Mass Court May Rule on Retroactivity of some Foreclosures Tied to ‘Naked Mortgages’, by Jann Swanson

Another next major marker in the convoluted foreclosure landscape will probably come in the next few weeks when the Massachusetts Supreme Judicial Court (SJC) is expected to rule on Eaton v. Federal National Mortgage Association (Fannie Mae).  This is another in a series of cases challenging the right of various lenders and nominees to foreclose on delinquent mortgages based on assertions that those parties do not own or at least cannot prove they own the enabling legal documents.

Eaton raises an additional point that has excited interest – whether or not that foreclosure can be challenged and compensation enforced on a retroactive basis or whether such retroactivity exacts too high a cost or permanently clouds title.

The details of the case are fairly standard, involving a note given by Henrietta Eaton to BankUnited and a contemporaneous mortgage to Mortgage Electronic Registration Systems (MERS).  The mortgage was later assigned by MERS to Green Tree servicing and the assignment did not reference the note.  The Eaton Home was subsequently foreclosed upon by Green Tree which assigned its rights under the foreclosure to Fannie Mae which sought to evict Eaton.  Eaton sued, charging that the loan servicer did not hold the note proving that Eaton was obliged to pay the mortgage.

The Massachusetts Superior Court relied on a January, 2011 ruling in U.S. Bank V. Ibanez in which the court held that the assignment of a mortgage must be effective before the foreclosure in order to be valid and that as holder of the note separated from the mortgage due to a lack of effective assignment, the Plaintiffs had only a beneficial interest in the mortgage note and the power of sale statute granted foreclosure authority to the mortgagee, not to the owner of the beneficial interest.

In Eaton the lower court said it was “cognizant of sound reason that would have historically supported the common law rule requiring the unification of the promissory note and the mortgage note in the foreclosing entity prior to foreclosure. Allowing foreclosure by a mortgagee not in possession of the mortgage note is potentially unfair to the mortgagor. A holder in due course of the promissory note could seek to recover against the mortgagor, thus exposing her to double liability.”

In its brief to the Supreme Judicial Court, Fannie Mae contests the lower court ruling on the grounds that:

1.  Requiring unity of the note and mortgage to foreclose would create a cloud on the Title and result in adverse consequence for Massachusetts homeowners.

2.  A ruling requiring unity of the note and mortgage to conduct a valid foreclosure should be limited to prospective application only (because)

A.  Such a ruling was not clearly foreshadowed and

B.  Retroactive application could result in hardship and injustice.

The case has been the impetus for filings of nearly a dozen amicus briefs from groups such as the Land Title Association, Real Estate Bar Association, and foreclosure law firms, most in response to a SJC request for comment on whether any ruling should be applied retroactively and if so what the impact would be on the title of some 40,000 homes foreclosed in the last few years.

Of particular interest is a brief filed by the Federal Housing Finance Agency, conservator of both Fannie Mae and Freddie Mac which some observers said might be the first time the agency had intervened in a particular foreclosure case.

FHFA asked the court to apply any decision to uphold the lower court decision prospectively rather than retrospectively.  It’s argument:  applying a ruling retroactively would be “a direct threat to orderly operation of the mortgage market.”   FHFA also said “Retroactive application of a decision requiring unity of the note and the mortgage for a valid foreclosure would impose costs on U.S. Taxpayers and would frustrate the statutory objectives of Conservatorship.”

“There presently is no mechanism or requirement under Massachusetts law to record the identity of the person entitled to enforce the note at the time of foreclosure,” FHFA said.  “Therefore, a retroactive rule requiring unity of the note and mortgage for a valid foreclosure would potentially call into question the title of any property with a foreclosure in its chain of title within at least the last twenty years.”

contrary opinion was advanced in a brief filed by Georgetown University Law School Professor Adam Levitin who called the ruling that a party cannot foreclose on a “naked mortgage” (one separated from the note) merely a restatement of commercial law and “to the extent that the mortgage industry has disregarded a legal principle so commonsensical and uncontroversial that it has been encapsulated in a Restatement, it does so at its peril.”

Levitin argues that it is impossible to know how widespread the problem of naked mortgages may be either in Massachusetts or nationwide so this should temper any evaluation of the impact of retroactivity.  He also states that there are several factors “that should assuage concerns about clouded title resulting from a retroactively applicable ruling requiring a unity of the note and mortgage.”  He points out that adverse possession, pleading standards, burdens of proof and equitable defenses such as laches all combine to make the likelihood of challenging past foreclosure unlikely and sharply limiting the retroactive effect of a ruling.

Kathleen M. Howley and Thom Weidlich, writing for Bloomberg noted that a decision to uphold the lower court “could lead to a surge in claims from home owners seeking to overturn seizures.”

According to Howley and Weidlich, the SJC ruled last year on two foreclosure cases that handed properties back to owners on naked mortgage grounds.  The Ibanez case, referenced above dealt with two single family houses, but in Bevilacqua v. Rodriguez the court handed an apartment building back to the previous owner five years after the foreclosure.  In the interim a developer had purchased the building and turned it into condos.  The condo owners lost their units without compensation and the building now stands vacant.

The decision may be available before month’s end and as said, “For interested legal observers of the foreclosure crisis, it really doesn’t get any better than this”.

Mr. Bevilacqua and the “Brooklyn Bridge Problem”, by Phil Querin,

From the same court that brought us U.S. Bank Association, Trustee v. Ibanez, earlier this year, it now appears we will soon hear from the Massachusetts Supreme Judicial Court again. This time the issue deals with what happens to title after a bank completes a procedurally improper foreclosure.

Ibanez ruled that a foreclosure by U.S. Bank was invalid because at the time of the foreclosure it did not actually own the mortgage foreclosed upon. Thus, the Ibanez ruling set up the next logical issue for the court: If the bank conducts an invalid foreclosure, can it then “launder the title” by transferring it to a “bona fide purchaser” and thereby give that buyer better title than the bank received?

The Massachusetts case of Bevilacqua v. Rodriguez raises this very question. In that case, following its invalid foreclosure, the bank sold the property to Francis Bevilacqua, a developer, who then built four condominium units on it. In an effort to establish clear title, he then sued the prior owner who had been foreclosed. The owner did not appear and defend in the case. Nevertheless, the Massachusetts Land Court, in 2010, per Judge Keith C. Long [yes, the Ibanez trial judge. – PCQ], held that Mr. Bevilacqua’s effort to use the state’s quiet title statute “…most often used when there is a genuine dispute as to which competing title chain (each with a plausible basis)….” was without merit since Mr. Bevilacqua had “…no plausible claim — just a deed on record derived solely from an invalid foreclosure sale….”

Putting a finer point to this conclusion, Judge Long elaborated as follows:

The first reason it has no merit is the most obvious. By its express terms, G.L. c. 240, § 1 et seq. [Massachusetts’ “try title” statute – PCQ] only applies “if the record title of land is clouded by an adverse claim.” G.L. c. 240, § 1 (emphasis added). Here, there is no cloud, and certainly none that would give Mr. Bevilacqua standing to assert it. A cloud is not created simply on someone’s say so. There must be, at the least, a plausible claim to title by the G.L. c. 240, § 1 plaintiff. See Daley v. Daley, 300 Mass. 17 , 21 (1938) (“[a] petition to remove a cloud from the title to land affected cannot be maintained unless both actual possession and the legal title are united in the petitioner”) (emphasis added). Otherwise, in the classic example, a litigant could go to the registry, record a deed to the Brooklyn Bridge, commence suit, hope that the true owners either ignored the suit or (as here, discussed more fully below) could not readily be located and be defaulted, and secure a judgment. As shown on the face of his complaint, Mr. Bevilacqua has no plausible claim to title since it derives, and derives exclusively, from an invalid foreclosure sale.

In short, you can’t create something from nothing. Or, as noted by Judge Long above, and again by Justice Ralph Gants of the Massachusetts Supreme Judicial Court, during oral argument on Monday, May 2, 2011, accepting the argument that Mr. Bevilacqua had acquired marketable title, would create “the Brooklyn Bridge problem,” i.e. permitting persons (or banks) with no colorable title, to sell anything into the marketplace, and thereby magically turn bad title into good. Alchemy disappeared in the Middle Ages. You can’t spin straw into gold, even if you’re a Big Bank.

Judge Long was not without sympathy for Mr. Bevilacqua, as “…he was not the one who conducted the invalid foreclosure, and presumably purchased from the foreclosing entity in reliance on receiving good title — but if that was the case his proper grievance and proper remedy is against that wrongfully foreclosing entity on which he relied….” In other words, “Sue the bank.”

My Analysis. Why Judge Long stated that he had “great sympathy” for Mr. Bevilacqua may have been because his purchase from the bank was in 2006. Back then, the real estate market was on fire, and the worst one could say about purchasing a property out of foreclosure was that it was simply capitalism working in the marketplace. Not so today. Since 2006 we have been regaled with story after story about illegal bank foreclosures. In most of these cases, the illegality was due to the fact that during the easy credit days of 2005 – 2007, banks securitized millions of loans with such fervor that they lost track of the true ownership of the paper. MERS, the electronic registration system that took the recording process “underground,” provided a perfect cover at the time. But when the foreclosure crisis hit, the banks realized they’d lost track of their loans, and thinking no one would notice, oftentimes, foreclosed homeowners without actually owning the mortgages foreclosed upon.

Under general common law rules in virtually all states, a “bona fide purchaser,” or “BFP,” is one who buys property in good faith, pays full and fair consideration, and has no notice of claims against the title. In most instances, the BFP prevails over all other competing claims. But under the Massachusetts’ Land Court ruling in Ibanez in January of this year, the type of foreclosure conducted by U.S. Bank was invalid, since it did not own the loan at the time. Thus, the bank never acquired title from the homeowner it ostensibly foreclosed. The inescapable conclusion therefore, must be that the bank had nothing to convey to Mr. Bevilacqua. To rule otherwise would mean that one can spin straw into gold.

So while Mr. Bevilacqua may have appeared to be a genuine BFP back in 2006, he still cannot prevail, since he acquired nothing from the bank in the first place. To rule in favor of Mr. Bevilacqua would reward the bank for conducting an illegal foreclosure. Moreover, Mr. Bevilacqua was not without a remedy – it was just against the bank that sold him the property – not against the foreclosed homeowner. It is for this reason that Judge Long concluded that while Mr. Bevilacqua certainly had equities on his side, his “…proper grievance and proper remedy is against that wrongfully foreclosing entity on which he relied.”

The Oregon Federal Bankruptcy Court has reached a conclusion similar to Massachusetts’ Ibanez decision, upon which Judge Long relied in his Land Court decision in Bevilacqua v. Rodriguez. Our version of Ibanez is the case of Donald McCoy , III v. BNC Mortgage, et al., No. 10-63814-fra13, where Judge Alley ruled that an illegal foreclosure is “void,” which means that the bank acquired nothing. Thus, the question begs to be asked: “If presented with the same title question as in Bevilacqua, would the Oregon courts reach a decision similar to Judge Long’s?”

Well, we will just have to wait. In the meantime, we can see what the Massachusetts Supreme Judicial Court decides in Bevilacqua. The answer (hopefully) will be that the Massachusetts high court will affirm Judge Long’s Land Court decision. There really is no other conclusion that can be reached. It is likely that in Oregon the local title companies already realize this, which explains why [as discussed in my post here – PCQ] it is currently declining to insure title to buyers – even BFPs – in those cases where the seller is a bank that acquired the property through a nonjudicial foreclosure.

Conclusion. Hopefully, we will not have to wait long before the Massachusetts Supreme Judicial Court rules on Bevilacqua v. Rodriguez. The smart money is on the consumer. I say this for the following reason, relying upon a couple of old legal concepts: First, one cannot convey title to property one does not own. Second, before one may be a grantor, they must first be a grantee. Neither event can occur when an illegal foreclosure precedes a conveyance from the bank. Under McCoy, the foreclosure sale is void. Thus, the bank acquired nothing and has nothing to sell.

How can the banks extricate themselves from this apparent conundrum? Here are some real world suggestions:

Conduct legal foreclosures going forward!
As to those foreclosures performed illegally, go back to the borrowers and obtain a quitclaim or bargain and sale deed. Sure it might cost a couple of bucks, but that pales in comparison to the $1.5 billion Bank of America (for example) paid last year in legal fees.
As to those borrowers in foreclosure, where no sale has yet been conducted, take back a deed-in-lieu of foreclosure. This approach works because there would be no illegal foreclosure sale to cast a shadow over the quality of the title when it is conveyed out into the marketplace.
And for those borrowers trying to short sell their homes, lenders should speed up their consent process so that the transactions are completed in the same time frame as equity sales – say 45-60 days. This way, title to the property is never tainted by an illegal foreclosure. The deed never goes to the lender in the first place.
All of the above approaches avoid the illegal foreclosure problem and the resulting clouded title problem. Equilibrium in the housing market would return and prices would become stabilized. Reasonable appreciation would resume and equity would grow. Until this occurs, we are destined for years of stagnation in housing.

So why don’t the Big Banks get their act together and adopt some or all of the above approaches? I have one answer: Because the servicers, many of which are owned or controlled by Big Banks, do not seem interested in resolving these problems quickly. As I have noted in my recent post, the servicers’ business model is neither designed nor intended to move quickly, because they make more money by going as s-l-o-w-l-y as possible, ultimately dragging borrowers through the entire foreclosure process. Even with short sales, quick consents only limit the amount of late fees and other charges such as forced placed insurance, that servicers can pile on in order to later recover them from their co-conspirators, the Big Banks.

Phil Querin is an attorney that specializes in Oregon Real Estate law. He has a blog in which he shares a wealth of information at