Massachusetts Supreme Court Upholds

Securitization Conveyance Practices

Relating to Assignments of Mortgages
Michael D. Jewesson, Mark W. Harris and Patrick C. Sargent
January 11, 2011
On January 7, 2011, in a widely followed case with serious implications
for the mortgage and securitization industry, the Massachusetts
Supreme Judicial Court validated the securitization industry’s
customary practice of utilizing mortgage assignments executed “in
blank” in connection with transfers of mortgage loans from originators
to securitization trustees and affirmed that confirmatory assignments
of mortgage need not be in recordable form or recorded prior to notice
of foreclosure and sale. Because the Massachusetts Supreme Court
ultimately ruled on different grounds that Wells Fargo Bank, National
Association and U.S. Bank National Association, in their capacities as
securitization trustees, did not make the required showings that they
were the holders of mortgages related to homes upon which they
foreclosed in Massachusetts, the general media has, in our view,
incorrectly characterized this decision as a major defeat for banks and
investors. While the Massachusetts Supreme Court ruling has left the
two trustee banks without clear title to the homes that secured the
mortgage loans purportedly held by the securitization trusts,
participants in mortgage-backed securitizations can take comfort in the
fact that the Massachusetts Supreme Court was unwilling to invalidate
the industry standard mortgage loan transfer process in these
transactions.

History

Wells Fargo and U.S. Bank (together, the “Banks”) foreclosed on two
separate properties of two different mortgagor homeowners, Ibanez
and LaRace, on July 5, 2007, in the town of Springfield,
Massachusetts. In September and October of 2008, the Banks brought
separate actions in a Massachusetts court (the “Land Court”) to
establish that they had clear title in their respective foreclosed and
purchased property. In those actions, both Banks acknowledged that
they had foreclosed on and sold the properties prior to executing and
recording in the registry of deeds confirmatory assignments of the
mortgages to the Banks (such recordable assignment document
generally referred to as an “Assignment of Mortgage”).

In March of 2009, a judgment was entered by the Land Court ruling

that the foreclosure sales were invalid and that the Banks failed to
make the required showing that they were the holders of the related
mortgages at the time of the foreclosure sale. Notably, the Land Court
indicated that the failure of the Banks to have Assignments of
Mortgage in recordable form reflecting the Banks as assignees prior to
the foreclosures was one of the reasons for dismissal of the Banks’
claims to clear title.

Both mortgage loans followed similar and familiar paths from

origination to securitization. The Ibanez mortgage was originated by a
small mortgage company and was recorded with the registry of deeds
the following day. It was assigned a few days thereafter to Option One
Mortgage Corporation, which recorded an Assignment of Mortgage
reflecting Option One as the new mortgagee. The LaRace mortgage
was originated by Option One and was recorded with the registry of
deeds on the same day. In both cases, after recordation of its
mortgage interest, Option One executed Assignments of Mortgage “in
blank” and assigned the mortgage notes together with its interest in
the related mortgages to Lehman Brothers and Bank of America,
respectively. Both Lehman Brothers and Bank of America further
assigned the notes and mortgages to special-purpose finance
subsidiaries for further assignment to the Banks as trustees for two
different securitizations, in each case without recordation of new
Assignments of Mortgages with the registry of deeds reflecting the
names of the subsequent assignees.

The Ibanez foreclosure commenced with a complaint to foreclose on

the mortgaged property in April of 2007. In that complaint U.S. Bank
represented that it was the “owner (or assignee) and holder” of the
Ibanez mortgage. A judgment was issued in June of 2007 permitting
the foreclosure and U.S. Bank held the foreclosure sale on July 5,
2007, at which sale U.S. Bank, as trustee, purchased the foreclosed
property. The foreclosure deed was not recorded until May of 2008 and
not until September 2008 was a confirmatory Assignment of Mortgage
put into recordable form reflecting U.S. Bank as assignee and filed with
the registry of deeds.

The LaRace foreclosure followed a similar path. A complaint to

foreclose was filed in April of 2007 in which Wells Fargo represented
that it was the “owner (or assignee) and holder” of the LaRace
mortgage, and a judgment was issued in July of 2007 permitting Wells
Fargo to commence with the foreclosure and sale, which took place a
couple of days after the judgment with a sale to Wells Fargo, as
trustee. The foreclosure deed was recorded in May of 2008 and within
a few days the confirmatory Assignment of Mortgage was put in
recordable form reflecting Wells Fargo as the assignee and filed with
the registry of deeds.

Significantly, the courts’ records reflected inadequate documentation

of the transfers of the Ibanez and LaRace loans from Option One to the
intermediate assignor/assignees and finally to the Banks. In the
Ibanez case, U.S. Bank was unable to produce for the Land Court the
necessary agreements or schedules to those agreements pursuant to
which the Ibanez loan was assigned from prior holders to U.S. Bank as
trustee. In the LaRace case, Wells Fargo was unable to produce to the
satisfaction of the Land Court a schedule to the pooling and servicing
agreement pursuant to which it acquired the LaRace loan that
adequately identified the LaRace loan. As in the Ibanez case, the Land
Court also ruled that there was a lack of evidence in the record to
reflect that the LaRace loan had been properly assigned from Option
One to the subsequent intermediate holders of the LaRace loan,
including the entity that assigned such loan to Wells Fargo prior to the
notice of foreclosure and sale.

The Massachusetts Supreme Court’s Decision

The Massachusetts Supreme Court noted that because Massachusetts
law permits non-judicial foreclosure by a mortgage holder, a
foreclosing mortgage holder must strictly follow the requirements of
Massachusetts law governing foreclosure. One of the requirements of
the foreclosure law that must be strictly observed is that the “statutory
power of sale” can only be exercised by “the mortgagee or his
executors, administrators, successors or assigns.” Any attempt to
foreclose by any other party renders the foreclosure sale void.

In both foreclosures, the Massachusetts Supreme Court found that the

Banks were unable to establish that they owned the mortgage loans at
the time of notice of foreclosure and sale because the Banks were
unable to produce executed agreements and schedules to those
agreements reflecting a clear chain-of-title of the mortgage loans from
Option One to the Banks. Notably, the Massachusetts Supreme Court
ruled that a post-foreclosure assignment is not able to cure a failure to
own the mortgage loan at the time of notice of foreclosure and sale.

More significantly, the Massachusetts Supreme Court stated that its

ruling should not be read as an invalidation of the commonly held
practice of executing Assignments of Mortgage “in blank,” which
securitization participants have viewed as an acceptable practice so
long as a complete chain-of-title (or assignment) from the mortgage
holder of record to the trustee can be established. Further, the
Massachusetts Supreme Court held that an Assignment of Mortgage
does not have to be in recordable form or recorded at the time of the
notice of sale or at the time of the subsequent foreclosure sale, so long
as the assignment itself was made prior to notice of foreclosure and
sale. Customarily, the in blank Assignment of Mortgage remains in the
loan files held by the securitization custodian until it becomes
necessary to register a sale of the related foreclosed property to the
trustee, at which time the Assignment of Mortgage is completed by
filling in the blank with the foreclosing party’s name and registered
with the appropriate land recordation office.

While the Massachusetts Supreme Court’s ruling did not invalidate a

fundamental tenet of securitization, it did reiterate that it is critical
that the foreclosing party have ownership of the loan at the time of
notice of foreclosure and sale. In addition, the foreclosing party should
be able to prove such ownership through production of executed
assignment agreements (and schedules thereto) entered into prior to
the foreclosure evidencing a complete chain-of-title from the party
reflected on the recorded mortgage to the foreclosing party. As a
result, the securitization industry should view the ruling as a lesson
learned regarding the requirements for documentation of assignments
and proof of ownership of mortgages in Massachusetts rather than a
condemnation of customary securitization conveyance practices.

If you would like more information about these developments, please

contact Mike Jewesson, Mark Harris, Pat Sargent, David Barbour,
Muriel McFarling, Darla Roden, Linda Stahl or your Andrews Kurth
contact.