paper–the only evidence they apparently could produce–referencing the mortgage by the mortgage dollar amount and the *zip code!* Yes, the zip code, that’s IT, that’s all they had on paper. Do you believe it? Not the borrower’s name, or the property address, never mind a recordation number. This isn’t casualness, this isn’t sloppiness. This is the footprint of deceit. Here’s my bet: they were double-(or triple or quadruple or…) pledging the collateral. What do you want to bet there is another, or ten other, of these securitization pools out there, each with its attached schedule claiming inclusion within the pool of a certain mortgage for the exact same dollar amount as Ibanez, and this mortgage is listed as being in the exact same Springfield MA zip code? Remember, toward the end of the MBE boom, just before the bottom fell out sometime around Thanksgiving, 2007, the MBE dealers were frantic, they believed they had an infinte supply of customers (read: suckers) lined up, but product, i.e. pool-able mortgages were in short supply, despite relaxing underwriting standards standards until to the point the standards were virtually prone on the floor. The dealers were hungry for product…they were already fleecing the borrowers, the government…they were already spreading around what they themselves were calling “toxic waste” like it was manure on the farm in May.

    Do you want to tell me that mortgage bankers in 2007 were the kind of upstanding God-fearing straight-arrow Dudley Dooright’s who would never, never, ever dream of double-clutching the collateral?

    Ladies and gentlemen, this is going to be one very wild ride.

  14. [...] foreclosure rights is presented by many as mere technical obstruction.  Some, instead, view the securitization process potentially as having a systemic legal flaw that may cause the relevant securities not to be [...]