More Ibanez Analysis

Of course, the American Securitization Forum has already issued some self-serving white paper analyzing Ibanez, mainly to minimize its meaning and effect.  Here is another take by Phil Querin, full article here:

In lawyer-speak, both banks’ arguments may be described as disingenuous and specious – in less charitable, but more descriptive terms, one might call them insulting.  Essentially, the banks rely upon a sort of fait accompli rationale:  Their predecessors, the Originating Banks, had the right of foreclosure; the Big Banks were going to get it sooner or later, and the borrowers were in default anyway, so there is no foul, since there was no harm. The Court rejected these arguments out of hand.  Relying upon precedent dating back to 1871, 1905, and 1936, it held that the statutory power of sale given to lenders in foreclosure – where there is “no immediate judicial oversight”- must be strictly followed.  [Note: This is the reason I maintained in my recent post on non-judicial foreclosures, that lender and servicer fraud is actually easier in trust deed states, such as Oregon. – PCQ] So, with 140 years of court precedent, it was a bit hard for the banks to argue that they didn’t realize the rules applied to them.

What is most interesting about this case, besides the holding itself, was the banks’ consistent unwillingness or inability to provide evidence supporting their legal position that they had a right to conduct the foreclosures without owning the actual mortgages that gave them the right to do so.  The gist of the banks’ arguments revolved around the claim that, although they did not hold the mortgages, they nevertheless had the ability to foreclose based upon the documents generated by the securitization process itself.  Here’s a sampling:

  • U.S. Bank argued that it had the right to foreclose based upon the trust agreement described in the private placement memorandum (“PPM”) for the REMIC trust – a preliminary document used in private securities offerings that outline the business plan of the offering.  However, the bank never offered the trust agreement into evidence.
  • Wells Fargo based its right of foreclosure on the Pooling and Servicing Agreement (“PSA”) which is the document governing the operations of the REMIC Trust.  However, although it offered the PSA into evidence, that document contained language that the trust deed had already been deposited with Wells Fargo, the Trustee for the REMIC.  The PSA did not grant the bank any future right of foreclosure. Moreover, the bank could not establish that based upon the mortgage loan schedule for the PSA, the borrower’s property was actually in the Trust. [Note: This is symptomatic of a related problem, which is that in many cases, the loan schedules are frequently not a part of the PSAs, which makes it nearly impossible to track down a particular loan. – PCQ]

In a last ditch effort, the banks relied upon the “everybody is doing it” argument.  In the rarified atmosphere of appellate argument, this defense is given the more dignified title of “custom and usage.”  Loosely translated, the rationale is that even though the banks’ actions fly in the face of 140 years of Massachusetts’s precedent, since the lending industry had been ignoring the law already, it should be permitted to continue doing so.  The Court would hear nothing of it.  With perhaps a note of exasperation coupled with whiff of disgust, the Court concluded that “(t)he legal principles and requirements we set forth are well established in our case law and our statutes.  All that has changed is the (banks’) apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.”  Smackdown!

And as if that were not enough, two of the concurring judges felt it necessary to include their own written opinions.  While they agreed with the majority, they added the following:  “(W)hat is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosures in Massachusetts, but rather the utter carelessness with which the plaintiff banks document the title to their assets.” [Italics mine. – PCQ] Significantly, while the two concurring judges acknowledged that although the borrowers had defaulted on their mortgages, “…that is not the point.  Foreclosure is a powerful act with significant consequences….”  Smackdown!

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