A ruling by Massachusetts' highest court Friday repudiating a widespread securitization practice could scuttle other foreclosure cases statewide and may portend similar blows to the industry elsewhere.
The Supreme Judicial Court of Massachusetts rejected claims made by U.S. Bancorp and Wells Fargo & Co. that the banks, as securitization trustees, did not have to prove their authority to foreclose on two separate homes.
"This is the first court to say directly, 'it doesn't matter if there are large dollars involved or if it is convenient to ignore governing laws. You are bound to the laws just like the rest of us are,'" said Paul Collier, a Cambridge lawyer who represented the homeowners in the case.
The ruling is an effective rejection of the industry's fallback defense on botched securitization procedures. The American Securitization Forum and numerous securitization attorneys working for the industry have argued that evidence of intended transfers of a mortgage are sufficient to demonstrate legal standing. The Massachusetts high court disagreed.
The case, Ibanez vs. U.S. Bank, has been closely watched because banks have routinely argued that pooling and servicing agreements allowed them to convey mortgages to securitized trusts "in blank," or without specifying who the new owner of the mortgage would be.
The court ruled that the banks could not submit documents after filing for foreclosure and that they failed to show they were the holders of the mortgage at the time of foreclosure.
"There is no dispute that the mortgagors of the properties in question had defaulted on their obligations," wrote Justice Robert Cordy in a concurring opinion joined by another judge. But the legal standard to foreclose is higher than simply demonstrating that, he added: "Before commencing such an action … the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order."