The highest court in Massachusetts
is poised to rule as soon as this month on a foreclosure case
that could lead to a surge in claims from home owners seeking to
overturn seizures.
The justices are deciding whether to uphold a lower court
ruling that gave a Boston home back to Henrietta Eaton after Sam Levine, a 25-year-old Harvard Law School student, argued in
front of the nation’s oldest appellate court that the loan
servicer made mistakes when it foreclosed because it didn’t hold
the note proving she was obliged to pay the mortgage.
“If the Massachusetts court says this defense works, that
would have a huge ripple effect across the country,” said Kurt Eggert, a professor at Chapman University School of Law in
Orange, California.
A ruling in favor of Eaton would show how a $25 billion
settlement reached this month with state and federal officials
still leaves banks exposed to liabilities tied to home
repossessions. It also underscores the challenge of resolving a
foreclosure process that Federal Reserve Chairman Ben S.
Bernanke said in a study last month is plaguing the housing
recovery.
At issue in Eaton v. Federal National Mortgage Association,
also known as Fannie Mae, are two documents borrowers sign to
get a home loan. The first is the mortgage establishing the
right to seize a property. The second is the promissory note
that creates an obligation to pay the debt. While the servicer
had the mortgage when it foreclosed, it didn’t have the note.
One without the other is known as a naked mortgage.
Foreclosure Challenges
Home-loan financiers such as government-controlled Fannie
Mae (FNMA) and Freddie Mac typically separate the two documents when
bundling home loans into securities to sell to investors. Almost
$6 trillion in mortgage-backed bonds have been issued in the
last three years.
“The banks will have to find ways to reunify them and
establish the same party holds both the note and mortgage,”
said Richard Vetstein, a real-estate lawyer in Framingham,
Massachusetts. “It’s going to open up foreclosures to
challenges all over the place.”
The Massachusetts Supreme Judicial Court justices signaled
last month they may rule in favor of Eaton when they asked
parties in the case to submit briefs arguing whether such a
decision should be applied retroactively or only to future
lending. If retroactive, it would cloud the titles of the 40,000
Massachusetts properties seized in the last five years and while
the ruling only applies to the state, it could serve as a model
for homeowners trying to overturn foreclosures in other states.
Harvard Legal Aid
Applying a ruling retroactively would be “a direct threat
to orderly operation of the mortgage market,” the Federal
Housing Finance Agency, which oversees Fannie Mae and Freddie
Mac, holders of more than half of all outstanding mortgages,
said in a court brief.
Eaton, who has lived in the two-bedroom home in Boston’s
Roslindale neighborhood for more than a decade, began fighting
an attempt by Fannie Mae to evict her in 2010 after students
from the Harvard Legal Aid Bureau knocked at her door as part of
a foreclosure outreach project. Last year, the state’s Superior
Court invalidated the foreclosure.
Levine was able to represent Eaton before the Massachusetts
Supreme Judicial Court in October because he acted under the
supervision of attorneys David Grossman and Esme Caramello, who
run the Harvard Legal Aid Bureau. Levine declined to comment
because the case is pending.
Right to Foreclose
Fannie Mae, owned by taxpayers, and Green Tree Servicing
LLC, the company that foreclosed on the property, argued the
loan documents signed by Eaton gave Reston, Virginia-based
Mortgage Electronic Registration Systems Inc. the right to
foreclose. Her signature also gave MERS the ability to transfer
that right to third parties such as Green Tree, the companies
said. Walter Investment Management Corp. (WAC), a mortgage servicer
and investor, bought St. Paul, Minnesota-based Green Tree last
year.
“The language of the mortgage is clear and manifests the
parties’ intent to empower a third party — not the lender –
with the right to foreclose,” Washington-based Fannie Mae and
Green Tree wrote in court papers.
For the purposes of Eaton’s motion, Fannie Mae and Green
Tree admitted they didn’t possess the original note at the time
of the foreclosure. They produced a photocopy of it with an
endorsement in blank, so-called bearer paper that is much like
an endorsed blank check.
Dollar Bill Copies
Copies of promissory notes aren’t enough to establish
rights, just as copies of dollar bills wouldn’t be honored by a
bank, said Kathleen Engel, a professor at Suffolk University Law
School in Boston. If an original note can’t be found, attorneys
must file a lost-note affidavit and provide evidence to
establish a claim.
In last year’s decision, the lower Massachusetts court said
it wasn’t troubled by the separation of the two documents after
homeowners signed them. The problem was the failure to rejoin
them before foreclosing on a property.
“Massachusetts courts have historically held that one must
hold both the mortgage and the mortgage note before initiating
foreclosure,” Superior Court Justice Frances McIntyre in Boston
wrote in a June 17 decision. “This rule flows from the fact
that a mortgage, by definition, is simply a security for the
note.”
One document without the other is known as a “naked
mortgage,” said Adam Levitin, a professor at the Georgetown
University Law Center. Without the promissory note, the right to
foreclose is unenforceable because the homeowner doesn’t owe
money to the mortgage holder, he said in a court brief.
“If a naked mortgagee could foreclose, the foreclosure
would not discharge the note,” he wrote.
Fraudulent Affidavits
Federal Reserve Governor Sarah Bloom Raskin last month
criticized “sloppy and deceptive” foreclosure practices in a
speech to the Association of American Law Schools in Washington.
“The dockets of federal courts, bankruptcy courts, and
state courts include numerous cases involving a wide range of
troubling issues, such as claims of missing or forged promissory
notes” and other abuses such as fraudulent affidavits, she
said.
About 5 million homes have been lost to foreclosure in the
U.S. since 2006, according to Irvine, California-based
RealtyTrac Inc. Lenders slowed the pace of seizures last year as
they negotiated with attorneys general across the U.S. over
allegations of faulty and fraudulent paperwork used to repossess
homes.
$25 Billion Settlement
The backlog may improve following the $25 billion
settlement announced Feb. 9 with the five largest U.S. mortgage
lenders. The agreement will provide mortgage relief to
homeowners and sets requirements for how the banks conduct
foreclosures and service loans. State and federal officials will
continue to investigate misconduct in the bundling of mortgages
into securities.
The Massachusetts Supreme Judicial Court last year ruled on
two other foreclosure cases. Both handed properties back to
owners because of botched foreclosures. In each case, the
servicers didn’t hold the mortgages when they seized the
properties.
In an October decision on Bevilacqua v. Rodriguez, the
Massachusetts Supreme Judicial Court handed a foreclosed
apartment building back to a prior owner five years after its
sale to an investor who turned it into condominiums. The high
court’s ruling meant people who bought the condo units lost
their homes with no compensation. The brick building now stands
vacant, its front door blocked with piles of old mail.
In a January 2011 case, U.S. Bank v. Ibanez, the high court
handed back two other properties to former owners. One couple,
Mark and Tammy LaRace, moved back into their Cape Cod-style
house in Springfield and “put their pictures back on the
walls” two years after they were evicted, said Glenn Russell,
one of the attorneys who won the case.
“If you’re going to take someone’s home away, you’ve got
to prove you have the right to do it, and you have to follow the
law when you do it,” Russell said.
To contact the reporters on this story:
Kathleen M. Howley in Boston at
kmhowley@bloomberg.net;
Thom Weidlich in New York at
tweidlich@bloomberg.net
To contact the editors responsible for this story:
Rob Urban at
robprag@bloomberg.net;
Michael Hytha at
mhytha@bloomberg.net
Article source: http://www.bloomberg.com/news/2012-02-21/seizures-threatened-in-massachusetts-with-naked-loans-challenge-mortgages.html
