Cleaning up the Foreclosure Mess

The first major piece of legislation that the Senate will take up this Fall is “An Act clearing titles to foreclosed properties.” It is a solid and necessary piece of legislation that I do support.

In the years before the recession, many banks and mortgage companies fell into a pattern of issuing mortgages on unfair terms and/or to people with limited ability to make mortgage payments. Standards were low enough in the secondary market that the lenders could turn around and sell these “sub-prime” loans and make a quick buck without taking any risk themselves. In turn, unscrupulous investment bankers would pool those loans and sell interests in the pools to investors unaware of the shaky underlying assets they were buying. The panic that set in as those “collateralized mortgage obligations” lost market credibility was a major factor in the crash.

In the wake of the recession, vacant properties — unmaintained, vulnerable to vandalism and inviting to crime — blight many neighborhoods in communities like Springfield and Worcester. In some instances, they have been actually abandoned by owners who walked away from payments they couldn’t make; in other instances, they have been effectively abandoned by foreclosing banks who just haven’t gotten around to maintaining them and selling them to new buyers. Many homeowners were dislocated by foreclosing banks.

Into this toxic situation, a series of decisions by our Supreme Judicial Court has injected an additional dimension of complexity  that has slowed the foreclosure process — in some instances benefiting original owners who are unable to pay their mortgages, in some instances keeping abandoned properties vacant, and in some instances clouding the title held by innocent buyers of foreclosed properties.  These decisions did nothing more than affirm rather ancient rules of law, but they were, nonetheless, unanticipated by the real estate bar.

Here is the background: Massachusetts has, for over a century, been a state in which borrowers actually give title to their homes to mortgage holders. By the terms of the mortgage, which usually track language laid out in statute, the mortgage holder can sell the property without court permission if the borrower falls behind. Because the power to foreclose by sale is a very significant power, Massachusetts law requires the mortgage holder to abide strictly by very specific procedures in the foreclosure process.

Most of these procedures make obvious sense and are designed to assure that the the borrower has fair notice and an opportunity to cure the default and/or to renegotiate the mortgage if at all possible. For example, if a bank were to file a foreclosure without having made all the legally prescribed efforts to notify the homeowner, the foreclosure would and should be void.  However, the Supreme Judicial Court’s recent decisions have made clear that subtler technical details in the foreclosure process can also void the foreclosure.

Specifically, the SJC held in the Ibanez case that when mortgage loans have been sold and resold in the secondary market, the final holder of the mortgage note must have had the mortgage title transferred before initiating a foreclosure. Previously, the real estate bar had believed and specifically advised clients that “the mortgage follows the note” and if the mortgage note had been assigned it was OK to clean up the assignment of the mortgage title itself after the foreclosure and before the recording of the foreclosure sale deed. This was consistent with standard industry practices nationwide.

The discrepancies between national industry practice and Massachusetts law as clarified by the SJC in its recent decisions are only loosely related to the problems in the pre-recession mortgage market.   Sloppy documentation went hand in hand with unscrupulous lending, but even scrupulous lenders were following standard procedures inconsistent with Massachusetts law.  As a result, essentially all properties that have been foreclosed upon since the advent decades ago of current secondary mortgage market practices have a potentially clouded title.

The bill that the Senate will consider later this week simply states that allegations of defects in foreclosure procedures must be raised within three years. Currently, there is really no directly applicable statute of limitations and owners may have  difficulty selling or borrowing against their properties.  The bill protects only third-party arms length buyers of the properties. If the foreclosing bank or an affiliate still holds the property it gains no protection. Additionally, regardless of who now holds the property, the original owner will retain their existing rights to sue the lending bank for actual and punitive damages under the state’s consumer protection law for any unfair practices in the issuance of the mortgage or the foreclosure itself.  Homeowners who are still in their properties and actively fighting a foreclosure can continue to do so.

I am convinced that it is only right to give third party buyers of foreclosed properties some repose. I also believe it is good for the housing market to define a process that will remove uncertainty. While offending banks will benefit indirectly from the reduced uncertainty, they will remain fully liable to the extent they have done harm through unfair or deceptive practices.

This is a bill that came through the Judiciary Committee which I chair.  I have studied it carefully and I fully support it.  It adjusts a complex legal process and there has been a lot of confusion about it over the past couple of months of discussion in the legislature.  I’m eager to answer any questions that constituents may have about it — so please fire away!

On Thursday, September 17, the Senate passed this bill by a vote of 31 to 7.

Published by Will Brownsberger

Will Brownsberger is State Senator from the Second Suffolk and Middlesex District.

26 replies on “Cleaning up the Foreclosure Mess”

  1. Would like to see significant personal and corporate criminal penalties for falsification of documents in order to accomplish foreclosure.

  2. No longer in your district, Will, but love hearing from you.

    Knowing nothing about real estate many years ago, I helped save a woman from a fraudulent foreclosure just by studying the real property law and she won a motion to shut it down.

  3. Dear Senator: the bill sounds fair to clear up part of the mess. Does it do anything to make Massachusetts law consistent with standard industry practices?

    1. It doesn’t — good question. It really only cleans up the cases where people were following rules that changed.

      There is discussion about forward-looking rules changes, but that is for another day.

  4. Hi Will,

    I too have studied this carefully. As a real estate appraiser, broker and auctioneer, I am all for it!

  5. Good morning and thanks, Will. It appears that you’ve done your homework as usual; this bill is necessary to clean-up the title problems caused by the SJC decision in Ibanez. Thanks for your efforts.

    Josh Alper

  6. Hi Will:
    I appreciate your detailed explanation, but I don’t agree with it. I find the equally detailed analysis of S.1981 by MAAPL (maapl.info) — The Massachusetts Alliance Against Predatory Lending — to be more convincing. I’d like to know your thoughts about the following points they make:

    “1. The Senate bill shortens the time to overturn an illegal foreclosure after filing a foreclosure deed and accompanying affidavit from the long standing, 20 year statute of limitations to only ONE YEAR for those previously foreclosed.

    “2. The bill provides no notice to homeowners of the Commonwealth of this change to hundreds of years of property rights.

    “3. The bill does NOT clear title and so does not fix the problem. Massachusetts courts do not need to determine most title & foreclosure violations because they are violations “by operation of law.” They become “fatal” simply if they occur. Rather, this bill only addresses the issue of who is permitted to sue. The violations exist regardless of the presence of a lawsuit or not.

    “4. Property rights are constitutionally protected in Massachusetts. The bill strips residents of their constitutional right to receive redress through the courts for injuries and wrongs done to themselves and their property (Article 11,
    Massachusetts Constitution).

    “5. The bill offers an exemption only if the former homeowner sues or is sued and knows to ask and can convince a judge they have a non-frivolous claim so as to receive judicial permission to file a copy of their
    complaint in the Registry of Deeds. Getting such a determination can be HARD since court rulings on foreclosed homeowners’ claims are still evolving as lenders’ illegal procedures are exposed.

    “6. While S1981 provides triple, monetary damages if the foreclosing affidavit’s signer is found to have lied on it, the home in which people raised their children, invested all their incomes and participated in their communities is GONE. A home is not just a financial investment. S1981 misses that reality by offering – instead of our right to fight for and
    reclaim an illegally foreclosed home – a financial recompense that will never be able to repay what is lost when a home is taken illegally.”

    1. Jim, thanks for passing on these points. MAAPL is a good organization that cares about the right things. To respond to their numbered statements.

      1. There is no 20 year statute of limitations — that comes from the adverse possession timeline — which is just a completely different situation.
      2. Adjustments like this happen routinely in the law and that is what lawyers are for — anyone who is actually contesting a foreclosure absolutely needs to have counsel who is aware of the evolving law on many issues. Further, most of the foreclosed upon parties are long gone and unreachable for notice purposes.
      3. The words in this point don’t really make sense. But the following is true: the bill may not fix every problem, but it will fix a lot of problems and that is progress.
      4. Statutes of limitations are normal and it settled constitutional law that the legislature has the power to adjust them, even with retroactive application.
      5. This is incorrect. However, there will likely be an amendment just to ease MAAPL’s concern on this point.
      6. If the homeowner is still in their home, this legislation does not deprive them of their right to fight the foreclsosure. If not, then the home is gone already.
  7. I appreciate your thoughtful analysis of this issue and I believe that your approach is the right one to take at this point. Our state laws have helped many families keep their homes because it gave them and their lawyers more time and leverage to obtain affordable work outs, but in some cases, particularly when homes had clearly been abandoned long ago, the lack of clear title has exacerbated problems for neighbors and municipalities because it is hard to get anyone to buy the property with the risk. Now that we are through the worst of the foreclosure crisis and really understand what happened, three years should be enough time for borrowers to stake their claim, and if they dont we need to be able to move to get the property back on the market.

    1. It has effect only on mortgages that have been foreclosed, really only on those foreclosed prior to all the court decisions — most of those foreclosed after the court decisions are in order anyway.

      Reverse mortgages are affected the same as regular mortgages — only in case of default and foreclosure.

  8. did the government and social organizations force banks in certain areas to give mortagages to unqualified applicants ? if so there is the problem.is there going a bailout by the working stiff? sounds like another punch to the gut of the taxpayer. correct us if we are wrong. thanks

  9. did not notice anywhere in this research and bill regarding relationship between borrower and lender, maybe there should be some consistent link of communication to perhaps avoid this foreclosure condition, kind of like preventive good business practice

    1. Yes. Absolutely. There are a lot of other pieces that have been put in place through legislation over the last few years to mandate communication and negotiation between borrower and lender.

  10. I don’t think there are ” innocent buyers of foreclosed properties”. If you are buying a foreclosed property, you are buying the property at a significant discount. You are taking a risk and getting a discount for the risk. the buyer of a foreclosed property buys at his peril.

    I am not convinced that these buyers are “victims” worthy of legislative intervention. Better we should have helped those thrown out of their homes and those living in neighborhoods blighted by predatory lenders.

    Better we should go after MERS, which is a fraudulent conspiracy by banks and lenders to avoid paying transfer fees to state registries of deeds.

    1. I agree we should be all about helping homeowners avoid foreclosure and we’ve put a lot in place on that.

      I also think we need to be about restoring neighborhoods. I think eliminating title uncertainty serves that end.

  11. This sounds like it clarifies transfers of title and offers additional protections to victims of mortgage fraud and “innocent buyers” of distressed properties, and I will abide by your judgment (I’m no lawyer).

    However, I have always been puzzled by how ownership of a particular note can be traced when mortgages are collateralized into tranches. When there are CDOs, exactly how is “the final holder of the mortgage note” ascertained? Don’t a bunch of investors wind up with shares of a large numbers of notes? Does title belong to the institution that created the CDO or to its investors? No wonder it is such a quagmire of flim-flam.

    1. The various tranches of a CDO are actually interests in a trust which holds the various mortgages, which are themselves, of course, indivisible. So, it is the trustee that is foreclosing on behalf of the CDO trust. The SJC’s opinion in Ibanez really picks this apart and is a great read if you want to get into the details.

  12. My head hurts. Why do banks just abandon property. the properties should be auctioned off. Maybe the “CDO” should be deemed a scam in Massachusetts and you cannot loan money that way.

  13. My highest regards and compliments, Senator Brownsberger. This is an excellent review and exposition of the background, intent and need for S. 1981 and its attempt to balance the rights of foreclosed borrowers and the rights of foreclosure property purchasers.

    While there have been several pieces of comprehensive legislation over the last 7 years providing greater notice and foreclosure avoidance opportunities for borrowers, other than S. 1981 and its predecessor bills, there has not been a single piece of legislation seeking to clear titles for purchasers who have taken title to foreclosed properties without knowledge that there were illegalities in the foreclosure process, many of which do not appear of record.

    I look forward to tomorrow’s legislative session on the bill.

    – – Ward.

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