“The record in this case reflects how mortgage lending changed in recent years and how the industry failed to ensure that its new business model conformed to state law. . . Having profited greatly from practices regarding the assignment and securitization of mortgages not grounded in the law, it is reasonable for them to bear the cost of failing to ensure that such practices conformed to Massachusetts law.”

-Massachusetts Attorney General Martha Coakley wrote in a brief supporting the borrowers.

U.S. Bank National Association (Trustee for Structured Asset Securities CorpMortgage Pass Through Certificate series 2006-Z vs Antonio Ibanez

Wells Fargo (As Trustee for ABFC 2005-OPT 1 TRUST, ABFC ASSET BACKED CERTIFICATES SERIES 2005-OPT 1) vs Mark and Tammy Larace


Bloomberg is closely following a Massachusetts Supreme court case. At stake is whether several specific foreclosures in Massachusetts should be voided “because securitization-industry practices violate real- estate law governing how mortgages may be transferred.

There are several issues in the case: The technical one is whether a mortgage can be transferred without naming the recipient, as is commonly done in securitizations. But the more important issue applies to mortgage rights — do they “detach” from the promissory note when that note is sold? Asked more plainly, must someone asserting the right to foreclose actually own that Note?

This is more than a technical issue; at risk is whether we, as a nation, are going to allow corporate entities to violate existing law, or even worse, attempt to create their own, extra-legal, non democratic policies.

In the current case, a mortgage that was sold and resold ultimately was purchased at auction. (Complicating the case was the paucity of bidders for the mortgage — the buyers were the only bidders, and they “substantial discount” paid for the notes). The key legal issue is whether the banks had the right to foreclose without the mortgage notes — a violation of State law.

In March 2009, a lower court ruled they didn’t. The court cited “Published notices listing U.S. Bank and Wells Fargo as the foreclosing parties when they weren’t the actual mortgage holders at the time of the 2007 foreclosure auction. Massachusetts state law requires foreclosing parties to actually be the mortgage holder. According to the evidence at trial, the Ibanez mortgage was transferred to U.S. Bank 14 months after the foreclosure auction, and the LaRace mortgage was transferred to Wells Fargo 10 months after.

If upheld, an undetermined number of homeowners may be able to “invalidate some foreclosures and force loan originators to buy back mortgages wrongly transferred into loan pools.

Bloomberg quoted law professor Kurt Eggert of the Chapman University School of Law in Orange, California. He noted “It ties into a theme nationally. The broader theme is the argument that efficiency of transfer is more important than real-property law.

Way back when I was a law student, it always stuck me as odd that efficiency arguments could somehow trump legislation passed by elected state legislators. Somehow, an efficiency was insinuated into legal cases. Not efficiency of Judicial resources mind you, but economic efficiency. Blame Gary Becker and the Chicago school of economics for wedging this extra-constitutional economics arguments into jurisprudence via a back door. It always sounded not only false to me, but a treasonous violation of the US Constitution that Judges are sworn to uphold. An economic theory, not part of the constitution, and not passed by any elected body, somehow was superior to democratically passed laws. Some jurists who were proponents of this economic efficiency school of thought, such as Richard Posner, appear to be backing away from those views. (See Posner’s 2009 book, A Failure of Capitalism).


The Ibanez brief is posted in Think Tank


Foreclosures May Be Undone by State Ruling on Mortgage Transfer
Thom Weidlich
Bloomberg, Jan. 6 2011

See also:
Land Court opinion and order (PDF)

Category: Foreclosures, Legal

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.

29 Responses to “Can Banks Foreclose on Mortgages They Do Not Own?”

  1. BusSchDean says:

    There is irony in the seemingly unlimited ways to “make a market” and our presumed confidence to “manage risk.” The unspoken risk here – or at least spoken only by a few – was that we actually have laws that regulate commerce and trade (quaint terms for sure). If the risk management indicator on your dashboard isn’t blinking everything must be OK. If it is blinking, like the check engine light on your car, but you need to do the deal then ignore the light, it’s probably a loose wire. This mortgage mess will be taught in business schools for years to come. Hopefully the outcome will help make the lesson worth teaching.

  2. It is a subtle but important issue.

    I suggest those interested read the brief in Think Tank

  3. RELawyer says:

    As a real estate lawyer who has specialized in commercial mortgages, real estate workouts and foreclosures for over 30 years, let me tell you that years ago real estate lawyers looked at the structure of these securitized mortgage pools and were horrified. They seemed to have been put together by a bunch of securities lawyers who knew nothing about mortgage servicing or basic real estate law.

    It is a basic principle of Anglo Saxon law going back to the middle ages that only the owner of the debt that is secured by the mortgage has the standing to foreclose the mortgage. This is plain vanilla common law, applicable in all the states. The mechanism for foreclosure varies from state to state, but this underlying principle remains. You cannot split ownership of the note from ownership of the mortgage. It’s impossible. In most states the mortgagee is required to record evidence of the transfer of the note in the real estate records.

    At some point, after the securities industry concocted securitization, the real estate lawyers pointed out that there would be “issues” down the road if the trustees for the securitized pools got sloppy with the notes and either lost them or couldn’t figure out who the “owner and holder” (basic UCC law) of the note was. This meant that millions of notes couldn’t be just flipped around and sliced and diced without jeopardizing the ability to foreclose (or negotiate a workout).

    So Freddie, Fannie and a bunch of other people came up with the idea of MERS. MERS was intended to be a note registry, the theory being that each note in a pool could be endorsed at the outset to MERS, as the nominal owner and holder who theoretically would act as some sort of trustee for the “real owners and holders” of the notes. So, the nominal owner and holder would remain MERS, while actual ownership could flipped and sliced and diced into tranches, with the real owners and holders merely notifying MERS of the transfers and slicing and dicing. Similar to a trust where MERS is the trustee and the noteholders are the beneficiaries. Beneficial interests could be transferred off record with the trustee tracking beneficial ownership.

    The problem was 1) most state judges could not get their hands around the concept of MERS and found MERS was not the owner/holder of the notes; and 2) the actual promissory notes “got lost”.

    The legal theory behind MERS is sound, but I am not sure how it was actually implemented. I do know that many notes were “lost” (which itself is a problem). I have represented lenders who lost the original note but had a copy. You can foreclose with a copy unless the borrower’s attorney asks to see the original note (which they never do). The trustees of these pools couldn’t even produce copies of the notes.

    When the plaintiff in a mortgage foreclosure proceeding 1) cannot prove it is the owner of the note; and 2) cannot produce even a copy of the note, the case will be thrown out, if the judge sua sponte sees the problems or the borrower has a lawyer. The defect in the MERS system was broadcast througout the legal profession at the beginning of the meltdown, so anyone who could afford a lawyer could challenge the foreclosure. Not all but most challenges were successful. Failure to produce a copy of the note was a killer. It doesn’t matter who owns the note if you can’t even produce a copy.

    The Mortgage Bankers Association saw these problems (as well as the problem of servicing defaulted mortgages) many years ago and put together a study on the looming disaster embedded in these structures. I am not sure what if anything was done to address the problems.

    As one of many real estate lawyers who foresaw these issues, I can’t say that I am sympathetic to their problems. Unless and until each state passes legislation overturning 800 years of Anglo-Saxon mortgage law, these issues will remain.

  4. RELawyer says:

    Re paucity of bidders at foreclosure sale. This is really a non-issue, though people often try to make it an issue. There is tons of case law out there supporting the validity of mortgage foreclosures where there are not bidders or the bidding price is low. So long as the required notice procedures are followed, it’s okay.

    There are companies who specialize in tracking home mortgage foreclosures who provide information to people who are in the lucrative (sometimes) business of purchasing homes at foreclosure, rehabbing them and selling them. Formerly, the only “notice” the public got of a foreclosure was a notice in the legal notice section of a news paper. In some states, like Texas, where non-judicial foreclosures are the rule, the foreclosure information is posted on the courthouse steps. I specialized in commercial mortgages and can say that in 95% of the time there were no bidders at the sale, either judicial or non-judicial. I would suspect that there would be more bidders at a consumer mortgage foreclosure because of this rehab industry, but am not sure it’s a significant percentage.

  5. b_thunder says:

    Is “backdoor bailout” of AIG and, just a week ago, BofA legal? Constitutional? Isn’t Secretary of the Treasury a “public service” job, i.e. a person appointed to that position serves the public?

    As hard as the Founding Fathers have tried to create the “checks and balances”, they probably didn’t consider the situation when all 3 branches become irreversibly corrupt. Or they would have included a provision in the Constitution for a “full reset” or a legal government overthrow and a do-over.

  6. tradeking13 says:

    Hell, they can break into your house, change the locks, and throw away all your belongings, including a loved one’s ashes.

    In a Sign of Foreclosure Flaws, Suits Claim Break-Ins by Banks [NYT]

  7. mark says:

    The problem of how to reign in wealthy, powerful interests who come to feel that their own interests are more important than those of society (or the state or the king or the emperor – how that society is organized is irrelevant) is as old as civilization itself.

    The US was able to reign them in the last two times this became a problem – both times ironically the heavy lifting was done while a guy named Roosevelt was in the WH. So far we are failing this time. As Simon Johnson predicted in “The Quiet Coup” (http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/) the financial industry has only become more powerful since the crisis began and their self-serving interests continue to diverge from that of society at large.

  8. Transor Z says:

    RELawyer’s 8:48 am comment is excellent.

  9. 1 currency now says:

    I had the same experience in law school, in the late 80′s, after getting an Economics degree that was still more “Political Economy”.

    “Economic efficiency” is not only bad constitutional principle, it’s bad “science”. There is no general optimal efficiency, only efficiency which benefits some at the expense of others.

    I haven’t looked at Posner’s new book. I knew he was a fool back then, and I guess he knows it now.

  10. odds says:

    What will be very interesting is the potential for blatant hypocrisy to be exposed. Supposedly conservative people who claim that judges have no business legislating from the bench should be on the side of Democrat AG Coakley and the plaintiffs. That is, the legislative and executive branches never authorized a change in the law. The banks just did it anyway and hoped that it would all get sorted out later.

    I guess this, along with last week’s de facto bailout BoA just received from FNM and FRE proves it’s better to ask for forgiveness than permission.

    [Of course, conservatives can find solace seeing Dem AG Coakley claim that judges shouldn't be legislating from the bench.]

  11. 1 currency now says:

    “if the judge sua sponte sees the problems”

    That would be Justice Schack, Kings County, NY (Brooklyn).

  12. Lugnut says:

    Any wagers or odds on whether Rule of Law or Corporatocracy will win the day? Corporatists seem to have been on a bit of a roll as of late. I’m thinking economic expediency might win out if the argument can be made that copies of notes represent a suitable enough warrant of interest under a demand to produce the original, under the MERS system. I would still hope that in a scenario where no copy can be produced, the claimant should still be SOL. Hell they shouldn’t be allowed to foreclose without the original. I hope we haven’t fallen too far down the rabbit hole.

    I’m just a skeptic of the three branches of government at this point. The Florida Courts shooting down the AG going after the foreclosure mill firms, saying he has no jurisdiction makes me shake my head.

  13. MondoGrapes says:

    Most of what I’ve been reading about the “see the note” movement has focused on homes that were in foreclosure. What I want to know is this: how does all of this incredibly and unforgivably sloppy paperwork affect the folks who are current on their mortgages? What about the ones who will eventually pay off their loans? Does this mean they will not be able to establish clear title to their own homes? What if the owner dies and wants to pass his or her fully paid for home onto their children? Can someone, anyone, a bank even, swoop in and contest it? What are the legal ramifications here? These are the questions that have me sweating when I think of buying a house right now.

  14. Transor Z says:

    Barry, here’s the link to the oral arguments before the SJC October 7, 2010:


    U.S. Bank National Association v. Ibanez, SJC-10694

  15. The 800 year old common law to which RELawyer refers is that a mortgage without a debt (i.e., promissory note) it secures is a nullity. This is as true today as ever it was. But Mers was designed with this reality in mind. The real question here is what constitutes ownership. Is it legitimate that a consortium of mortgagees agree amongst themselves that all mortgages and notes will be owned by a single entity? I’m surprised some enterprising antitrust lawyer hasn’t attacked Mers as an impermissible collusion amongst competitors.

    So far as the idea that laws are being usurped for economic efficiencies, I have to ask, from where do you suppose laws arise? It is the interplay of political forces, that are themselves derived from economic interests. Law is a second derivative of economics. It’s not unsound for courts to use the economic interests driving the formulation of law in rendering interpretations and rulings. In fact, it would be silly to do otherwise.

  16. Greg0658 says:

    reLawyer 8:48am “The Mortgage Bankers Association saw these problems …. not sure what if anything was done to address the problems”

    would that have been the invention of instrument CDS & a salesforce for them ? add an early jump to safety for profits . now add a hungry class action lawyer looking for 30% in clawbacks . another pointer “I’m thinking economic expediency might win out” . or from another thread worser yet

  17. Julia Chestnut says:

    I’m with you, BR – except that all that law and economics crap didn’t just confuse me, it frightened me: I believe that efficiency is the sworn enemy of the law. The law exists to create a framework of rules that, in some cases, radically countervail the efficient use of power and leverage. While the result of such a system of rules may include efficiency in certain transactions — we all know what the underlying legal assumptions of our deal are, and we believe between us they will be equitably enforced — “efficiency” and “justice” are not cut from the same cloth. When I hear someone talking about efficient results from the legal system, I know that they are either crooked or crazy.

    Inefficiency in the legal system isn’t a bug, it’s a feature. It forces parties to slow down and consider whether they can’t work this out with less pain on their own. It forces someone to consider whether it is right to do what a powerful party is demanding. It insists on due process before taking away property or liberty. And it stands sorely wounded in this country! The whole past few decades of improving “efficiency” have resulted in the very opposite of “improvement” in my view.

  18. FrancoisT says:

    “There is no general optimal efficiency, only efficiency which benefits some at the expense of others.”

    Bingo! Efficiency applies to machines; robustness applies to social systems, which laws are an integral part.

    BTW, any engineer worth his/her diploma will tell you that efficiency does have several drawbacks, something that the “economic efficiency” proponents conveniently omit….but since they’re not engineers, they don’t need to deal with reality.

  19. [...] Barry Ritholtz comments on a Massachusetts Supreme court case, where several homeowners have sued to void their foreclosures “because securitization-industry practices violate real-estate law governing how mortgages may be transferred.”  He says: There are several issues in the case: The technical one is whether a mortgage can be transferred without naming the recipient, as is commonly done in securitizations. But the more important issue applies to mortgage rights — do they “detach” from the promissory note when that note is sold? Asked more plainly, must someone asserting the right to foreclose actually own that Note? [...]

  20. Transor Z says:

    Lawsuits are a serious matter and are not a place for “do-overs.” When a point is in issue, a litigant cannot wait for the court’s decision and, if dissatisfied, amend its pleadings to remove that issue. The principle behind this is simple and fundamental. Litigants are expected to “investigate their claims before filing a complaint so that they have a basis at the outset to make particularized factual allegations in the complaint.” [cites omitted]

    You go, Judge Long!

    Moreover, the plaintiffs’ own post-judgment submissions have made the soundness of these discussions even more apparent. It took the plaintiffs over two months after they filed their motions to vacate the judgment (from April 6 to June 8, 2009) to gather the documents that they believed were necessary to show their status as purportedly valid assignees of the mortgages at the time of the notice and sale. The reasons they gave for needing that time (what they themselves described as “the problem”) are telling — “the size of the documents themselves,” “the number of documents which must be taken together to capture the entire transaction,” “the fact that some of the documents contain industry sensitive and confidential business practices information” (if so, none were produced), and “[f]inally, the economic crisis itself [which] has impacted both the Custodians of these documents (the Trustees for the Securitized Trusts or their designee) and the loan servicers employed by them (increased foreclosure workload compounded by decreased staffing due to financial losses).” This does not inspire confidence. Indeed, many of the documents were never produced. Moreover, left unsaid (and equally telling) is the fact that the major entities now revealed as central to these transactions are presently either in bankruptcy (Lehman Brothers), out of business (Option One Mortgage Corporation, some of whose assets were sold to AH Mortgage Acquisition Co., Inc., now renamed American Home Mortgage Servicing, Inc.), or required billions of dollars in government aid (Bank of America). It is surely a fair inference that this would make potential bidders even more unwilling to bid (or sharply
    discount their bids) without the plaintiffs’ ability to show that they were valid “holders of the mortgage” and thus were able to convey title at the time of the sale. How else would they have any assurance that potentially critical documents and authorizations could be obtained in timely fashion thereafter?

  21. Ramstone says:

    Not unrelated, there’s the small matter of revenue: in parellel Mass. is going after Mers for the transfer fees the state feels entitled to. Mass. isn’t quite as pissy as NYS about collecting revenue, but it’s not that far behind.


  22. hammerandtong2001 says:

    So in assumption that RELawyer is voted down in the practice of law in America today, thus then —

    I want my UCC filing charges back — since they meant nothing in the first place. And so do all the millions of homeowners who executed sales and buys since MERS was put in place.

    I’d guess close to a 1/2 $trillion — or free US defense for a year.



  23. canoles says:

    “This is more than a technical issue; at risk is whether we, as a nation, are going to allow corporate entities to violate existing law, or even worse, attempt to create their own, extra-legal, non democratic policies.” – as if “we as a nation” have any power to do anything about it. It’s not about you or me allowing anything, it’s about corporatist banksters stealing from the tax payers aided by our political leaders.


  24. swag says:

    The Massachusetts Supreme Court just dealt a negative ruling to the banks in the closely-followed Ibanez case, which challenged securitization standards. It’s pretty straightforward: The banks didn’t have the proper parwork to foreclose, says the court. Hence, no legitimate foreclosure.

    Read more: http://www.businessinsider.com/bank-of-america-ibanez-case-2011-1#ixzz1AMqcQAaM

  25. Mrinkerton says:

    As usual on the mortgage issue, there is so much ignorance on the issue, both on the part of Barry and on the part of man commentators, it almost hurst my eyeballs.

    1) The UCC has nothing to do with transactions securing real estate, other than fixtures, and is irrelevant. You want facts, Barry? See this link: http://www.law.cornell.edu/ucc/9/9-104.html

    2) MERS was not created to have anything to do with the Note. It is the holder of the recorded security interest and tracks that. See this link, from an independent site that is also criticizing MERS on other grounds: http://www.cticct.com/news_mers.asp

    3) Many states in fact explicitly DO allow the non-loan holders to foreclose. Specifically they allow the AGENT to foreclose. That is why servicers can foreclose. See here for California, which repeatedly refers to agents and authorized parties: http://law.onecle.com/california/civil/2924.html

    I could go on, but let’s start with that, and see if Barry actually allows this post to get past moderation, unlike my last one.

  26. 1) I never mentioned UCC, but thanks for the strawman argument

    2) MERs was created to avoid state property filings, fees, and laws. If you have a better explanation as tot he extra legal nature of the way they avoid state RE laws, please feel free to enunciate it.

    3) This case is in MASSACHUSETTS, not other states. Your 3rd comment that is not the subject of this State Supreme Court argument is irrelevent.

    You should be aware that there are numerous reasons comments may be moderated– obnoxiousness, irrelevancies, and getting things wrong (ie, bullshit) are only three.

    Congratulations on hitting the trifecta.

  27. Transor Z says:

    Justice Cordy’s concurrence sums up the opinion and hits the nail on the head:

    I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it. As the opinion of the court notes, such strict compliance is necessary because Massachusetts is both a title theory State and allows for extrajudicial foreclosure.

    The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court’s opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.

    What is more complicated, and not addressed in this opinion, because the issue was not before us, is the effect of the conduct of banks such as the plaintiffs here, on a bona fide third-party purchaser who may have relied on the foreclosure title of the bank and the confirmative assignment and affidavit of foreclosure recorded by the bank subsequent to that foreclosure but prior to the purchase by the third party, especially where the party whose property was foreclosed was in fact in violation of the mortgage covenants, had notice of the foreclosure, and took no action to contest it.

  28. [...] legal question we asked yesterday “Can Banks Foreclose on Mortgages They Do Not Own?” has now been [...]