January 15, 2011
Validity of Foreclosure Titles after Ibanez
This past week the Supreme Judicial Court of Massachusetts issued a slip opinion in the case of U.S. Bancorp v. Ibanez unanimously affirming a Land Court decision invalidating a nonjudicial power-of-sale foreclosure because the foreclosing party had not produced a valid chain of title with regard to the mortgage. The SJC rejected the bank's arguments that a mortgage automatically passes to the assignee of the note and that an assignment in blank is a valid transfer of a mortgage. The SJC acknowledged that an executed Pooling Service Agreement (PSA) that properly identified the subject property could authorize foreclosure but found that the bank lacked the necessary paperwork in this case. Adam Levitin (Georgetown) analyzes the decision in a post at the Credit Slips blog.
Even though the majority of states allow assignment of the note alone to provide authority to foreclose, this decision has significant ramifications for the validity of many foreclosure titles in Massachusetts and the states that may follow the SJC's reasoning. The slapdash volume-maximizing paperwork practices of the mortgage securitization industry are hardly limited to robo-signing of foreclosure affidavits. Pre-default shortcuts such as improperly executed PSAs, missing collateral schedules, and incomplete transfers appear to be all too common.
What seems to be missing from the conversation so far is any discussion of how the nonjudicial nature of these foreclosures perpetuates the mess. In the context of botched mortgage securitizations, properties transferred by nonjudicial power of sale processes enjoy little of the title assurance that properly noticed judicial proceedings confer. Without the built-in action to quiet title provided by a judicial foreclosure, will those trying to prevent abandonment of foreclosed homes in the many power-of-sale states have to turn to title-clearing litigation just to make these properties bankable for rehabilitation and resale? Will our inner-ring suburbs be peppered with chronically derelict houses because our mortgage foreclosure proceedings are now producing titles as unreliable as those that tax foreclosure actions have produced for inner-city vacants in years past?
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Jim is raising a critical question here about the spawning of what I call a toxic title -- that is, a title in which any person holding an interest stands to incur liabilities exceeding benefits from exercising their property rights. Consequently, the public is forced to adopt these orphans and pay for the clean-up of both the property and its title so that it can be purchased for reuse. The scale of the problem in the country invites the prospect of federal legislation to effect a cure. Is Congress fit for this task? Will states lose control of land use law if foreclosure is federally regulated? Are the federal courts a good place to handle title disputes?
Posted by: Kermit Lind | Jan 18, 2011 7:29:05 AM
Yes, I've heard of this problem as well. I think it's very serious. Add to that Michigan's problems with the backlogged/delayed recordation of title documents, and when people buy and sell property, it takes quite a while before there is actual proof of ownership.
Posted by: Prof E Nichols, Esq. | Apr 26, 2011 8:32:33 AM