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One Step Closer to the Edge…

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It appears that the Massachusetts Supreme Court may rule soon on whether transfers of mortgages were properly done in a case called Ibanez. [UPDATE: The Court has ruled; the banks have lost, and we’ve got a problem. More on this later.] The lower court has already ruled (twice) that the foreclosures were invalid because the foreclosing bank did not hold title to the properties. This case is the first major state court case that deals squarely with the chain of title problem, especially in the second ruling where the lower court held:

Moreover, their newly-presented facts do not lead to a different result. Instead, they show that the plaintiffs themselves recognized that they needed mortgage assignments in recordable form explicitly to them (not in blank) prior to their initiation of the foreclosure process, that the plaintiffs’ “authorized agent” argument fails both on its facts and as a matter of law, and reaffirm the correctness of the original judgment. They also show that the problem the plaintiffs face (the present title defect) is entirely of their own making as a result of their failure to comply with the statute and the directives in their own securitization documents. (Italics in original.)

If the Supreme Court upholds this ruling, we can consider the systemic risk clock to start ticking. Hard. And fast.

How hard? How fast?

Well, as of December, 2010, we’re talking about 40% more litigation and a switch from consumer lawsuits to investor lawsuits:

“In recent months, the focus of mortgage litigation has begun to transition from primarily consumer foreclosure disputes towards loan documentation and servicing issues. Therefore, an increase in residential note repurchase litigation from investors in securitization trusts and banks that face indemnity claims from government-sponsored enterprises should be expected,” said Patrick McManemin, a partner in Patton Boggs’ Dallas office. (Emphasis added)

Repurchase litigation is another way of saying, put-back claims. And as I’ve noted before, those put-back claims could be more than the entire capital reserves and market capitalization of the largest U.S. banks.

Oh, by the way, Massachusetts is a non-judicial foreclosure state. And there was no mention of fraudulent affidavits in the lower court’s rulings as in the judicial foreclosure states. This was a straightforward “foreclosure is void because you’re not the mortgage owner” case. Let us pause a moment to remember that California is a non-judicial foreclosure state….

More on this issue later.

-rsh

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