Saturday, January 8, 2011

Massachusetts Supreme Judicial Court Rules In Favor of Foreclosed Homeowners

According to Gretchen Morgenson's article in The New York Times, the Massachusetts Supreme Judicial Court (the highest court in the state, and the first to apply such a broad-based ruling in foreclosure cases) voided the seizure of two properties by U.S. Bankcorp and Wells Fargo because they did not prove ownership before foreclosing on the property:

Instead, the banks had acquired the mortgages after they had begun foreclosure proceedings. The ruling on Friday upheld that position. Foreclosures are supposed to occur only when lenders can prove they own the note underlying the property.

For those of you (which includes almost everyone) who still believe that one bank services your mortgage, let me disabuse you of that notion. During the housing bubble, mortgages went through a process called securitization which theoretically reduced risk. Securitization also lengthened the chain of claims upon debt, increasing fees for each link in the chain: the loan originator, the bank which bundled thousands of mortgages together to create a derivative, the mortgage-backed security (MBS), the credit ratings agencies which slapped a seal of approval on the MBS (a triple-A rating, which was downgraded in a hurry when the banks could no longer sell the MBSs) and institutional investors like CALPERS who bought them.

The enormous sums of money made through the process of securitization must of clouded the self-regulatory minds of banks that bundled the mortgages:

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.

There have been claims of robo-signing and forged signatures.

Rest assured, although these banks did take over the plaintiffs' mortgages and presumably profited from them, their spokesmen claim they merely acted as trustees, go-betweens between the loan originator and the investors:

Vickee J. Adams, a Wells Fargo spokeswoman, said, "The loans at issue in the court's ruling were not originated, owned, serviced or foreclosed upon by Wells Fargo. As trustee of a securitized pool of loans, Wells Fargo expects the entities who service these loans to abide by all applicable state laws, including those laws that govern foreclosure sales."

Who takes the haircut? Who do you think?

The defendants asked the court to limit its ruling only to new foreclosures (by "new" I guess they mean ones they will begin tomorrow).

The court declined to do so, allowing foreclosure cases that have been completed to be reopened and brought under scrutiny.

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