Last week, the Massachusetts Supreme Court ruled against two banks, Wells Fargo and US Bancorp, who had each foreclosed on homes and were now asking a judge to declare that they held clear title to the properties in fee simple.

The decision surprised quite a few, and represented a major landmark for those on the foreclosure defense side of the fight.  Bank stocks got pretty much creamed after the decision was announced.  Foreclosure defense blogs went into sheer elation mode, and it’s easy to understand why… finally, a decision by a top court had gone their way, establishing that the rules of foreclosure weren’t some trivial set of technicalities.

But, what was so amazing about the decision was not that it went against the banks.  It should have and it did.  What was amazing was how the banks attempted to defend their positions.

Here’s an overview of what happened…

The judge ruled that the foreclosure sales were invalid because the notices of the sales named U.S. Bank and Wells Fargo, in their respective foreclosure actions, as the mortgage holders but  neither had yet been assigned the mortgages.  The judge found, based on each PLAINTIFF’S ASSERTIONS, that “the plaintiffs acquired the mortgages by assignment only after the foreclosure sales and thus had no interest in the mortgages being foreclosed at the time of the publication of the notices of sale or at the time of the foreclosure sales.”

Now, that’s just stupid on the part of the banks.  I think we can all agree that banks should own homes before foreclosing on them, but that’s not the amazing part…

The banks moved to vacate the judgments, and at the hearing they CONCEDED that each complaint alleged a post-notice, post-foreclosure sale assignment of the mortgages, but they now said that there were documents that would show a pre-notice, pre-foreclosure sale assignment of the mortgages.  In other words… okay, we did it wrong last time, but we’ve got our act together now, your Honor.

The judge basically said okay, fine… go fetch them then.

In response, the banks showed up with HUNDREDS OF PAGES OF DOCUMENTS, which they said established that the mortgages had been assigned to them before the foreclosures, and submitted them to the judge.

Many of the documents the banks submitted to the court related to the creation of the securitized mortgage pools in which the mortgages in question were supposed to be included.

US Bancorp showed up with a private placement memorandum (“PPM”), a 273-page, unsigned offer of mortgage-backed securities created for use with potential investors.  Basically, a boilerplate document that could have been printed the day before, with language saying that mortgages “WILL BE” assigned to the trust and that “each mortgage loan will be identified in a schedule appearing as an exhibit to the Trust Agreement.”

But, the bank didn’t provide any sort of schedule listing the loan in question as being among the mortgages assigned in the trust agreement.  Why not, I wonder… did they forget to bring it?

Wells Fargo, in a variation on the same theme, provided the judge with a copy of the Pooling & Servicing Agreement (“PSA”), but the copy was downloaded from the Securities and Exchange Commission website and was not signed, so it didn’t contain the loan schedules referenced in the agreement that should have identified the mortgage in question as being included in the pool.

In an attempt to make up for this obvious inadequacy, however, Wells Fargo also brought in a schedule that it said identified the loans assigned in the PSA, but the schedule did not list property addresses, names of mortgagors, or any number corresponding to the loan or servicing number on the mortgage in question.  So, I’d have to say, very nicely done there.

Now… let’s take a moment to review things… in both of these cases, the documents showed that the banks weren’t assigned the mortgages in question until after they had foreclosed on the properties, and both banks had CONCEDED that was the case.  So, this was them bringing in the paperwork that was to prove otherwise.

I just want to say that I would not have brought such absurd “proof,” to argue my own case in traffic court.  I would have been too embarrassed to do so… and I’m not a lawyer.  That the attorneys for Wells Fargo and US Bankcorp would present this sort of crap to a judge is nothing short of astounding, at least to my way of thinking.

Apparently, the justices agreed… in fact, in his opinion, Justice Cordy wrote:

“… 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.”

Now, there was certainly more to the case… this is not intended to be a comprehensive review of all of the legal theories involved.  But I want to make sure we all understand what’s at the core of this situation… what caused Bank of America, JPMorgan Chase, Wells Fargo, and GMAC, et al, to employ “robo-signers,” and attempt to foreclose using fraudulent affidavits claiming that each bank had lost the actual notes.

All a bank has to do, as trustee of a given securitized trust, in order to foreclose legally, is to show up with the promissory note that was signed by the borrower and when the judge turns it over, he or she should see that it was assigned to the trust that is now trying to foreclose.

Well, there is one more wrinkle worth mentioning.  The note has to be assigned to the trust within a certain time frame, usually 90 days, because it’s almost always a REMIC trust we’re talking about… a tax-exempt entity, and the Internal Revenue Code’s rules on such transfers are very clear.

The banks want us to believe that they all lost the notes with the assignments on the back… they all lost them… all at the same time.  As I mentioned above and took directly from the court documents by the way, the banks brought in HUNDREDS of pages of supposed documentation to prove that the trusts did in fact hold the notes at the time of the foreclosure… that’s HUNDREDS OF PAGES… but not one assigned note, and not even one schedule of the loans supposedly assigned to the trust trying to foreclose.

And remember, the bankers had plenty of time here… once they lost in the lower court, they filed motions to vacate and were given more time to bring in the proper paperwork.  And this case went all the way to the Massachusetts Supreme Court, so it’s not like that happens in a hurry.

In the end, the banks tried the argument… everybody’s doing it, so why can’t we do it too.  My mother heard this argument from me once.  I was seven years old.  She didn’t buy it, and I never tried it again. The court’s response was to say:

“… the legal principles and requirements we set forth are well established in our case law and our statutes.  All that has changed is the (banks’) apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.”

Why can’t the banks just show up with the note assigned to the trust, as they are legally required, when they foreclose?  Because they all lost them?  Is that the story from the world’s largest banks… that they’re all having problems losing stuff?  It was a mass misplacement?

The question, of course, is what happens next?  What happens if the bank cannot establish that a note was assigned to a trust that now wants to foreclose?  Does the amount owed become an unsecured debt, dischargeable in bankruptcy?  And if the trust does not hold the note because it wasn’t ever assigned, who owns it?  And where is it, damn it?

A lot of people say that the homeowners shouldn’t get their homes free and clear under any circumstances.  They say that in buying the homes in the first place, they gambled and lost… and therefore should lose their homes that they now can’t refinance and therefore can’t afford.  But, according to that way of thinking, why shouldn’t they be able to discharge the debt that’s no longer secured by the mortgage… it would seem that they gambled and won.  Gambling, one should remember, cuts both ways, does it not?

The thing is… I asked a good friend of mine who is a fairly senior level executive at a major bank, although not one of those mentioned here, and he said that he can’t imagine the banks losing the notes.  He explains that the truck pulls up at his bank every day to take documents such as the notes in question to Iron Mountain, where they are expertly stored in a salt mine, of all places.  And if you think Iron Mountain lost them, visit www.ironmountain.com and get back to me on that.

So, perhaps the banks didn’t lose the notes in question… perhaps they just don’t want to show them to anyone in court because when the judges flip them over to look at the back they will find that they were NEVER ASSIGNED to the trusts as the REMIC RULES REQUIRED.

And then the investors would be something just shy of pleased that they were sold empty securities… to be specific, mortgage-backed securities without the mortgage-backed part.  And if notes weren’t assigned to the tax-exempt REMIC trusts… well, then someone would owe quite a bit in back taxes, now wouldn’t someone?  Maybe even some penalties and interest too?  I would think so.

Now, that might be a reason not to want to show up with the actual note, wouldn’t you think?

Or… maybe the largest banks in the world… the ones that make me sign, have two firms of I.D. and leave a fingerprint just to cash a check for $5… all lost them.  At the same time.  Maybe… it could happen… I guess.

On some other planet, perhaps, but not here on Earth… not a chance in the world.

My blog sits squarely on the side of homeowners in this fight, but I didn’t say anything about this decision right away.  The American Securitization Forum, however, did issue a statement immediately following the ruling:

“The ASF is pleased the Court validated the use of the conveyance language in securitization documents as being sufficient to prove transfers of mortgages under unique aspects of Massachusetts law.”

And then…

“The ASF is confident securitization transfers are valid and fully enforceable,” concludes the ASF’s Executive Director, Tom Deutsch.

And if those statements don’t confuse you, then perhaps you missed your calling and should have been a banker.  That’s not at all what the courts ruled, or maybe part of it is, but it’s not at all the point to the decision.

See… I didn’t rush to write something about this decision because I wanted a few days to discuss it with a variety of attorneys and others involved in the foreclosure crisis, and to see what other experts would say and write about the case.

There are simply too many really smart people looking at this and the myriad of other cases going through the judicial process related to foreclosure, and I see no point in my trying to fake being as smart or smarter than Yves Smith over at Naked Capitalism, for example.  The woman is like a walking encyclopedia on this subject and undoubtedly countless other subjects, and I’m pretty sure I couldn’t make the cut to be on her research staff, unless there’s a position available that makes or fetches coffee, and that assumes she’s got a research staff in the first place… and likes coffee.

Besides, I wanted to know what I knew my readers would want to know… So what, and who cares?  How does this impact me if I could be losing my house?  Because if it doesn’t impact me in some positive way… I don’t care.

Fair enough… and I actually agree with that sentiment.  The last thing I wanted to do was assign, no pun intended, too much significance to the decision, and potentially lead homeowners down the wrong path.  When it comes to the foreclosure crisis, there are some things I know with certainty to be true, and other things of which I couldn’t be sure and the idea of waxing idiotic in the face of some of the country’s top legal minds looking at this case’s outcome, just didn’t seem at all appropriate.

And besides all that… I had to read the damn thing and all the accompanying analysis, and unlike Yves, who I’m convinced makes Evelyn Wood look like Sly Stallone in Rocky I, it’s not the kind of thing I can just scan over breakfast.

Well, with all of that being said and done, I’ve come to the conclusion that it very probably does affect you, assuming your loan was securitized and therefore should have been assigned to a trust, and I mean that regardless of whether you reside in Massachusetts or not.

Let’s run it down and then I’ll tell you what I thought was particularly noteworthy… no… fascinating, even.

1. Basically, the court found that neither bank as trustee was able to establish that the notes had been properly assigned to the respective securitized trusts at the time that each had foreclosed on the two properties.
2. The two banks tried to say that the mortgages simply followed the notes and therefore were transferred with the transfers of the notes, but the courts said no, that was not the case in Massachusetts, at least.
3. The two banks also tried to say that the mortgages transferred via what’s termed “assignments in blank,” which is the equivalent of writing: Pay to the order of _______, and leaving it blank as to whom is to be paid, but that didn’t fly with the Massachusetts high court either.
4. The court was unanimous in its decision, making it quite clear that when the foreclosure notice names the wrong plaintiff, it does not constitute proper notice of the foreclosure to the previous owner of the property.
5. The banks also tried to say that the mortgages had been transferred via the Pooling & Servicing Agreement(s) and on this point the court said that an “executed” PSA could possibly be an acceptable way to prove valid assignment of the mortgages, but only if the PSA also contained a schedule that specifically identified the mortgage in question as being part of the respective trust, and assuming there was proof that the assignor in the PSA actually held the mortgage it was assigning.  And neither bank was able to produce such a schedule.

In other words, when it comes to the title of a property, it’s back on the chain gang.  And if the band that recorded this wasn’t called “The Pretenders,” I probably could have let this one go, but come on… The Pretenders?  How could I… and with my most sincere apologies to The Pretenders… once again, it’s time to sing along…

Your Title Lacks Chain, Gang.

~~~

You found my mortgage un-paid… Oh, oh, oh, oh, oh.

Wouldn’t modify terms under HAMP.

So, you foreclosed, just like a champ. Oh, oh, oh, oh, oh.

But now I’m back in the fight, ‘cause… Ooh, ah.

Your title lacks chain, gang.

Ohhhh, your title lacks chain, gang.

~~~

Circumstances seem to be glossed.  Oh, oh, oh, oh, oh.

As to REMIC assignments they’re all lost.

Shot from my house like a pigeon from hell. Oh, oh, oh, oh, oh.

But your quiet title just wouldn’t quell.

Your title lacks chain, gang.  Ooh, ah.  Ooh, ah.

Ohhhh, your title lacks chain, gang.

~~~

The courts up in Mass they didn’t buy. Oh, oh, oh, oh, oh.

Your explanations whether truth or a lie.

Your securitization may have just failed you. Oh, oh, oh, oh, oh.

And I’m still surprised no one has jailed you.

Your title lacks chain, gang.  Ooh, ah.  Ooh, ah.

Ohhhh, your title lacks chain, gang.

~~~

I’ve got a picture of you on my wall. Oh, oh, oh, oh, oh.

Since signing that loan, my life’s been a squall.

But the battle’s not through, yeah.  Ooh, ah.  Ooh, ah.

There’s still more you must do, yeah.

Ohhhhh… Your title lacks chain, gang.  Ooh, ah.  Ooh, ah.

Ohhhh, your title lacks chain, gang.

~~~

Okay, well I’m sure we can all agree that’s about enough of that.  Georgetown Law School Professor, Adam Levitin, is clearly one of the country’s leading experts on this subject matter.  He’s testified in Washington on numerous occasions, and he’s certainly a lot of fun to watch and listen to when he speaks about banks… in fact, I’d put him right up there with Elizabeth Warren.

His blog is titled, “Credit Slips,” and on it he points out, among many other things, that…

“I don’t think this is a big victory for the securitization industry–I don’t know of anyone who argues that an executed PSA with sufficiently detailed schedules could not suffice to transfer a mortgage. That’s never been controversial. The real problem is that the schedules often can’t be found or aren’t sufficiently specific. In other words, deal design was fine, deal execution was terrible.

Important point to note, however: the (court) did not say that an executed PSA plus valid schedules was sufficient for a transfer; the parties did not raise and the (court) did not address the question of whether there might be additional requirements, like those imposed by the PSA itself.”

Another blog I found particularly helpful when trying to get my arms around this whole thing was ZeroHedge.  Tyler Durden’s post, which was written by Greg Lemelson of Amvona.com, was very good, in part saying…

“The ruling, should not distract from the important underlying errors in the execution of securitized mortgages which appear to be all but universal.  Thus the (court’s) ruling, is not an end in itself, but rather is part of a means to an end, which is discovering the realities of mortgage securitization in the US and what it may indicate regarding the banks motivations is expediting foreclosure actions in recent years.”

And it should go without saying that my good friend Max Gardner, the lawyer who knows this stuff like he learned it in grade school and then just kept learning it over and over again for say… 50 years, give or take, had a lot to say about this case too, but in the end, wasn’t conclusive as to what the decision would mean to homeowners en total…

“No one’s sure what the Ibanez ruling will mean just yet, but one thing is clear: Foreclosing on mortgages that were securitized with insufficient documentation will continue to be tricky business for the banks.”

Adam Levitin was a little more sure about the two mortgages in this case not being enforced, saying…

“So what does this mean?

There’s still a valid mortgage and valid note. So in theory someone can enforce the mortgage and note. But no one can figure out who owns them. There were problems farther upstream in the chain of title in Ibanez (3 non-identical “true original copies” of the mortgage!) that the (court) declined to address because it wasn’t necessary for the outcome of the case. But even without those problems, I’m doubtful that these mortgages will ever be enforced.

Actually going back and correcting the paperwork would be hard, neither the trustee nor the servicer has any incentive to do so, and it’s not clear that they can do so legally. Ibanez did not address any of the trust law issues revolving around securitization, but there might be problems assigning defaulted mortgages into REMIC trusts that specifically prohibit the acceptance of defaulted mortgages. Probably not worthwhile risking the REMIC status to try and fix bad paperwork (or at least that’s what I’d advise a trustee). I’m very curious to see how the trusts involved in this case account for the mortgages now.”

So, that’s pretty interesting coming from a law professor who knows this area like I know what I like to eat for lunch.  But, I took away something additional from all this, and I thought others might find my thoughts interesting… maybe even meaningful…

My thoughts on the Ibanez decision…

First of all, I have to point out that this was a Massachusetts Supreme Judicial Court ruling, not something that comes up in a hurry, so the banks involved had plenty of time to prepare… to put their best judicial foot forward, as it were.

And yet… one bank brought in a blank Private Placement Memorandum, and the other a PSA downloaded from the SEC Website.  Neither had schedules identifying the mortgages specifically.

Blank documents downloaded from a Website?  Seriously?  That was their best judicial foot forward?  I know 14 year olds who would have called this one early… no way was that going to work, any more than downloading my car’s brochure from GM.com would prove that I own my car.  These banks brought in hundreds of pages of being and nothingness, and couldn’t come up with a way to establish that the notes were ever assigned to the trusts… for which they were the trustees.

If you’re hearing that Ringling Bros. circus music playing in your head right about now, there’s good reason for it… these guys are clowns, but more important than that, they’re done… finished… washed up.  The lawyers for US Bancorp and Wells Fargo may just go down in history as the guys that knocked Humpty Dumpty off of the wall.

Of course, the question on everyone’s mind is… so, who owns the loans and who gets to foreclose, because the idea that no one does is enough to make many people run screaming from the room.  I’m not so sure… like I said earlier in this article, if they gambled and lost, which is why many would say that they lost their homes to begin with, why couldn’t they also have gambled and won?

What I hear from most of the people on the banking side of this decision is that there’s nothing to worry about, but the bankers are simply not credible in such matters, for reasons that I think are both obvious and abundant.  This side also seems to have some belief that “Congress” will somehow act and make this whole nightmare go away… and to that I can only say… I don’t think so.

What would they do to “act”?  Pass a law saying you don’t have to pay attention to any of the other laws governing such transfers of property?  It’s a neat idea, if you’re maybe six years old, but I just don’t see the investors going along.  I mean, if the banks are allowed to just say which loans were assigned to the securitized trusts and which weren’t… well, do you think they’ll say the good loans were assigned, or would they just take out the trash and say the bad loans were assigned?  Ignoring the entire assignment/chain-of-title issue just isn’t going to be something that one can just legislate away, in my view.

Remember, Congress may not care about homeowners, but they are somewhat beholden to pension plans, insurance companies, hedge funds, and sovereign wealth funds, and those are the investors we’re talking about here, right?

So, now it’s a question of when the next shoe will fall, and there are plenty of such shoes hovering around out there looking like they might drop at any moment.  And one has to wonder why the investors aren’t already suing the bankers for selling them mortgage-backed securities without the mortgage-backed parts.

And here’s one of those shoes now… Naked Capitalism once again… with a hat tip to April Charney, who has also become a friend of mine over the last year or so, has posted: Mass Supreme Court to Consider Whether Buyers Out of Faulty Foreclosures Actually Own Property.

Here’s what Yves has to say about this up and comer…

“A ruling against Bevilacqua would cast a shadow over sales of property in foreclosure out of real estate securitizations and would create a major impetus for legislative intervention, aka yet another bailout, in the foreclosure mess. It could even raise questions about whether loan mods and short sales are valid since the servicer in securitizations may not be acting on behalf of the owner, which may not be the trust, but instead an entity earlier in the securitization chain.

This sword of Damocles will hang over the banks for some months; oral arguments in Bevilacqua are slotted for April. Stay tuned.”

The sword of Damocles, Yves?

Okay, so from what I can remember about said sword, it hung over the head of a king’s throne, suspended by like a single strand of a horse’s hair, or something like that… and the story’s moral was something about how power may look attractive, there are also grave threats that accompany such power.

Personally, I think Spiderman said it even better when he said: “With great power comes great responsibility.”

The bankers have blown it, and they’ve blown it big.  To me it looks like there are multiple swords hanging over the heads of the too-big-to-fail crowd.  They report fake earnings based on suspended accounting rules… they lie about… well, most everything… they’ve alienated almost every middle class homeowner in America… and their friends in Washington are of the sort that will desert a sinking ship faster than Larry Craig can claim a wide stance.

As I said to an entire room full of banking lawyers at last years conference on consumer financial services, and to a room full of 9^th Circuit judges last April at their judicial conference in Santa Barbara… the banks may have taken an early lead, but the path they’ve chosen doesn’t end well for anyone, least of all them.

We’re in a river, people, not a lake.  Homeowners should do everything they can to hang on as long as they can… the water we’re standing in today is not the water we’ll find ourselves in tomorrow.  Or, in other words, if you don’t like the weather in New England… wait a minute.  And look for more on this from me in the next week or so…

Mandelman out.

P.S. Also, just for the record, I wrote about this case a couple of years back when it was still in the lower courts, and you can find that article here: Massachusetts Judge Rules Against Wells Fargo and U.S. Bank – Threatens Millions of Foreclosures. I’m just saying…

Ibanez Massachusetts Supreme Court Ruling