Behind the Ibanez Case
In ruling that U.S. Bank and Wells Fargo had to own mortgages before foreclosing on them, one judge put an end to a two-year saga that left two families without their homes. While the banks tried to convince Massachusetts Land Court Judge Keith Long that the foreclosure sales the banks held in 2007 were valid, Antonio Ibanez and Mark and Tammy Larace’s homes sat empty and deteriorating pending the lawsuits outcome. Over two years later, the Ibanez and Larace’s homes are back in their possession, but with an uncertain future ahead, despite the favorable ruling by Massachusetts Supreme Court.
When the economy worsened, Antonio Ibanez and Mark and Tammy Larace stopped being able to afford their mortgage, and knew it was only a matter of time before their home would be lost to foreclosure. After trying to prevent the inevitable, they received notice that their banks would sell their homes on July 5, 2007. Because Massachusetts permits foreclosure by notice, the banks did not need to receive court permission to foreclose, nor did they seek it. Instead, the banks were able to provide notice in the local newspaper of the foreclosure three weeks before the sale, and then sell the property at auction.
Without means to stop the foreclosure sales, the banks sold each property on schedule in 2007. No one bided on the homes except U.S. Bank and Wells Fargo. U.S. Bank bought Ibanez’s home for $16,437 (15%) less than the appraised value; Wells Fargo bought Larace’s home for $24,602 (17%) less than the appraised value.
Most mortgage loans are no longer lent and held by a local bank, determining who has ownership rights to the any particular loan at any given time becomes difficult and confusing. Banks buy and sell pools of loans regularly, sometimes bundling them with thousands of others to be sold off in chunks by Wall Street. Here, that is what happened to Ibanez and Larace’s loans. Their loans were bundled and sold as part of a security, meaning ownership had transferred multiple times and ended up in a trust. Unfortunately for the banks, however, they did not update their paperwork to show the proper transfers before the foreclosure. Without the proper paperwork, U.S. Bank or Wells Fargo could not prove they had the legal right to order the foreclosure sale. Because the banks did not have the proper paperwork, they could not prove they were the actual mortgage owners, so neither could establish its right to conduct the sale. This means neither bank could obtain title insurance through a title company.
Picture the banks’ problem this way. If you lent John money, and then he stopped paying you, you would have the right to sue him. However, you are the only person with the right to sue him. Your cousin Sally would not be able to take John to court to collect on your loan, nor could she collect on your loan and keep the money for herself. In order for Sally to have that legal ability to sue for you (called having “standing”), you would have to give Sally some legal right. You could either ask Sally to act on your behalf, or sell the loan to Sally so she could sue in her own name. Only when the loan belongs to Sally (or she has your permission) can Sally sue.
The same concept is at work here. U.S. Bank and Wells Fargo were not the original lenders on the Ibanez and Larace’s loans. Instead, other banks owned the mortgages, and never properly sold (assigned) their interest to U.S. Bank and Wells Fargo before those banks foreclosed on the property. Thus, U.S. Bank and Wells Fargo, like Sally, could not show they were the rightful owners of the mortgages and the banks with the power to foreclose. This caused a serious problem for U.S. Bank and Wells Fargo because without standing, they could not legally foreclose or sell the properties.
Without the legal right to foreclose on the properties, the banks did not have the legal right to sell the properties at auction. Without that legal right, the rights of any purchaser of the property would also be tarnished. Think of it in terms of buying a stereo system you know was stolen. Because the thief stole the stereo (he did not have the right to sell it), your ownership is also void – even though you paid the thief money for it. Just because you pay for the stereo does not mean you have ownership rights to it, if the seller never had legal authority to sell it to you. Similarly, if the banks take and sell homes without the legal right to do so, the buyer’s ownership rights will also be tarnished.
Here, the banks were both the seller and the buyer of the tarnished homes, raising serious questions about the legitimacy of the foreclosures and sales. The ownership problem was so big for the banks that title insurance companies would not issue policies on the Ibanez and Larace properties. Title companies issue insurance that covers property owners from losses associated with faulty property ownership chains. If the title company is not comfortable that the foreclosure was proper, and refuses to issue title insurance, then the value of that property drops significantly. After all, no one wants to buy a house from someone that cannot establish they actually own it.
Faced with the prospect of having two nearly worthless properties, U.S Bank and Wells Fargo sue for a court order blessing their foreclosure procedures. The banks could have gathered their paperwork establishing their rights to foreclose, which would mean obtaining “assignments” of the mortgage that showed an unbroken chain of ownership from the original lender to them. However, instead of gathering that paperwork so they could correctly foreclose on the properties, the banks filed a lawsuit asking the court to rubber stamp their shoddy procedures. With such an approval, the banks could then continue to take people’s homes without gathering the necessary paperwork first. Needless to say, the court told the banks to pound sand. The judge did not buy the banks’ arguments in his March 2009 decision, finding that without proper proof of ownership before the foreclosure sale, the banks could not meet the minimal legal requirements necessary to take and sell the homes. The judge noted that beyond Massachusetts’s minimal requirements that require the bank show ownership before the sale, a production of corrected documents after the sale do not fix the problem.
Neither bank was happy with the judge’s decision, and filed documents asking him to change his mind. The banks produced extra documents that they claimed demonstrated their actions were legitimate, including complex securitization documents. After reviewing those documents, the judge again denied their request, finding that “lawsuits are a serious matter and are not a place for ‘do-overs.’” He also found that the additional documents actually offered more proof the banks’ actions were illegal and that his original ruling was correct.
The judge’s order invalidated U.S. Bank and Wells Fargo’s foreclosures against the Ibanez and Larace properties. Both families are back in possession of their homes after two years of sitting empty, and the Massachusetts Supreme Court may have just paved the way for them to stay there. However, despite the favorable Supreme Court ruling, final resolution of these foreclosures is uncertain. While the court’s decision paves the way for each family to sue their bank for wrongful foreclosure, there is still a lingering question about which bank actually owns the mortgage and whether some other lender can appear with the correct documents to foreclose.
What has happened since then is the question?