Mass Court May Rule on Retroactivity of some Foreclosures Tied to 'Naked Mortgages'

Another next major marker in thernconvoluted foreclosure landscape will probably come in the next few weeks when thernMassachusetts Supreme Judicial Court (SJC) is expected to rule on Eaton v. Federal National MortgagernAssociation (Fannie Mae).  This is anotherrnin a series of cases challenging the right of various lenders and nominees tornforeclose on delinquent mortgages based on assertions that those parties do notrnown or at least cannot prove they own the enabling legal documents.  </p

Eaton raises an additional point thatrnhas excited interest – whether or not that foreclosure can be challenged andrncompensation enforced on a retroactive basis or whether such retroactivityrnexacts too high a cost or permanently clouds title.</p

The details of the case are fairlyrnstandard, involving a note given by Henrietta Eaton to BankUnited and arncontemporaneous mortgage to Mortgage Electronic Registration Systems (MERS).  The mortgage was later assigned by MERS tornGreen Tree servicing and the assignment did not reference the note.  The Eaton Home was subsequently foreclosedrnupon by Green Tree which assigned its rights under the foreclosure to FanniernMae which sought to evict Eaton.  Eatonrnsued, charging that the loan servicer did not hold the note proving that Eatonrnwas obliged to pay the mortgage.</p

The Massachusetts Superior Courtrnrelied on a January, 2011 ruling in U.S.rnBank V. Ibanez in which the court held that the assignment of a mortgagernmust be effective before the foreclosure in order to be valid and that as holderrnof the note separated from the mortgage due to a lack of effective assignment,rnthe Plaintiffs had only a beneficial interest in the mortgage note and thernpower of sale statute granted foreclosure authority to the mortgagee, not tornthe owner of the beneficial interest.    </p

In Eaton the lower court said it was “cognizant ofrnsound reason that would have historically supported the common law rulernrequiring the unification of the promissory note and the mortgage note in thernforeclosing entity prior to foreclosure. Allowing foreclosure by a mortgagee not inrnpossession of the mortgage note is potentially unfair to the mortgagor. Arnholder in due course of the promissory note could seek to recover against thernmortgagor, thus exposing her to double liability.”</p

In its brief to the Supreme Judicial Court, FanniernMae contests the lower court ruling on the grounds that:</p

1.  Requiring unity of the note and mortgage tornforeclose would create a cloud on the Title and result in adverse consequencernfor Massachusetts homeowners.</p

2.  A ruling requiringrnunity of the note and mortgage to conduct a valid foreclosure should be limitedrnto prospective application only (because)</p

A.rn Such a ruling was not clearly foreshadowed and</p

B. rnRetroactivernapplication could result in hardship and injustice.</p

The case has been the impetus for filings of nearlyrna dozen amicus briefs from groups such as the Land Title Association, RealrnEstate Bar Association, and foreclosure law firms, most in response to a SJCrnrequest for comment on whether any ruling should be applied retroactively andrnif so what the impact would be on the title of some 40,000 homes foreclosed inrnthe last few years.   </p

Of particular interest is a brief filed by thernFederal Housing Finance Agency, conservator of both Fannie Mae and Freddie Macrnwhich some observers said might be the first time the agency hadrnintervened in a particular foreclosure case.</p

FHFA asked the court to apply any decision to uphold the lower courtrndecision prospectively rather than retrospectively.  It’s argument:  applying a ruling retroactively would be “arndirect threat to orderly operation of the mortgage market.”   FHFA also said “Retroactive application of arndecision requiring unity of the note and the mortgage for a valid foreclosurernwould impose costs on U.S. Taxpayers and would frustrate the statutoryrnobjectives of Conservatorship.”  </p

“There presently is no mechanism or requirement under Massachusetts law tornrecord the identity of the person entitled to enforce the note at the time ofrnforeclosure,” FHFA said.  “Therefore, arnretroactive rule requiring unity of the note and mortgage for a validrnforeclosure would potentially call into question the title of any property withrna foreclosure in its chain of title within at least the last twenty years.”</p

A contrary opinion was advanced in a brief filed by Georgetown University LawrnSchool Professor Adam Levitin who called the ruling that a party cannotrnforeclose on a “naked mortgage” (one separated from the note) merely a restatementrnof commercial law and “to the extent that the mortgage industry has disregardedrna legal principle so commonsensical and uncontroversial that it has beenrnencapsulated in a Restatement, it does so at its peril.”</p

Levitin argues that it is impossible to know how widespread the problem of nakedrnmortgages may be either in Massachusetts or nationwide so this should temperrnany evaluation of the impact of retroactivity. rnHe also states that there are several factors “that should assuagernconcerns about clouded title resulting from a retroactively applicable rulingrnrequiring a unity of the note and mortgage.” rnHe points out that adverse possession, pleading standards, burdens ofrnproof and equitable defenses such as laches all combine to make the likelihoodrnof challenging past foreclosure unlikely and sharply limiting the retroactiverneffect of a ruling.</p

Kathleen M. Howley and Thom Weidlich, writing for Bloomberg noted that a decision to uphold the lower court “couldrnlead to a surge in claims from home owners seeking to overturn seizures.”</p

According to Howley and Weidlich, the SJC ruled last year on two foreclosurerncases that handed properties back to owners on naked mortgage grounds.  The<iIbanez case, referenced above dealt with two single family houses, but in Bevilacqua v. Rodriguez the court handedrnan apartment building back to the previous owner five years after thernforeclosure.  In the interim a developerrnhad purchased the building and turned it into condos.  The condo owners lost their units withoutrncompensation and the building now stands vacant.  </p

The decision may be available before month’s end and as Massrealestateblog.com said, “For interested legal observers of thernforeclosure crisis, it really doesn’t get any better than this”.

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