Improperly Documented Foreclosures

A case decided by the Massachusetts Supreme Court could have a devastating effect on property acquired by foreclosure if followed by the California courts. In U.S. Bank, N.A. v. Ibanez (SJC-10694), decided on January 7, 2011, the court ruled against foreclosing lenders who improperly documented their assigned mortgage interests and those who purchased the foreclosed properties.

In U.S. Bank, a mortgage was assigned “in blank” (the assignment did not specify the name of the assignee) to multiple successive lenders, eventually becoming part of a mortgage-backed security asset pool. The mortgage-backed security asset pool involved a private placement memorandum (an unsigned offer of mortgage-backed securities to potential investors) which contemplated that the mortgages would ultimately be assigned into a securitization trust agreement with U.S. Bank as the trustee of the trust. U.S. Bank then foreclosed on the property by non-judicial sale as the “owner” of the mortgage. However, the mortgage was not actually assigned to U.S. Bank and recorded until more than one year after the foreclosure sale. The Massachusetts Supreme Court held that because the assignment was not executed by U.S. Bank and recorded until after the sale, U.S. Bank did not have the requisite ownership interest of the mortgage necessary to foreclose and the foreclosure was null and void. The court stated that if, prior to the sale, there had been an executed securitization trust agreement with language authorizing present assignment, and a schedule including Ibanez’ mortgage, the foreclosure would have been valid. But U.S. Bank could not produce such an executed trust agreement, only the assignment recorded after the sale. This ruling applies retroactively, thus any purchasers of foreclosed properties in Massachusetts affected by this issue technically no longer own their properties, and title automatically reverts to the previous owner upon whom the lender foreclosed.

California is a state which operates under a non-judicial foreclosure system, similar to Massachusetts. Although this decision is not binding in California, the reasoning could be followed by California courts sometime in the near future. California courts have previously held foreclosure sales invalid due to lender’s procedural oversights. For example, in Dimock v. Emerald Properties LLC (81 Cal.App.4th 868), decided in 2000, the original trustee filed a notice of default and the lender subsequently recorded a substitution of trustee. Upon the borrower’s failure to pay according to the terms of a forbearance agreement, the lender proceeded with a foreclosure sale under the original notice of default and the original trustee. The court in Dimock held that because the substitution of trustee was recorded, the original trustee had no power to convey the property, and its deed to the new buyer at the foreclosure sale was void. The court stated that if the lender had recorded another substitution of trustee reinstating the original trustee, it could have properly proceeded with the original notice of default and foreclosure sale. Although not specifically involving a lender and it’s lack of authority to foreclose due to improper assignment, Dimock shows that a foreclosure sale can be nullified in California due to a lender’s failure to properly and timely record required documentation.

If U.S. Bank is followed in California it would cause great uncertainty as to ownership of property involved in these types of foreclosures. This case is a stark reminder to lenders who acquire their mortgage interest by assignment, to execute and record their assignments in a timely manner prior to initiating a foreclosure sale. This is especially critical in a case involving mortgage-backed securities in which multiple mortgages are assigned to different lenders throughout the process. If applicable, lenders must be sure to properly execute securitization trust agreements which include language about present assignment of the specific mortgages. If lenders fail to properly document such assignments and U.S. Bank is followed in California, those who acquire their property through foreclosure and subsequently have it taken away due to an improper sale may seek recourse against these offending lenders.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben & Junius, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

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