Massachusetts' highest court on Friday voided foreclosures on two homes because the servicers that tried to take title to the properties failed to show they held the mortgages at the time of foreclosure.

The ruling by the Supreme Judicial Court upheld a lower court ruling against U.S. Bancorp and Wells Fargo, and sent the share price of certain large banks lower while fanning fears that if other states rule the same way the foreclosure and REO market could slow to a crawl.

One investor in nonperforming loans and REO said, "I guess being the owner of a 'bearer bond' or 'assignment in blank' is not good enough for the liberal Massachusetts folks who want to protect all of the non-paying borrowers from being out in the cold this winter."

According to figures compiled by National Mortgage News, the largest holders of REOs outside of Fannie Mae and Freddie Mac are: Bank of America, Wells Fargo, and JPMorgan Chase.

But servicers fear the ruling may cause other foreclosure sales to be invalidated, especially where lenders may not have access to all of the underlying documentation.

The ruling has the potential to harm securitizations because it raises the issue of whether a mortgage can be transferred without naming the recipient, a common securitization practice.

Also at issue is whether the right to a mortgage follows the promissory note it secures when the mortgage is sold, as the servicing industry has argued.

But some analysts believe the court ruling, in the long term, may mean little as servicers are forced to re-file documents with the court, giving additional proof of lien ownership.

The ABS market saw the decision as a validation of the securitization process.

"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 the unique aspects of Massachusetts law," Tom Deutsch, executive director of the American Securitization Forum (ASF).

He also cited the fact that unlike the lower court, the Supreme Judicial Court also said assignments of mortgages can be executed in blank as long as a complete chain of transfers can be shown via the applicable transaction documents. Deutsch said that in this specific case, however, the executed deal documents with the loan schedules were not introduced in the lower court and so the Supreme Court ruled that an otherwise valid confirmatory assignment was not enough to prove the right to foreclose.

"If these documents had been introduced, it appears that the ruling would have been substantially different," Deutsch said. "The ASF is confident securitization transfers are valid and fully enforceable.”

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.