“The promise given was a necessity of the past: the word broken is a necessity of the present.”
– Niccolo Machiavelli
It was just a matter of time. Sooner or later, trial court rulings against Big Banks were going to make it into the appellate system and become recognized judicial precedent. Such is the case of U.S. Bank Association, Trustee vs. Antonio Ibanez, which consisted of two appeals from trial court rulings that were disposed of in one consolidated court opinion out of Massachusetts. There are several things that distinguish thus case. First, Ibanez does not arise out of a bankruptcy court ruling, as so many previous opinions have. Second, it is not a case of a homeowner/borrower contesting the initial foreclosure action. [Presumably, like most homeowners, they had neither the money nor the appetite for a fight. – PCQ]. Lastly, this consolidated case arose out of the Oregon equivalent of a quiet title action, initiated by the banks well after the foreclosures had been completed. Both lenders sought a judicial declaration that once they had acquired title following the foreclosures, they actually had the legal right to convey marketable title to another purchaser. The banks both failed and flailed.
The Ibanez ruling was released on Friday, January 7, 2011. The facts of the consolidated cases are substantially similar, so I will summarize them as if a single case. Essentially, the borrowers closed their loans directly with the lenders that loaned them the money (the “Originating Banks”). The mortgages were duly recorded on the public record. Through successive assignments, both loans were pooled and securitized into REMIC trusts. In one case, the REMIC Trustee was Wells Fargo, and in the other case, it was U. S. Bank. Both of these lenders, acting in the capacity as Trustees for the REMICs, initiated foreclosure proceedings against the borrowers, seeking to either sell the properties at auction, or recover them back to re-sell.
However, as it turns out, at the time of both sales, neither bank had the power to foreclose on the properties. In the U. S. Bank case, the foreclosure sale occurred on July 5, 2007, but the Assignment of Trust Deed from the Originating Bank to U. S. Bank (giving it the legal power of sale) did not occur until September 11, 2008 – well after the actual foreclosure sale date. In the Wells Fargo case, the loan was also closed on July 5, 2007. But the Originating Bank’s conveyance of the mortgage containing the power of sale was not recorded until May 12, 2008. In short, at the time both lenders advertised and conducted their foreclosure sales, they had no legal power to do so, since the mortgages granting them that power had not yet been transferred to them.
In lawyer-speak, both banks’ arguments may be described as disingenuous and specious – in less charitable, but more descriptive terms, one might call them insulting. Essentially, the banks rely upon a sort of fait accompli rationale: Their predecessors, the Originating Banks, had the right of foreclosure; the Big Banks were going to get it sooner or later, and the borrowers were in default anyway, so there is no foul, since there was no harm. The Court rejected these arguments out of hand. Relying upon precedent dating back to 1871, 1905, and 1936, it held that the statutory power of sale given to lenders in foreclosure – where there is “no immediate judicial oversight”- must be strictly followed. [Note: This is the reason I maintained in my recent post on non-judicial foreclosures, that lender and servicer fraud is actually easier in trust deed states, such as Oregon. – PCQ] So, with 140 years of court precedent, it was a bit hard for the banks to argue that they didn’t realize the rules applied to them.
What is most interesting about this case, besides the holding itself, was the banks’ consistent unwillingness or inability to provide evidence supporting their legal position that they had a right to conduct the foreclosures without owning the actual mortgages that gave them the right to do so. The gist of the banks’ arguments revolved around the claim that, although they did not hold the mortgages, they nevertheless had the ability to foreclose based upon the documents generated by the securitization process itself. Here’s a sampling:
- U.S. Bank argued that it had the right to foreclose based upon the trust agreement described in the private placement memorandum (“PPM”) for the REMIC trust – a preliminary document used in private securities offerings that outline the business plan of the offering. However, the bank never offered the trust agreement into evidence.
- Wells Fargo based its right of foreclosure on the Pooling and Servicing Agreement (“PSA”) which is the document governing the operations of the REMIC Trust. However, although it offered the PSA into evidence, that document contained language that the trust deed had already been deposited with Wells Fargo, the Trustee for the REMIC. The PSA did not grant the bank any future right of foreclosure. Moreover, the bank could not establish that based upon the mortgage loan schedule for the PSA, the borrower’s property was actually in the Trust. [Note: This is symptomatic of a related problem, which is that in many cases, the loan schedules are frequently not a part of the PSAs, which makes it nearly impossible to track down a particular loan. – PCQ]
In a last ditch effort, the banks relied upon the “everybody is doing it” argument. In the rarified atmosphere of appellate argument, this defense is given the more dignified title of “custom and usage.” Loosely translated, the rationale is that even though the banks’ actions fly in the face of 140 years of Massachusetts’s precedent, since the lending industry had been ignoring the law already, it should be permitted to continue doing so. The Court would hear nothing of it. With perhaps a note of exasperation coupled with whiff of disgust, the Court concluded that “(t)he 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.” Smackdown!
And as if that were not enough, two of the concurring judges felt it necessary to include their own written opinions. While they agreed with the majority, they added the following: “(W)hat is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosures in Massachusetts, but rather the utter carelessness with which the plaintiff banks document the title to their assets.” [Italics mine. – PCQ] Significantly, while the two concurring judges acknowledged that although the borrowers had defaulted on their mortgages, “…that is not the point. Foreclosure is a powerful act with significant consequences….” Smackdown!
Will Ibanez have any effect on bank foreclosure practices? First, presumably, lenders will do a better job in picking which cases they decide to appeal. In retrospect, Ibanez raised questions they may not have wanted answered. In my opinion, there were other ways to make title to the properties in question marketable, without submitting the issue to court scrutiny after flaunting 140 years of Massachusetts judicial precedent. Secondly, and more to the point, perhaps Big Banks will now begin seriously considering pre-foreclosure events, that is, modifications, short sales and deeds-in-lieu, as viable alternatives they should more seriously entertain.
