Happy Thanksgiving!

New Mortgage Loan Disclosures from the Consumer Finance Protection Bureau

The best way to fight a foreclosure is to stop one from happening in the first place.  While many foreclosures are the result of unexpected financial hardships, far too many are caused by homeowners not understanding the terms of their mortgage loans.  The mountains of paperwork that come from a real estate closing doesn't help either. As the saying goes: hire a lawyer, kill a tree.

The Consumer Financial Protection Bureau's ("CFPB") new "Know Before You Owe" mortgage loan disclosures are intended to make this process easier.  This initiative combines several, existing disclosures under federal law into new forms.  The goal is to make it easier for consumers to compare loans and understand the financial implications of their decisions.  With the foreclosure crisis far from over, the CFPB's initiative is a step in the right direction.  

Foreclosure By Entry

As foreclosure cases increasingly become litigated in Massachusetts, foreclosure by entry—once considered by many to be a mere back-up option—is becoming an important area of foreclosure practice. 

Nearly all foreclosures in Massachusetts are foreclosures by power of sale, or “non-judicial” foreclosures.  With the exception of the Servicemembers Civil Relief Act case, meant solely to determine whether a claimant is in the military, a foreclosing entity does not need to bring a court case or obtain a judicial order to foreclose a property.  However, while a non-judicial foreclosure allows a foreclosing entity to obtain title to a property, it must go to summary process (the lawyerly word for an eviction case) to obtain possession of the premises.  In Bank of New York v. Bailey, the Supreme Judicial Court held that a defendant in a summary process case involving a foreclosed property may challenge the validity of the foreclosure as a defense to the plaintiff’s claimed right to possession. This had lead to summary process becoming an active forum for deciding the validity of foreclosures in Massachusetts.  Given the complexity of the issues in these cases, these matters often last well beyond the timeframe for a typical landlord/tenant case. 

Foreclosure by entry is another type of foreclosure in Massachusetts. Compared to a foreclosure by power of sale, a foreclosure by entry has far fewer statutory requirements.  Pursuant to G.L. 244 § 1, a mortgagee can obtain a foreclosure by entry by making an "open and peaceable entry" on the mortgaged land.  Then, the mortgagee must record a certificate of this entry in the land records, signed by two witnesses.  The holder of the mortgaged property then has three years from the date that this memorandum is recorded to “oppose” this entry.  If this entry is not opposed, the mortgagee is entitled to foreclosure. While a foreclosure by entry has fewer requirements for foreclosure, this process requires a three year “wait period;” a timeframe that is significantly longer than a foreclosure by power of sale.  In the past, mortgagees would often file a certificate of entry as a backup plan with little expectation of this method being needed for foreclosure.  Often, the mortgagor will have left the property long before this three year period has elapsed. 

Today, however, foreclosure by entry promises to take on a greater role in Massachusetts foreclosure law.  Why? With the increased number of foreclosures in the Commonwealth, and the increased number of defenses in these cases, a mortgagee can easily be defending against a foreclosure years after the non-judicial foreclosure occurred.  Challenges to foreclosures are almost always about the non-judicial foreclosure and involve challenges to the foreclosing entity’s standing to bring the foreclosure and whether the involved parties followed the proper notice requirements.  Creeping in the background, however, is the foreclosure by entry.  With the complexity of the issues in these cases, and the backlog of the trial courts, many of mortgagors challenging their foreclosures find themselves getting close to the three-year deadline for challenging the foreclosure by entry.

For a process that has existed for over years, little case law exists on foreclosure by entry and like any challenging area of law, there remains more questions than answers.  One unresolved issue is what constitutes “opposition” for a foreclosure by entry.  Does a mortgagor need to specifically oppose the foreclosure by entry or is an opposition to foreclosure in general enough?  This issue has faced many mortgagors who have diligently challenged their non-judicial foreclosures, but have not specifically addressed the certificate of entry.  

It is also unclear whether the Supreme Judicial Court’s U.S. Bank v. Ibanez holding is applicable to mortgagees performing a foreclosure by entry.  Ibanez requires a foreclosing entity to be the holder of the mortgage at the time of the non-judicial foreclosure.  Ibanez’s reasoning would seem to apply equally to a foreclosure by entry, but it remains unclear whether certificates of entry recorded by entity without assignment of the mortgage would equate to a valid foreclosure by entry.

Finally, it also remains uncertain whether the notice provisions for foreclosures, under both statutory law and the terms of most mortgages, apply equally to foreclosures by entry.  The majority of trial court decisions in the Commonwealth have taken the position that non-judicial foreclosures must “strictly comply” with these requirements.  This notice requirements seem to be written broadly enough to cover all methods of foreclosure, but only time will tell if these challenges are effective against foreclosure by entry. 

The little case law that does exist regarding foreclosure by entry suggests that any type of opposition is sufficient to challenge a certificate by entry.  To be on the safe side, such opposition should specifically address the certificate by entry and make it certain that the mortgagor objects to this specific method of foreclosure. Demand letters, affidavits, and notices of trespass addressed to the mortgagee all seem to be adequate means of making this opposition. Depending on the registry of lands, a G.L. 183 § 5B affidavit related to land may also be option.

Case Summary: U.S. Bank v. Ibanez (458 Mass. 637)

The Massachusetts Foreclosure Blog presents cases summaries on the major Massachusetts foreclosure law cases.  The post discusses the seminal decision of U.S. Bank v. Ibanez.

Ibanez was the first Supreme Judicial Court decision of the recent foreclosure crisis.  Up to Ibanez, foreclosure law had been mostly left alone by Massachusetts courts, with no significant decisions in the past century.  Ibanez not only sent shockwaves through Massachusetts but also drew national attention as well.

Ibanez started as a case where two foreclosing entities—after performing non-judicial foreclosures—went to Land Court in an attempt to quiet title to their respective properties.  In short, these foreclosing entities were asking the Court to declare they were the rightful and true owners of the properties. Simple enough?

Not so, said the Supreme Judicial Court, who heard these cases on appeal.  The SJC held that these foreclosing entities were not the rightful owner of these properties because they failed to properly follow Massachusetts foreclosure law.  Why?  These entities did not hold the respective mortgages of these properties at the time of the foreclosure, meaning they were not the "mortgagee" under G.L. 244 § 14.

To understand these, we need to take a step back.  In the old days, when you bought a home, you took out a mortgage that belonged to the local bank.  The mortgage stayed with this bank, where you made your payments until the debt was satisfied.

Times have changed.  Today, many mortgages are "securitized."  Securitization is a complicated financial process where financial debts are "pooled" into investments, shares of which are sold to investors.  Think of it like a baker who combines different ingredients into a cake and sells slices of the combined, finished product for profit.

In Ibanez,  the underlining mortgages had been securitized.  Unfortunately for the foreclosing entities, these financial institutions didn't do their paperwork and did not have proper assignment of the mortgages as of the time of foreclosure.  As a result, the underlining foreclosures were void.

So, what are the take home lessons of Ibanez?

• To do a foreclosure, a foreclosing entity must have record assignment of the mortgage. Paperwork needs to be checked carefully to see if this important requirement in satisfied.
• The Supreme Judicial reaffirmed the long-standing requirement of "strict compliance" for non-judicial foreclosures.  While this has been part of Massachusetts caselaw for over a century, Ibnanez made it clear that this high level of review continues to exist in reviewing the validity of foreclosures. 
• Challenging a foreclosures does not require a showing of "prejudice" to the mortgagor.  In other words, a foreclosure can be defective even if the defect or error had no impact on the mortgagor. 
• Ibanez is applies to all Massachusetts foreclosures, even those happening years ago.  This is of particular concern to homeowners who have purchased foreclosed properties and title insurance companies who have insured such properties.  No easy solution exists for fixing these "Ibanez" issues.