What Does the Ibanez Decision Mean?

What Does the Ibanez Decision Mean?


19 January 2011

Article by Mintz Levin Real Estate Group



The following client alert is in response to the U.S. Bank v. Ibanez, decided by the Massachusetts Supreme Judicial Court on Friday, January 7, 2011.

The Massachusetts Supreme Judicial Court (SJC) announced its decision of the Ibanez case and ruled against the validity of foreclosure sales of two securitized mortgages. The case has important implications for all foreclosures in which the foreclosing party is not the original lender. Here are some particulars of the decision for your consideration.

1. A lender or servicer exercising the power of sale must be the holder of the mortgage by a complete chain of valid assignments. Ownership of the note alone does not confer a right to foreclose unless the mortgage so provides. The rule previously followed by some Massachusetts conveyancers—that ownership of the mortgage automatically follows ownership of the note—was rejected by the Court. The Court also rejected the banks' argument that their right to obtain an assignment of the mortgages (which was set forth in the securitization documents) gave the banks the right to foreclose.

2. A lender or servicer must be the holder of the mortgage when the power of sale is exercised. Back-dated assignments and assignments made after the exercise of the power of sale do not satisfy this requirement. Confirmatory assignments are effective only if they confirm a written assignment that was in existence when the power of sale was exercised.

3. An assignment of a mortgage in blank, that is, an assignment that does not name the assignee, is invalid.

4. A valid mortgage assignment need not be in recordable form and need not be recorded. An assignment of a pool of mortgages made in an unrecorded securitization document may be valid if the document meets the requirements of M.G.L., Chapter 183, Chapter 3 and if it specifically identifies the mortgages being assigned. The Court noted that the best practice is to record allmortgage assignments in the proper order.

5. The Ibanez decision does not address questions of New York law concerning transfers of securitized mortgages to bond trustees, nor does it address the validity of MERS (Mortgage Electronic Registration Systems) or of mortgage securitization in general. The banks lost because they could not produce valid assignments of the mortgages that they had purported to foreclose.

6. The Ibanez decision is based entirely on existing Massachusetts law and applies only to Massachusetts. Courts in other states that use judicial foreclosure or treat mortgages as liens rather than conveyances of legal title to real estate may reach different results on similar facts.

When foreclosing a mortgage in Massachusetts, we have recommended to our clients that ownership of both the note and mortgage be transferred of record to a single asset entity established by the lender for the purpose of foreclosing the mortgage and taking title to the property after the foreclosure sale. We have also recommended that lenders obtain a commitment for a new owner's policy of title insurance, which will insure the validity of the foreclosure sale and the validity of any assignments of the mortgage. The Ibanez decision confirms our belief in the soundness of this advice.

When drafting a mortgage for a loan, which may be securitized or which may become subject to some form of co-lending agreement (such as an A and B note structure), particular attention should be paid to the drafting of the power of sale clause. There should be no ambiguity as to who has the power to foreclose the mortgage if ownership of the note should become separated from legal title to the mortgage or if ownership of the debt should be split among several parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances