The highest court in Massachusetts ruled Friday that US Bancorp and Wells Fargo erred when they seized two troubled borrowers’ properties in 2007, putting the nation’s banks on notice that foreclosures cannot be based on improper or incomplete paperwork.
Concluding that neither institution had proved it had the right to evict the borrowers, the Supreme Judicial Court voided the foreclosures, returning ownership of the properties to the borrowers and opening the door to other foreclosure do-overs in the state.
Legal experts said that while this ruling did not set a precedent for other states, the outcome will be closely watched across the country because it is the first such ruling from a state’s highest court. Investors viewed the ruling as negative for banks; an index of financial company shares fell almost 1 percent on the day.
“The broad implication is you’ve got to dot your i’s and cross your t’s,” said Kathleen G. Cully, an expert in bankruptcy and lender regulatory law in New York. “You need a proper chain of title, and in both of these cases there was a gap in the chain.”
The case dates to July 2007, when Wells Fargo and US Bancorp began foreclosure proceedings against delinquent borrowers on two separate properties. Neither borrower fought the proceedings — the courts in Massachusetts are not obligated to oversee foreclosures — and both banks quickly seized the properties.
The banks’ problems began in the fall of 2008, when Wells Fargo and US Bancorp sought judgments from the Massachusetts Land Court that would have given them clear title to the properties. In 2009, the court rejected the banks’ arguments, ruling that the banks had not been assigned the mortgages before they foreclosed on the borrowers, as is required. Instead, the banks had acquired the mortgages after they had begun foreclosure proceedings.
The ruling on Friday upheld that decision.
Foreclosures are supposed to occur only when lenders can prove they own the note underlying the property.
While it is common now for borrowers to question whether banks moving to seize their properties have the right to do so, in 2007, most borrowers assumed that the institutions foreclosing on them were acting properly.
Since then, lenders’ foreclosure practices have come under intense scrutiny. Borrowers’ advocates have argued that lenders flouted private property rights in their rush to foreclose on troubled borrowers. As lenders and Wall Street firms bundled thousands of mortgage loans into securities, banks often failed to record each link in the chain of documents demonstrating ownership of a note and a property.
Attorneys general in all 50 states are investigating foreclosure improprieties, which include forged signatures on legal documents and other dubious practices meant to patch up holes in loan documentation.
A sad, sad day for the banksters and hedge fund criminals like Whitney Tilson - banks actually have to follow the rule of law.
Tilson, of course, is on record saying banks ought to be able to foreclose on anybody they want, paperwork be damned.
Tilson says following the letter of the law is just a technicality.
Thankfully the Massachusetts court found differently.