Ruling against U.S. Bancorp, Wells Fargo might bode ill for housing market

Massachusetts' highest court ruled against U.S. Bancorp and Wells Fargo & Co. Friday in a pivotal mortgage foreclosure case that could spark more turmoil and uncertainty in a housing market already mired in depression.

The state's Supreme Judicial Court affirmed a lower court ruling that invalidated two mortgage foreclosure sales because the banks, in their capacity as trustees for mortgage securities, did not prove that they actually owned the mortgages at the time of foreclosure.

The decision highlights the failure of financial firms to adhere to the rules that govern mortgage-backed securities, and is likely to lead more borrowers to sue bank servicers and trustees for wrongful foreclosures. It's unclear what the ruling means for people who were forced from their homes after defaulting on their loans or for those who purchased houses in foreclosure sales.

"There are now thousands of these homes that have been purchased through foreclosures handled in a very similar fashion where the titles are defective," said Ward P. Graham, a Massachusetts title attorney who co-authored a friend-of-the-court brief.

Robo signers

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

Minnesota Attorney General Lori Swanson started an investigation last fall into the foreclosure practices of 15 large mortgage lenders and servicers, including Bank of America, J.P. Morgan Chase and Minneapolis-based GMAC. A significant part of the investigation is focused on allegations that lenders signed off on foreclosures without verifying their accuracy. The state investigation is ongoing.

The ruling underscores just how complicated the mortgage process has become. During the housing boom, millions of mortgages were packaged into securities that were sold to investors. In many cases, these securities were placed into large trusts administered by banks that had no stake in the mortgages themselves. The result was a confusing paper trail that left many homeowners unsure of what entity actually owned their mortgage.

In the Massachusetts case, the high court found that the banks, who were not the original mortgagees, did not show that they held the mortgages at the time of foreclosure. As a result, the court found, the banks did not demonstrate that the foreclosure sales were valid.

'It's fraud'

Carl Christensen, a Minneapolis real estate attorney, said transfers of home mortgages from lenders to trusts are frequently done "haphazardly," with key loan documents misplaced or manufactured. "This is not just sloppiness. It's fraud."

The banks argued that the securitization documents they submitted were sufficient to prove they owned the mortgages before the publication of the notices of sale and the foreclosure sales. Wells Fargo said Friday that as trustee of a securitized pool of loans, it expected those servicing the loans to abide by all applicable state laws, including those governing foreclosure sales. The San Francisco bank was the trustee of the securitized trust in question. American Home Mortgage Servicing Inc. was the servicer.

American Home Mortgage Servicing, based in Coppell, Texas, said that the "decision is of limited applicability because it is based on law that is unique and specific to Massachusetts. The decision does not extend to foreclosures in other states."

But attorney Paul Collier III, who represents Antonio Ibanez, one of the homeowners in the case, said the ruling affects thousands of mortgages in Massachusetts and could have a far-reaching impact on the nation's banking industry.

Jon Arfstrom, a bank analyst at RBC Capital Markets in Minneapolis, said the ruling likely will embolden more consumers to challenge their foreclosures, which will slow down the foreclosure process. "Banks will have to make sure they have everything in order before they go and try to foreclose on someone," he said.