Earlier this month, the Massachusetts Supreme Judicial Court voided multiple foreclosures by US Bancorp and Wells Fargo, holding that because the banks presented no evidence that the mortgages were assigned to them during the securitization process, they did not hold title to the properties and therefore could not foreclose on them. The decision in U.S. Bank v. Ibanez may have a broad impact on the mortgage industry and homeownership in general, as at least 60% of the U.S. mortgage market is tied up in mortgage-backed securities. Reactions to the decision have swirled in the following weeks, with bank and financial industry stocks plunging immediately following the ruling. Business commentators and legal experts debated how catastrophic the decision will prove for the mortgage securitization system, while the decision has also been declared a victorious use of the rule of law to protect homeowners struggling to keep their homes during a recession induced by the same financial industry that is now tying to seize them.
The decision appears to have already had a number of effects. GMAC Mortgage Corp. announced it will dismiss and re-file hundreds of foreclosure suits in Maryland to avoid litigation over title disputes, and banks in Florida have also been dropping hundreds of similarly flawed suits. Back in Massachusetts, a class action lawsuit against U.S. Bancorp and Ally Financial (parent company of GMAC) that was on hold while Ibanez was decided will now resume.
Government officials have put forth a number of policy proposals in the last month. A Massachusetts regulator has proposed requiring banks to prove ownership of a mortgage when they inform a borrower that they are at risk of foreclosure, instead of only at the later foreclosure stage. Republicans and Democrats in the Virginia legislature are seeking to require better documentation of chains of title by banks, and FDIC head Sheila Bair has called for a “foreclosure claims commission” to compensate homeowners harmed by shoddy paperwork on the part of the mortgage securitization industry. Bair actually stated in a speech to the mortgage industry’s lobbying group, “We need to provide remedies for borrowers harmed by past practices”.
Despite Bair’s proposal, it seems unlikely that the federal government will take any aggressive action on behalf of homeowners or consumers. The upper ranks of the Obama administration remain hostile to any protections of homeowners that might reduce the profits of their allies in the financial industry. The Centrist-Democratic think tank Third Way responded to Ibanez by calling on Congress to bar paperwork-related litigation on certain foreclosures, and to enact a statute of limitations on foreclosure challenges. Bill Daley, recently named by President Obama as his new Chief of Staff, has served as a board member of Third Way. More strikingly, Daley is arriving at the White House after serving as the head lobbyist at JPMorgan Chase, a huge player in the mortgage industry. But Obama’s selection of Daley is not a shift away from a homeowner rights-friendly posture, but rather a smooth continuation of past policies protecting the financial industry.
The Ibanez decision now looks like it will be followed up with another blockbuster, as the MA SJC considers whether a home buyer can rightfully own a property if the bank that sold it obtained it through an invalid foreclosure. Taken with the Ibanez case, this situation suggests that the foreclosure crisis is a zero-sum game with distressed homeowners on one side and good faith home purchasers on the other. However, it is the banks and mortgage servicers who submitted fraudulent foreclosure documents that should ultimately be liable for this harm, and should have to provide the remedy that can help compensate victims and correct the exploitive mortgage industry.