Implications of the Ibanez Case Ruling

The Too Big To Fail banks have been waiting with trepidation for a ruling from the Supreme Judicial Court of the State of Massachusetts on the case titled US Bank National Association (as trustee) vs. Antonio Ibanez. They were right to be fearful. The state supreme court has ruled against the banks and upheld a lower court order that nullified foreclosures by US Bancorp and Wells Fargo, on the grounds that neither bank had the legal right under Massachusetts law to foreclose. Today’s ruling has far-reaching consequences for the banks and the housing market in general, as it throws into serious question the legal soundness of millions of mortgages in the US if, as expected, courts in other states come to similar conclusions as the Supreme Judicial Court of Massachusetts.

The Ibanez case tied together two separate but similar foreclosure actions in Massachusetts, the second case being that of Wells Fargo vs. Mark and Tammy LaRace. Both foreclosures took place on the same day, the banks having previously published their intention to foreclose in a local newspaper as required by law. The banks then purchased the properties at prices described by the court as significantly below market value. About a year after the foreclosures (in autumn of 2008) the banks then applied to the local Land Court for a ruling that in each foreclosure, the bank had full legal right to foreclose as mortgagee, that the bank title to the property was ”œunclouded” by any other contesting right, and that the bank therefore owned the property in what is legally known as ”œfee simple” status. These claims were contested by the property owners who had lost their homes in the foreclosure, and the Land Court agreed with the homeowners that the foreclosures had been invalid. Critical to the decision of the Land Court was the fact that both banks admitted that they did not receive assignment of the mortgage to the property until after the foreclosure.

The State Supreme Judicial Court Upholds the Ruling of the Lower Court

The Supreme Judicial Court found that the Land Court made no errors in its judgment for the defendants. Citing the Ibanez case as an example, the justices noted that Antonio Ibanez executed a mortgage in 2005 with Rose Mortgage Inc., which allegedly assigned this mortgage (which gives the proper holder the legal right to foreclose) to Option One Mortgage Co. They in turn assigned it to Lehman Bros. Lehman Bros. supposedly assigned the mortgage to Lehman Bros. Holdings Inc., which packaged it with about 1,000 other mortgages to be sold as a security. These mortgages were supposed to be placed with Structured Asset Securities Corp, set up explicitly for the purpose of protecting the bondholders who bought the securities. This company was supposed to assign the mortgages to US Bancorp N.A., as trustee. In the event there was need to foreclose on any of the properties, it was the job of US Bancorp to do so, on behalf of the trust and the interest of the bondholders. This is why US Bancorp entered into a foreclosure action against Antonio Ibanez, who clearly had defaulted on his mortgage, and it is why US Bancorp became a plaintiff in front of the Land Court and the Supreme Judicial Court of Massachusetts.

This chain of assignments is important to the case, because all it took for the banks to win was to show up in court with the proper legal documents evidencing the mortgage assignment. They didn’t even have to show up with the original mortgage or the note from the borrower ”“ they just had to have documentation for each link in the chain of assignments. Not only did they not have this, the best they could show was an assignment after the date of the foreclosure, meaning the banks never had assigned the mortgage properly in the first place. This was the basis under which the Land Court ruled against the banks, and which was convincing proof for the state supreme court justices that the foreclosures were never legal.

Carelessness Is a Polite Term for Criminal Recklessness by the Banks

One of the justices who concurred in this decision, Justice Cordry, wrote:

[W]hat is surprising about these cases is … the utter carelessness with which the plaintiff banks documented the titles to their assets.

Carelessness is a polite word. The banks have acted with criminal recklessness. In these and similar cases that have cropped up around the country, it is becoming obvious that the big banks involved in securitizing mortgages during the past 15 years purposefully evaded local legal requirements for registering mortgages and accompanying borrower notes with a county recorder of deeds. The banks sold mortgages to other banks without bothering to transfer to the buyer a proper document of assignment evidencing the sale. Mortgages were bundled up into trusts for the purpose of securitizing them to investors, but the trusts were also never given proper legal evidence of the assignment of the mortgages. Then, when the housing market blew up and banks were forced into pursuing millions of foreclosures, they created the assignments after the fact, used ”œrobo-signers” to submit legal documents to the courts (in one such case the signer had been dead for over five years), falsified notarizations, and in other similar ways perpetrated fraud upon the courts. This is on top of the thousands of documented cases where foreclosures were conducted even though the borrower was not notified in advance, or the borrower was specifically told by the bank to withhold payments in order to qualify for a mortgage modification but then declared in default by the bank, or the bank added thousands of dollars of ”œlate fees” to the borrower’s account, forcing them into default.

Today’s ruling by the Massachusetts supreme court is just one more step in this long judicial argument over foreclosures, but it is consistent with a string of similar rulings from common law courts and bankruptcy judges against the banks. It remains to be seen whether today’s ruling will be appealed by the banks to the US Supreme Court, but this may be highly risky. Real estate law is almost always viewed by the federal courts as the province of state legislatures and courts, so it is hard to overturn a state supreme court on such a matter. Moreover, the banks’ case is exceptionally weak. Banks have been unable in courts anywhere in the US to show up with basic documentation, including a stream of assignments properly executed, that shows they are the holder of the mortgage with a right to foreclosure.

The right of the banks to foreclose on residential property is now being contested in every state. People who have lost their homes in foreclosure are now suing for compensation for their loss, on the grounds the foreclosure was fraudulent. Even more serious than this, investors who bought ”œmortgage backed securities” are beginning to file claims of fraud against the banks, arguing that these securities were never properly collateralized in the first place. These investors want 100% of their money back, which would lead to claims of trillions of dollars against the big banks.

There are therefore two areas of jeopardy for the big banks. First, investors who bought securities that were supposedly collateralized by mortgages can claim they were victims of fraud, and demand their money back. This means that the big banks will become direct mortgagee not only for the properties in their portfolio now, but for millions more that they must buy back. This could constitute much more than half of all homes/mortgages in the US, of which over 3% are now already in default.

The second problem is that the mortgages in many of these cases may now be deemed legally invalid. This doesn’t mean the homeowner can live for free forever in their home if they default; it just means that the banks have to pursue the defaulting homeowner as it would someone who defaults on an unsecured credit card loan. Credit card defaults are usually absorbed 100% by the banks since there is no collateral to posses and sell. Credit cards therefore carry interest rates as high as 30% p.a., compared to mortgage rates of around 5%, even though the term of a mortgage is much longer. If mortgages were unsecured, they would be priced much closer to 30% p.a. to ensure that the banks made enough money on their mortgage portfolios after taking 100% of the loss on defaults. This would make homeownership virtually unaffordable for any American.

Are You Incredulous Yet?

What is beginning to unfold before our eyes is a situation which can only be comprehended with jaw-dropping incredulity. For at least ten years the large US banks have been selling a product ”“ the residential home mortgage ”“ with a fatal legal flaw that renders it uncollateralized. The product should have been priced like any other unsecured consumer loan ”“ at rates at least triple the actual mortgage rate in the US. There are something like $6 trillion of mortgages extant in the US, among over 55 million borrowers. Most of these mortgages have been grossly underpriced, and at existing default rates, there is simply not enough equity capital in the banking system ”“ and not enough profit being generated by mortgage portfolios – to absorb current losses. Even if you assume the banks don’t have to take a full 100% loss on a home default, and that some portion of the home sale after bankruptcy will eventually trickle down to the bank as a general creditor, the Too Big To Fail banks are doomed to insolvency.

Dragged into this situation automatically is the federal government. The US Treasury owns Fannie Mae and Freddie Mac, which are already insolvent and must turn to the government for capital infusions every quarter just to cover the losses on their existing home mortgage portfolios. These institutions are now facing much higher loss rates on their own portfolios of trillions of dollars of home mortgages. You may throw into this picture also the Federal Reserve System, which chose to buy over one trillion dollars of mortgage backed securities from the banks in 2008 and 2009, and which is itself technically insolvent if this portfolio turns out to be uncollateralized, as is becoming increasingly likely.

With increasing desperation, banks along with their enablers in Washington are going to try to jerry-rig a way out of this problem. Unfortunately for the banks, ex post facto laws are strictly forbidden by the Constitution, which is now being treated with new-found reverence by the Congress. It may be impossible to construct a law that solves problems like this that already exist. Perhaps the banks will get lucky, and some courts will begin to find in their favor, though that is certainly not the trend at the moment. Maybe the US Supreme Court will accept the banks’ argument that the securitization process in itself established a valid foreclosure claim even though mortgages were not properly assigned as required by state laws. This, however, would require the Supreme Court to make up a legal doctrine out of the blue (as the banks have done), thereby overturning all state laws and court rulings going back well over 100 years. Only a Supreme Court bought and paid for by bank lobbyists, and willing to prostitute itself publicly to its paymasters, would issue such a ruling.

This means that the likely progression of events ”“ the path we are now on – will lead to a near complete collapse of the housing market, because the big banks and the two government enterprises responsible for supporting the housing market will be fatally crippled wards of the state. The US government itself, including the Federal Reserve, will be equally crippled. Try as you might, you will find no words in the Bible ”“ no phrases applicable to The Flood or to the destruction of whole cities at the hands of a vengeful God ”“ that appropriately capture the financial gravity of this situation. But if we are forced to come up with some metaphor, Financial Armageddon will have to do.

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Numerian

Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website, jehoshuathebook.com.

19 CommentsLeave a comment

  • to appease the desires of the banks and their political lap dogs, they will do. With a 5-4 decision, probably. And then we’ll have a nice convenient precedent for the rich and powerful that permits other kinds of theft of honest people’s property.

    It’s pleasing to think that the bastards might already be undone by their own unbounded greed and recklessness, but I think that will probably have to wait until a later moment.

    _______________________________________________________________

    “There’ll be one corporation selling one little box
    It’ll do what you want and tell you what you want
    and cost whatever you got” — Greg Brown

  • I ask the question in the re: line while thinking that, as chalo notes, the current iteration of the US SCOTUS has distinguished itself for its cavalier approach to both precedent and jurisprudential reach. Still, it seems a logical next step to these naive eyes that the house of cards that is the MBS-based derivatives market is merely a component of a deeply incestuous global market balanced on various forms of risk diversification and collateralization vehicles – an unknown number of which may be pure fictions are root.

    Assuming my naivet̩ is not all consuming, how do you, numerian, see the landscape of interested parties taking shape Рon a global playing field?

  • What did the banks know and when did they know it? Not a hard question – mid 90’s and they knew it all. They’re the players under the old rules, the ones that they changed. There is a fix for this and it involves collapsing hundreds of years of contract law. Count on the WH, Congress, the banks and the MBS investors to insist on it. The money is bad enough. The loss of contract law is worse in the long term.

    This is an interesting decision to read. The .doc is at the link provided. I is the decision upheld today from the lower court.

    Conclusion

    The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.

    U.S. BANK NATIONAL ASSOCIATION v. ANTONIO IBANEZ, Defendant

    08 MISC 384283 (KCL)

    COMMONWEALTH OF MASSACHUSETTS, THE TRIAL COURT, LAND COURT DEPARTMENT
    Dated: 14 October 2009

    .doc Download

    http://www.themoneyparty.org/main/wp-content/uploads/2011/01/ibanezruling.doc

    —————-
    The Money Party RSS

  • This would include Collateralized Debt Obligations and Credit Default Swaps that involve RMBS’s in the structure, or that reference an RMBS for pricing or payout purposes. Exactly how many of these are outstanding in the market no one knows. Also, these instruments could be used to short the market, so that a decline in value in the mortgage backed securities would make the derivative more valuable to the holder. Some holders might have used these for speculation, and others for hedging purposes. In a crisis in the RMBS market, how profitable do these instruments become, does the bank that sold them have the resources to pay out on this profitability, and can the bank refuse to honor the derivatives arguing that the mortgages and securities were fraudulently issued in the first place?

    All told, these are serious questions, and probably add several hundred billions of dollars of uncertainty to an already complicated picture.

  • It’s called making new laws through massive trampling of old laws until it becomes impossible or impractical to go back. The banks didn’t like mortgage assignments because they could make the MBS chain more efficient without them so they simply decided not to do mortgage assignments according to the old laws anymore and hope that no one stopped them through the courts until it was too late; until, that is, the old laws had been trampled to death; that remains to be seen, SCOTUS may decide that it’s just impossible to go back; they will just make something up as they have done so often in the past.

  • The mortgage securitization market has been operating on the basis of an untested legal doctrine invented by the banks. They must have hoped that courts would accept this doctrine as sound if it was ever put to the test, though in a world where housing prices never went down, no one thought such a test would occur.

  • Something so basic as executing a legal document to assign a home mortgage from one bank to another appears increasingly to be at the center of a flawed securitization process in place in the US for nearly 20 years. You would think that the banks would take proper care in executing these assignments, since the whole intent of securitization was to create a market of liquidity for home mortgages based on multiple assignments, allowing them to be sold ultimately in the form of bond cash flows to investors. The fact that they didn’t may well lead to the complete destruction of the Too Big To Fail banks, and when these behemoths have to be taken into receivership by the federal government, the global financial system goes down with them. How did it come to this?

    The people involved in setting up the securitization process for residential home mortgages met in the early 1990s, with the major banks sending representatives from their trading desks, legal departments, operational departments, etc. These people are probably no longer working in the banking industry, but it will be interesting to hear from some of them at the heart of the creative process describing how securitization was intended to be set up. At this stage, we can only conjecture about some areas which may have gone wrong.

    Not every bank at the table had detailed knowledge of mortgage foreclosures – Back then, the world consisted of commercial and investment banks, and while the consortium involved in securitization issues consisted of both types, the investment banks had no history of dealing with home foreclosures and the legal complexities therein. That meant that only a few banks – Citibank, JP Morgan, Chase, Bankers Trust – had some familiarity with what was going to be needed each time a mortgage was passed from one bank to another. This narrowed the expertise down to only a handful of people – maybe five experts working on a subcommittee, and one or two of these could easily have swayed the whole group to think a certain way.

    Everyone knew home prices never went down – This was the mindset in the financial industry until the housing bubble burst in 2006. No one really expected a nationwide decline in housing values, combined with a crippling depression that would lead to massive foreclosures across the US. This was a “nuclear bomb” or “depression” scenario that banks dismissed as unrealistic; if you talked this way in consortium meetings and tried to urge the banks to prepare for this, you would have been laughed out of the room. Even if people took you seriously, the most likely rejoinder would have been: “this is such a remote possibility, that the risk/reward payoff of preparing for such a catastrophe just isn’t worth it.”

    The group may have prized a different type of out-of-the-box thinking – It would be exciting working on a project to create de novo a nationwide home mortgage tracking project like MERS that would obviate the need to bother with cumbersome state procedures. This would be a much more efficient market, and surely the courts and anyone else would recognize the value of that? Besides, banking was now the biggest and most profitable sector in the economy, and it was getting used to muscling its way into what it wanted.

    Then, of course, there was the question of fees – A big project involving nationwide securitization of mortgages into derivatives/bonds, plus the establishment of MERS, was going to cost money. Each member of the consortium had to get their own management to pony up the millions of dollars to fund the research, legal work, etc. that would be necessary before the market began operations. The best way to economically justify this effort was to point to the billions of dollars of savings for the banking industry if they didn’t have to pay fees to county recorders each time a mortgage was sold from one bank to another.

    Maybe they honestly thought each assignment was going to at least be properly notated – Back in 1995, when the market was being developed, no one envisioned the pyramiding monstrosity of mortgage assignments that was going to be necessary at the peak of the housing bubble. The consortium banks may have fully expected each assignment to be properly documented on an allonge appended to the mortgage. This seems likely, since the legal document they designed to govern the operations of the securitization trusts specifically called for such assignments to be fully documented.

    What went wrong, then, occurred later as the market went out of control – By 2004, when the “private label” securities began to appear that had virtually no credit standards and were later to lead to huge losses, the creators of the mortgage securitization market were mostly gone from the scene. The watchdogs sitting in bank audit and risk management departments were probably very unfamiliar with the nuances of mortgage assignments, especially given state-by-state complexities. The financial industry already had a history of falling seriously behind on its documentation supporting derivatives deals, so it evolved that the industry players became dilatory in following through on mortgage assignments and trust details. Back office people were already swamped with the operational requirements of an exploding market, and there simply weren’t enough paralegals on staff in any bank to get on top of all the missing assignments. Besides, to do so would involve a huge effort on each security to track down all the different players in the chain of assignments, some of whom were small regional brokerage companies. No one had the staff or money to organize such an effort, so things just continued as they were with a rising housing market hiding all problems.

    None of this explains why the regulators weren’t on top of these deficiencies. Did they even write up the banks for these failures, or did they simply not see a problem here? Why did the rating agencies just assume the banks were doing what the trust agreements required? Wasn’t there at least one instance in the past ten years where a team of examiners, lawyers, or auditors went through one simple securitization to see that all the details were properly met?

    It would be interesting to know if there was one such person who told bank management: “This is a serious problem. The market is getting overheated, and we have a large number of securitizations that we organized or support as trustee where the documentation is incomplete or flawed. We need to stop securitizations until these problems are fixed.” We haven’t heard of such a deep-thinking and prescient person, but if there was one, chances are the bank traders would have had their usual answer: “You’re going to kill our business and the hundreds of millions of dollars of fees we earn for the bank each year!” That would have instantly shut up any naysayer, because no top management team was going to kill off such a font of bonus money.

  • Maybe the banks are about to get new insight into ‘The Mystery of Capital’ a la Hernando de Soto.
    I am not qualified to critique the book or his thesis, but I have spent enough time in poor countries to understand his point about lack of clear chain of title and ownership.
    Should we go back to a system where little is written down and ownership depends on what the neighbors and village chieftain have to say?
    Seems like the banksters want to go back to that.

  • is that it drops the veil all at once. The Supreme Court becomes an openly fraudulent institution, people will simply give up on the US legal system as a way of addressing their grievances. Then people start handling their problems themselves, outside of the system. Also, I would expect quickly protests that turn to riots that turn to extended battles.

    Sure, you say, they want that so they can establish a police state. But even a fascist state needs certain illusions of legitimacy to function. Nazi Germany had courts and you can’t sit on every decision by every judge and hope the people go along. The argument of the fascists is that the trains run on time and the food is delivered, the price for these boons is the loss of your freedom. If the food doesn’t make it to the shelves, if the trains are derailed, if (for the USA) gas exceeds $5 gallon forever, and if you have no avenue for redress for a blatant grievance, there is no reason to buy into the police state.

    It makes it much harder to buy off half the poor to contain the other half when none of them have a legal system to depend on.

    They might back the banks, but I’m not so sure. One way or another, this really could be the final straw that breaks the banks’ backs. When not even the full complacency and support of the largest government in the world (and it’s entire monetary system) can save your asses, you have fucked up beyond measure. TBTF indeed.

  • don’t do details. To your very enlightening list of contributing factors for the mess, I’d add the simple observation that young men (primarily) were chasing high dollar incomes in the lucrative world of the new finance. They had completed expensive degrees at high status institutions where they learned to implement strategies and play with spreadsheets. The nitty gritty of how the world works is outside their purview. So to the question of “why wasn’t anybody checking on this?”, I’d give as part of the answer, the new banksters treated it as they had learned to do in school. The idea and the numbers counted, and that’s all they had learned to count.

  • You don’t fulfill your family’s expectations by getting an MBA degree at an Ivy League school, and then wasting it on a job in the back office, even if it is a managerial position. There was a time when Wall Street firms made sure incoming MBAs did their stint in operations, but that has long passed. There is no money to be made there, and no prestige in working in a side of the business that can save your ass (and that of the firm) by doing things correctly and consistently, which is by no means an easy goal day in and day out. How much more exciting to work on the trading desk, where you can parlay your position into a lucrative spot at a hedge fund.

  • And when I say environmental law I mean law firms that specialize in environmental law who have clients like BP and Chevron. I’ve experienced this approach where I live. The strategy that the banks used to trample property laws is very common. Here is an example. Suppose you are a power plant developer and you would like to site your power plant in an environmentally sensitive area. Its going to be hard to get your Energy Facility Siting Permit in such a pristine area. The solution? Remove the “pristine” part by helping to fund other kinds of development nearby. What’s 10 million dollars in a project that will cost hundreds of millions? Oh look, now there’s already light pollution and noise, our power plant will only be incremental. These guys are very patient, it takes years to get a power plant sited because of such nuisances. There are actually lawyers specializing in “environmental law” who do this for a living.

  • Only a Supreme Court bought and paid for by bank lobbyists, and willing to prostitute itself publicly to its paymasters, would issue such a ruling.

    DONE!

  • Numerian, thanks for the reply. You’ve clarified some of the thoughts that have been swirling around my head.

    Following the line of reasoning and instrument uses you touched upon, is it fair to say – or think – that the US and potentially global web of investment banks are using “financial innovation” to mask a deep and wide-spread state of insolvency?

  • In this whole conversation we’re having here, the point that shakes me the most is the point that if SCOTUS sells out to the banksters, a turning point will have been reached.

    I still have some faith in the US justice system, although it is diminished from the level I had earlier in life.

    But if that happens, I know the bell will ring for me that there truly is no justice in this country.

    That’s the point at which I, like many other expat people start looking around to see which country has the most useful passport, and which ones will allow me a dual citizenship.

    If I can’t get healthcare, if my retirement is wiped out, and if there is no guarantee of a justice system to protect my rights as a citizen, really, what is the point? What is the frickin’ point?

  • I don’t think since the credit crisis hit that the banks have been booking new derivative instruments intended to disguise their true balance sheet condition. However, it is obvious that the derivatives which were on their books at the time of Lehman’s collapse have been carried on the books at inflated values since the banks can mark to whatever “market” they think suits them.

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