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SJC upends rules on foreclosed properties

Ruling against lenders may have US impact

By Jenifer B. McKim
Globe Staff / January 8, 2011

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The state’s highest court yesterday upheld a controversial Land Court ruling that calls into question the ownership of hundreds, possibly thousands, of foreclosed properties in Massachusetts and could affect how foreclosures nationwide are conducted.

In a 6-to-0 decision, the Massachusetts Supreme Judicial Court rebuffed the way lenders in recent years have conducted foreclosures — without having all the documentation in place at the time a property is seized. The justices affirmed a 2009 ruling that invalidated foreclosure proceedings involving two Springfield houses because the lenders did not hold clear titles to the properties.

“We agree with the [Land Court] judge that the plaintiffs . . . failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,’’ Justice Ralph Gants wrote in the decision.

Housing attorneys and state officials said the SJC’s ruling will increase pressure on major US lenders to prove they own mortgages before foreclosing, give homeowners seeking to fight foreclosures additional fodder for legal action, and further stall foreclosures in other states where similar litigation is pending. In cases where there is doubt about whether property was improperly taken, banks might even have to return homes to former owners.

It is often difficult to prove who owns a particular mortgage because millions of home loans were bundled into bonds and sold to investors during the housing boom, creating long and twisted paper trails. Before the 2009 Land Court ruling, however, lenders believed they could complete foreclosure transactions and later produce formal proof they held the mortgages.

Boston lawyer Gary Klein, who represents many clients dealing with home foreclosure, called the ruling “a train wreck for the foreclosure industry.’’

Both Wells Fargo and US Bancorp — the lenders involved in the Springfield case — said that because the loans in question had been sold to investors, they were being managed by third parties that were responsible for overseeing management of the loans as well as the foreclosures.

Wells Fargo said in a statement that it doesn’t believe the ruling will prevent foreclosures on loans that are packaged into large groups and sold. “The court simply set forth a standard legal process that mortgage servicers must follow in Massachusetts,’’ the bank said.

In addition to affecting people who have lost their homes to foreclosure, the decision could spur a wave of litigation from people who bought bank-owned properties. Many of them will want assurance that they own clear title to their homes, real estate industry specialists said.

Lenders have been under increased scrutiny since the fall, when some bank employees, now known as robosigners, admitted to signing off on thousands of documents a week without reviewing the papers. Attorneys general in all 50 states are now in the process of investigating such practices.

The court said yesterday that its ruling applies to all foreclosures in Massachusetts — no matter when they took place — because laws governing proper foreclosure procedures have remained constant over time.

“All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities,’’ Gants wrote in the decision.

Officials from the Real Estate Bar Association for Massachusetts said that by not placing a time limit on its ruling, the court has guaranteed a legal traffic jam.

“There is a mess of titles out there,’’ said Edward Bloom, president of the association. “There will be a lot more litigation which could have been avoided.’’

Secretary of State William Galvin said the court’s ruling boosts his efforts to get legislation passed that would mandate judicial approval of foreclosures. Massachusetts is one of 27 states that do not require a judge to sign off before a bank can take back a home. Galvin, who heads the state Registry of Deeds, also said he will work to make sure homeowners can easily access records to see who owns their mortgages.

“This is about the quality of title for new buyers who come along,’’ he said. “We have to get it straightened out right away.’’

Attorney General Martha Coakley said lenders now must “bear the brunt and cost’’ of fixing a mess they caused.

“In their careless and hasty stampede to securitize loans, the banks moved at their own peril,’’ Coakley said. “Whether by robosigning or failing to properly transfer titles, these financial institutions created this real estate chaos.’’

The Springfield case involved two homeowners who were foreclosed on more than three years ago. But it was the lenders, not the homeowners, who went to court — they wanted to clear up lingering issues clouding ownership of the homes’ titles. Instead, Land Court Judge Keith C. Long ruled the foreclosures were invalid because the mortgages were not officially recorded as being owned by US Bancorp and Wells Fargo until months after the proceedings.

Jenifer B. McKim can be reached at jmckim@globe.com.