Massachusetts Foreclosures - Legally Enforceable or a Permanent Cloud in Title?

Will the Massachusetts Supreme Judicial Court provide timely guidance on the Ibanez Case?

For those of you unfamiliar with the case of U.S. Bank v. Ibanez, attorney and fellow Active Rainer, Richard Vetstein, Esq. provides a nice, easy to understand narrative in his blog Ibanez Update: Massachusetts Land Court Decision Invalidates Foreclosures Based On Post-Sale Assignments. If you are a Massachusetts Realtor, this one is a must read.

The March 2009 ruling in the Ibanez case, which potentially invalidates hundreds, if not thousands of foreclosure judgments across the Commonwealth, is based on a Land Court judge's ruling that the lender (U.S. Bank), who was seeking to clear a cloud in the title of a property that they had previously foreclosed upon, did not hold clear title to the property at the time of the default judgment for foreclosure in 2007.

Massachusetts, being a non-judicial foreclosure state (sounds like an oxymoron, because we actually use the legal system to provide notice of foreclosure under the Servicemembers Civil Relief Act (SCRA) and obtain a default judgment from the Land Court before any property can be seized) requires the timely and orderly processing, filing and recording of public notices, including the deed, the mortgage and any assignments. As we all know, the promissory note securing a mortgage lien can be sold and re-sold, packaged, securitized, stripped, etc. with the paper trail eventually catching up and being recorded on the public record. In the Ibanez case, the Land Court ruled that the default judgment that it ordered in 2007 was procedural and was not based on the facts as subsequently laid out, which demonstrated that U.S. Bank did not have ownership or possession of the promissory note at the time of the default judgment and therefore, the bank's repossession, sale and repurchase of the property at public auction was invalid and therefore null and void.

The implications of the Land Court's decision to invalidate the Ibanez foreclosure cannot be ignored. If upheld, hundreds, if not thousands, of home foreclosures in Massachusetts could be found to be invalid. Just ponder for a moment these possibilities:

• Law firms whose responsibility is to follow the foreclosure process to the letter of the law are at risk for malpractice;
• Conveyance attorneys who followed the guidelines of the Real Estate Bar Association (a private entity) are subject to scrutiny;
• Lawyers who wrote title insurance for their lender and buyer clients could be sued for issuing title insurance on a previously foreclosed-upon property with a cloud;
• Original homeowners could petition to get their homes back;
• People who bought a foreclosure may find that their title policies have certain exclusions which do not insure them for any loss arising from this court ruling;
• Some people may not have even bought title insurance for themselves and could lose everything;
• Homes that were foreclosed prior to the ruling and are still on the market or are being held by a lender, may not be insurable and lenders may not want to issue loans on these properties;
• The GSEs who lent on these properties using federal funds could bear the brunt of the problems as the tsunami of complex legal issues unfold.

If you are a Realtor who works with foreclosure properties - even one that is relisting a property previously foreclosed upon, the uncertainty surrounding the insurability (and salability) of a pre-Ibanez foreclosure puts our professional standard of competence to a test. How do you counsel the buyer and/or seller? What should you disclose? How much should you disclose? Can the seller get a legal opinion of marketability of title? Should you and your broker consult an attorney for advise? Would your E&O policy cover you in the event someone made a claim against you for any problems that may arise?

Professional and legal opinions about the Land Court's decision have been loud and clear. From a legal standpoint, the Land Court already concluded that the letter of the Massachusetts law was not followed. From a practical standpoint, no one could have possibly anticipated the complexities of documenting the paper trail for the sale, resale and packaging of mortgage backed securities, which literally would be like unraveling a 50 mile ball of string and untying the individual knots. Trying to demonstrate the chain of ownership and recording and re-recording assignments on instruments that literally can be traded, unwound, repackaged and resold multiple times will be so time consuming that the Land Court might as well declare a permanent moratorium on foreclosure proceedings for the foreseeable future.

Sounds like a forensic accountant and trial attorney's nirvana, doesn't it?

What about going to the Land Court and filing a petition for quite title, re-record the deed as a registered deed and close off the chain of title? Won't work - what if it was your house that was seized and you really want it back, instead of being compensated for your loss?

Last week, on February 25, both sides asked the Massachusetts Supreme Judicial Court ("SJC") to hear the case. This would certainly be welcome news for those of us awaiting a final decision and the issuance of authoritative guidance resulting from the Ibanez case, so that we can get on with our jobs with a certain level of understanding.

As Richard Vetstein, Esq. so eloquently states in The Massachusetts Real Estate Law Blog, "Meanwhile, in the aftermath of Ibanez, some lenders are re-doing foreclosures and some are just waiting it out. Most title insurance companies are unwilling to touch an Ibanez afflicted property with a ten foot pole."

My question is - what is and what isn't an Ibanez afflicted property? And will there be a statute of limitations. Will we see new legislation because of Ibanez?

Only time will tell. Until then, be careful. Be very, careful.