Banks Lose Pivotal Massachusetts Foreclosure Case

US Bancorp and Wells Fargo & Co. lost a foreclosure case in Massachusetts’s highest court that will guide lower courts in that state and may influence others in the clash between bank practices and state real estate law. The ruling drove down bank stocks.

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts.

“We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote.

Wells Fargo, the fourth-largest U.S. lender by assets, dropped $1.10, or 3.4 percent, to $31.05 at 11:41 a.m. in New York Stock Exchange composite trading. US Bancorp declined 28 cents, or 1.1 percent, to $26.01.

The 24-company KBW Bank Index fell as much as 2.2 percent after the decision was handed down.

Claims of wrongdoing by banks and loan servicers triggered a 50-state investigation last year into whether hundreds of thousands of foreclosures were properly documented as the housing market collapsed. The probe came after JPMorgan Chase & Co. and Ally Financial Inc. said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America Corp. froze U.S. foreclosures.

Teri Charest, a spokeswoman for Minneapolis-based US Bancorp, didn’t immediately return a call for comment. Jason Menke, a spokesman for San Francisco-based Wells Fargo, didn’t have an immediate comment.

Foreclosures Voided
Charest previously referred questions on the case to the loan servicer for both mortgage-backed trusts, American Home Mortgage Servicing Inc. Philippa Brown, a spokeswoman for Coppell, Texas-based American Home Mortgage, didn’t have an immediate comment.

In March 2009, Massachusetts Land Court Judge Keith C. Long voided the foreclosures, finding that the mortgage transfers were done months after the house sales. In October of that year, Long declined the banks’ request to reverse that ruling after they argued that the documents that bundled together the mortgages had transferred those instruments to them.

Today’s court decision held out the possibility of securitization documents properly transferring mortgages.
Such documents, along with “a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to be proof that the assignment was made by a party that itself held the mortgage,” Gants wrote. “However, there must be proof that the assignment was made by a party that itself held the mortgage.”

The case is U.S. Bank v. Ibanez, 10694, Supreme Judicial Court of Massachusetts (Boston). The lower-court cases are U.S. Bank National Association v. Ibanez, 08-Misc-384283, and Wells Fargo Bank NA v. LaRace, 08-Misc-386755, Commonwealth of Massachusetts, Trial Court, Land Court Department (Boston).

To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at tweidlich@bloomberg.net.