The Massachusetts Supreme Court Decision on Foreclosures

For those following U.S. Bank v. Ibanez, the Massachusetts Supreme Court made a decision that surprised some last week: It upheld the ruling of the Massachusetts Land Court decision that invalidates foreclosures based on post sale assignments. Simply put, the decision means that – in the State of Massachusetts – a lender must prove they own the loan before they foreclose.

When the issue of illegal foreclosures went mainstream earlier this year, many assumed the courts would side with banks and lenders. The thinking went: most people who have been foreclosed on were likely delinquent on their payments anyway, therefore technicalities like proving the lender actually owned the loan are just that – technicalities.

We didn’t believe the courts would see it that way.

Neither did Reggie Middleton, who via The Huffington Post wrote an excellent blog regarding the courts decision. Reggie, of BoomBustBlogger.com, is an “entrepreneurial investor” who predicted the collapse of the financial and real estate markets long before anyone else did. Or at least, long before most of the “experts” did.

While all the analysis of the courts decision and how it will affect the financial markets, other states, etc., are worth the read, my area of interest lies in what happens to those who purchased foreclosed homes that will turn out to be among those that were foreclosed on illegally.

As I’ve mentioned in past blogs, it’s been my hypothesis that the homes would revert back to the original owners, if at least for a short time, meaning someone who thought they had legally purchased a home would now be kicked out.

Reggie cites the Massachusetts Law Blog, with the following points:

• “Despite pleas from innocent buyers of foreclosed properties and my own predictions, the decision was applied retroactively, so this will hurt Massachusetts homeowners who bought defective foreclosure properties.”
• “If you own a foreclosed home with an “Ibanez” title issue, I’m afraid to say that you do not own your home anymore. The previous owner who was foreclosed upon owns it again. This is a mess.”
• “The opinion is a scathing indictment of the securitized mortgage lending system and its non-compliance with Massachusetts foreclosure law. Justice Cordy, a former big firm corporate lawyer, chastised lenders and their Wall Street lawyers for “the utter carelessness with which the plaintiff banks documented the titles to their assets.”
• “If you purchased a foreclosure property with an “Ibanez” title defect, and you do not have title insurance, you are in trouble. You may not be able to sell or refinance your home for quite a long time, if ever. Recourse would be against the foreclosing banks, the foreclosing attorneys. Or you could attempt to get a deed from the previous owner. Re-doing the original foreclosure is also an option but with complications.”
• “If you purchased a foreclosure property and you have an owner’s title insurance policy, you have a potential claim against the title policy.”

Naturally, the point I’ve tried to make in the past and will continue to make going forward is simple: in light of the inconsistencies with the foreclosure process and the risk one takes in purchasing a foreclosed home, a short sale is a much safer bet. It’s safer for the buyer, it’s safer for the title company and, most importantly, it’s safer for the bank. Now, if only lenders saw it that way. Maybe they will – if the decision from Massachusetts spreads nationally, it could go a long way in prolonging the economic recovery. If that happens, lenders might not have a choice but to take short sales more seriously…