During the housing boom, banks carved up mortgages into pieces and sold the pieces in a process known broadly as securitization. What they didn't realize: without flawless paperwork, you can't foreclose on a defaulting homeowner.
Paul Sakuma / AP
The Supreme Judicial Court of Massachusetts affirmed a lower court judge’s ruling invalidating two mortgage foreclosure sales because Wells Fargo and U.S. Bank did not prove that they actually owned the mortgages at the time of foreclosure.
Neither bank had originated the mortgages in question but had purchased mortgage securities that included the mortgages.
“For homeowners and foreclosures in general, it means that any mortgage foreclosure which was initiated by a securitized trust at a time when the trust had not obtained a mortgage assignment which gave it the lawful right to do so is void. Those homeowners, like Mr. Ibanez, still own the property,” Paul Collier, attorney for one of the homeowners, said.
Real estate law requires the physical transfer of loan documents and loan sale assumption agreements. In the heady days of the housing boom it is questionable that all the paperwork and loan documents were transferred properly during each step of the securitization process or in the case where loans were sold numerous times.
Only the holder of the actual paper and ink signed note has the standing to file foreclosure and evict homeowners. Not so many years ago this wasn’t an issue because the savings and loan down the street made the loan and kept it on its books.
However, securitization changed all of that as local mortgage originators sold the loans and the loans became part of mortgage-backed securities (MBS). The paperwork got sloppy with all of this selling and packaging.