Massachusetts Set to Overrule Past Foreclosures; Harbinger for ARM Industry?

Hey, do you live in Massachusetts? And did you buy a bank-foreclosed house? In the last five years? Oh boy. You’re probably going to want to sit down for this. You kept your moving boxes, right? And receipts? Because things are about to get a little complicated in the Bay State. (Bonus motto: Ense petit placidam sub libertate quietem.)

The best way to tell you is just to come out and tell you: it’s likely that the foreclosed house you bought between, say, 2006 and 2011, was not yours to buy. Which means you bought something from someone who didn’t have the right to sell it to you in the first place. (Sort of like how the Indians that sold Manhattan to the Dutch for $24 worth of beads weren’t actually residents of Manhattan in the first place.)

What does all of this have to do with the ARM industry? Well, the mortgage business is currently embroiled in all kinds of legal trouble over a practice that some debt buyers have also been accused of using: robo-signing of affidavits in legal actions to prove ownership of a debt.  Since the mortgage industry is much, much bigger than the ARM industry, courts are acting on it first. But as we’ve seen, debt buyers are increasingly attracting legal and regulatory scrutiny on this matter, so pay attention.

Let’s start from the beginning.

In early 2011, the Massachusetts Supreme Court issued a decision voiding several home foreclosures by US Bancorp and Wells Fargo. This was known as the Ibanez Decision, in reference to Antonio Ibanez, the defendant in the case.

Why were these foreclosures voided? The banks could not prove proper chain of ownership. Since one can’t foreclose on something one doesn’t own — and also, since one can’t sell what one doesn’t own (unless you’re the Canarsie Indians) — the banks practices were called into question and they found themselves in the uncomfortable position of being in the wrong.

This brings us to the newest wrinkle in the slowly-and-messily-collapsing housing market bubble, foretold by the Ibanez Decision: “Without a promissory note, a foreclosing plaintiff cannot show a legal injury, i.e., does not have standing to sue.”.

We get that bit of business from a case earlier in October: the sort of thrillingly and menacingly named Francis J. Bevilacqua, Third vs. Pablo Rodriguez.

This, then, devolves into a “for want of a nail” situation: No promissory note, no legal injury or standing. No standing? Then the case doesn’t trigger Article III of Massachusett’s constitution — the piece that makes it “case or controversy.” A court can only make rulings on the aforementioned “case or controversy” business and if it has, in the past five years, say, made a judgment on a case with no case or controversy (i.e., didn’t trigger Article III) — then that court has a “legal nullity” on its docket.

The blog over at amvona.com puts it this way:

In essence, the [Bevilacqua] ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years), did not in fact have title to those properties. Given the fact that more than two-thirds of all real estate transactions in the last five years have also been foreclosed properties, this creates a small problem.

The Massachusetts SJC is one of the most respected high courts in the country, other supreme courts look to these decisions for guidance, and would find it difficult to rule any other way in their own states. It is a precedent. It’s an important precedent.

For right now, there hasn’t been a flood of foreclosed on homeowners trying to get their homes back. It’ll be interesting to see how this all plays out. As we get more info as to how this will all shakes down, we’ll follow-up on this story.