Condo Media - May 2012 - 52

FINANCE

On a macro level, foreclosure delays affect the housing market as a whole, depressing prices, discouraging purchases, and impeding the recovery of both the housing market and the economy as a whole. But on a micro level, foreclosure delays are particularly problematic for community associations because of their common interest ownership structure. Unit owners facing foreclosure almost always stop paying their common area fees — if they haven’t stopped already — reducing the revenues that finance the maintenance, operation and governance of the community. The resulting financial strains on the association can impair the marketability of other units and, in extreme cases, threaten the viability of the community as a whole.

Foreclosure “Irregularities”
The court cases at issue spring from the legal morass surrounding allegations of widespread “irregularities” in the foreclosure process. The short summary of this very complicated legal and financial mess is that in the wake of the financial meltdown, many mortgage lenders and loan servicers did not dot all the legal i’s and cross all the t’s in their foreclosure actions. In the first Massachusetts case (U.S. Bank v. Ibanez), which has gotten national attention, the Supreme Judicial Court (SJC) invalidated two foreclosures because the lenders involved could not produce documents proving that they held the mortgages when they initiated their foreclosure actions. At the height of the housing boom, when mortgages were being sliced, diced, syndicated and sold at the speed of light, mortgage assignments were not always completed or recorded in a timely fashion. In many cases, the recording did not occur until after the foreclosure auction. But in this case, the SJC held that the assignment must be either recorded with the appropriate registry of deeds before the lender publishes the first of the required three consecutive weekly legal notices advertising the public mortgage auction, or

be signed and dated prior to the first legal ad being published. The court also refused to make its decision prospective, creating two decades or more of foreclosures with potential “Ibanez problems.” Lenders who had hoped the court would recognize that problem and correct it in a subsequent decision were disappointed. The next decision (Bevilacqua v. Rodriguez) arguably made things worse. Here, the plaintiff (Bevilacqua) raised the obvious question resulting from Ibanez: Does a buyer who purchased a home on which the lender foreclosed improperly have legal title to that property? Bevilacqua had purchased one of the properties in the Ibanez case — a four-unit residence that he had converted to condominiums. Bevilacqua sought to clear the title flaw resulting from the Ibanez decision by bringing a “try title” action in the Land Court. But the Land Court found that Bevilacqua lacked standing to initiate that action because he did not own the property — a conclusion with which the SJC agreed. The decision invalidated the creation of the condominium, leaving Bevilacqua and the three buyers who had purchased units from him without valid claims to those properties.

on the promissory note.” Although the note and mortgage don’t have to reside together throughout the life of the loan, the court agreed, the two documents must be “reunited” before a lender or servicer can foreclose. Analyzing the case in his blog, Massachusetts attorney Richard Vetstein said its impact could be “potentially bigger than Ibanez.” If the SJC upholds the lower court decision, he noted, “It could render the vast majority of securitized mortgage foreclosures invalid, thereby creating mass chaos in the Massachusetts land recording and title community.” The SJC, which accepted the case on direct appeal from the lower court, apparently recognizes that concern. After hearing oral arguments, the court issued an unusual order seeking “supplemental briefing” on three points: • Whether a decision against the lenders in this case “would cloud any title that has a foreclosure in the chain of title, regardless of how long ago the foreclosure occurred,” as some have argued; if so • “What legal or practical remedies” might mitigate that negative impact; and • If the court holds that the law requires “unity” of the mortgage and the note, what legal arguments would support or not support a decision to make that ruling prospective only. The court is expected to issue its decision within the next three or four months. Many bank attorneys agree with Vetstein that a decision against the lenders will create “chaos” for lenders and for title insurers, who will be inundated with lender demands to clear muddied titles. In truth, the current situation is pretty chaotic already, as lenders and their foreclosure actions are being challenged on multiple fronts. In addition to the Ibanez decision and its progeny:

Getting Murkier
Now a third case pending before the SJC (Eaton v. Fannie Mae) threatens to further muddy these already murky legal waters. The story is a familiar one: Eaton obtained a subprime home mortgage loan and defaulted on it. Green Tree, which had purchased the loan from the originating lender, foreclosed, purchased the property at the foreclosure auction and assigned its interest to Fannie Mae, which moved to evict Eaton. Eaton sought an injunction to block the eviction, arguing that Green Tree did not have the promissory note underlying the mortgage, and so, lacked standing to foreclose. The Superior Court sided with her, holding that “the mortgage has a parasitic quality, in that its vitality depends

CONDO MEDIA • MAY 2012

Condo Media - May 2012

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