A decision last week in Massachusetts on a foreclosure case could have a big impact on future foreclosures in the state.
Henriette Eaton refinanced the mortgage on her Boston property for $145,000 in September 2007 with BankUnited FSB, according to a ruling from the Massachusetts Supreme Judicial Court. The Mortgage Electronic Registration Systems Inc. was named as the mortgagee on the mortgage.
MERS as mortgagee, or its assignee, holds legal title to the property with power of sale “solely as nominee” of the lender BankUnited or its assignee, according to the mortgage. However, “if necessary to comply with law or custom, MERS (as nominee for lender and lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the property; and to take any action required of lender.”
Mortgagee interest was assigned from MERS to Green Tree in April 2009, though there was no record of a corresponding transfer of the note — which was indorsed in blank by BankUnited on an undetermined date.
Eaton defaulted on the loan in 2009, and Green Tree moved to foreclose on her home through exercise of a power of sale contained in the mortgage. Green Tree was the highest bidder in a November 2009 foreclosure auction and assigned rights to its bid to Fannie Mae. A foreclosure deed was recorded in the Suffolk County registry of deeds.
But when Fannie commenced a summary process action in January 2010 to evict Eaton, she filed a counterclaim arguing that the underlying foreclosure sale was invalid because Green Tree did not hold the note at the time of the foreclosure sale and therefore lacked the requisite authority to foreclose.
A Superior Court judge subsequently allowed Eaton’s motion for a preliminary injunction and preliminarily enjoined Fannie from proceeding with an eviction.
On appeal, the Massachusetts Supreme Judicial Court ruled that non-judicial foreclosure statutes require a mortgagee to either hold the note or prove its authority to act on behalf of the note holder before the mortgagee can exercise a power of sale in the mortgage, according to a client letter from Ballard Spahr.
“The question on appeal was whether, for a valid foreclosure sale to occur under Massachusetts law, both the mortgage and the underlying note must be held by the foreclosing party,” the client letter stated. “To answer that question, the court was required to determine the meaning of the term ‘mortgagee’ in the Massachusetts statutes that provide for a power of sale. Observing that such meaning ‘was not free of ambiguity,’ the court construed the term to refer to “the person or entity then holding the mortgage and also either holding the mortgage note or acting on behalf of the mortgage holder.'”
Amicus briefs were filed in the case by several organizations including the American Land Title Association, the Federal Housing Finance Agency and the Mortgage Bankers Association. One attorney that presented a briefing warned it could prove disastrous if the court determines that servicers need to possess both a promissory note and mortgage in order to foreclose.
Since the trial court’s decision was based on the view that a mortgagee must have physical possession of the note to foreclose, the Supreme Judicial Court vacated the preliminary injunction and remanded the case to the trial court for it to additionally consider whether the company that was the assignee of MERS’ interest had authority to act on behalf of the note holder, Ballard Spahr wrote. The court noted that the designation of MERS in the mortgage as the bank’s “nominee” could have “some bearing on the agency question.”
Ballard Spahr noted that the June 22 decision, however, won’t impact foreclosures that have already been completed since the ruling is prospective only.
“But we anticipate that it will have a significant impact on pending and future mortgage foreclosure-related litigation in Massachusetts by adopting the ‘show me the note’ theory frequently advanced by borrowers in an attempt to avoid foreclosure,” the law firm wrote.