Article Courtesy of The Palm Beach Post

By Christine Stapleton

Published January 9, 2010

The highest court in Massachusetts ruled against two of the nation's largest lenders on Friday in a widely watched case that could have serious implications for banks that foreclose on homes without proving they own the mortgages.

The Supreme Judicial Court affirmed a lower court judge's ruling invalidating two mortgage foreclosure sales because U.S. Bancorp and Wells Fargo did not prove that they owned the mortgages at the time of foreclosure.

Friday's news quickly made its way to the monthly lunch gathering of two dozen Palm Beach County foreclosure defense lawyers.

"It's a big deal, a really big deal," said Joann Hennessey, a foreclosure defense lawyer who attended the luncheon at the offices of Palm Beach County Legal Aid. "It basically states what we have been saying all along: You have to have standing."

The opinion is binding only in Massachusetts, but the foreclosure defense attorneys who dined together said it could send a message to judges in other states that lenders who foreclose on mortgages that have been bundled into securities must prove ownership of the mortgage when they file to foreclose. The attorneys said they routinely challenge the legal standing of lenders filing foreclosure but that their objections are shrugged off.

Although judges enforce stringent rules governing documents and endorsements in other types of cases, many often overlook similar document requirements in foreclosure cases, they say.

"Mortgages are like the red-headed stepchild at the courthouse," said Boynton Beach attorney James Bonfiglio, a veteran of foreclosure defense. ⌦

The fact that the Massachusetts Supreme Judicial Court endorsed their argument will probably prompt other foreclosure defense attorneys to raise the issue in their cases, too. "This is an instance where we have a court realizing that there is something wrong with the paperwork," Bonfiglio said.

The broader implications of the case sent bank stocks lower, with Wells Fargo stock falling 65 cents, or 2 percent, to $31.50 in heavy trading. It earlier traded as low as $30.64. U.S. Bancorp shares slid 20 cents to $26.09, after dropping as much as 2.4 percent after the ruling. ⌦⌦

Last fall, the banking industry's foreclosure machine came under scrutiny with the revelations that low-level employees called "robo signers" powered through hundreds of foreclosure affidavits a day without verifying a single sentence. Analysts warned that the banks' allegedly fraudulent document procedures could imperil their ability to prove they owned the mortgages.

The Massachusetts Supreme Judicial Court found that the banks, which were not the original mortgagees, did not make a required showing that they held the mortgages at the time of foreclosure. In one case the mortgage was transferred to U.S. Bancorp 14 months after the auction. In the other case, the mortgage was transferred to Wells Fargo 10 months after the auction.

As a result, the court found, the banks did not demonstrate that the foreclosure sales were valid, qualifying them to convey title to the properties. "We agree with the judge that the plaintiffs did not demonstrate that they were the holders of the mortgages at the time that they foreclosed these properties, and therefore failed to demonstrate that they acquired fee simple title to these properties by purchasing them at the foreclosure sale," Justice Ralph Gants wrote for the court in the 6-0 ruling.

In a concurring opinion, Justice Robert Cordy cited what he called the "utter carelessness" with which the banks documented the titles to their assets.

"There is no dispute that the mortgagors of the properties in question had defaulted on their obligations," Cordy wrote. "Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order."