Whether banks, trustees in mortgage securitization schemes, could foreclose on properties some ten to fourteen months before they acquired explicit mortgage assignments from the original mortgagees.

The plaintiffs, two banks, each foreclosed on properties in 2007, after advertising foreclosure sales. The banks purported to be “Present holder of said mortgage” in the notices, on the basis of a series of assignments by which the original mortgage document passed through a number of hands, and then was securitized by the bank as trustee of a large number of investors. Each bank was the only bidder in its auction, and purchased the property at about 85% of its own evaluation of fair market value.

The banks did not at the time of foreclosure hold a deed formally assigning the mortgage to them. They did, however, hold (1) a “note in blank,” assigning the note from the original mortgagee with a blank for the assignee; (2) a “mortgage in blank,” assigning the original mortgage with a blank for the assignee; (3) the original mortgage document itself; and (4) an agreement purporting to pool a number of mortgages and assign them to the banks as trustees. None of those documents was filed with the registry of deeds prior to foreclosure. Ten and fourteen months after sale, respectively, the banks executed and registered “confirmatory” assignments from the original mortgage holders.

Some time afterward, the banks became concerned that their newspaper notice of foreclosure may have been defective because it was published in the wrong newspaper, and asked a Superior Court judge to issue a declaratory judgment that they held good title to the properties. The judge found that their choice of newspaper was appropriate, but held that the foreclosures were void because the banks had not actually owned the mortgages or power of sale at the time of foreclosure. The banks appealed, and the SJC granted direct appellate review.

A home loan comes in two parts: a note, which is an agreement to repay the loan, and a mortgage, which is title to the property, held by the mortgagee until the mortgagor repays the note. Because one is a financial instrument and one a land title, they may be governed by different law and held by different parties.

1. Holder of mortgage or power of sale. The first issue is whether the banks were mortgagees or persons holding the power of sale at the time of foreclosure, as required by G.L. c. 244, § 14. The judge held that none of the papers offered by the banks was sufficient to show right to foreclose: the mortgages in blank were void, because they gave no assignee; the agreements to pool and assign mortgages created only a right to an assignment, not the assignment itself; and the assignment of the note, while valid, did not assign the mortgage. The plaintiffs argue that the documents independently—and certainly together—were sufficient to make them mortgagees, or else grant an equitable power of sale.
2. Sufficiency of notice. This argument will be relevant only if the Court finds that the banks did not hold the mortgages, but otherwise had a power of sale. The judge found that the foreclosures were independently void because the banks advertised themselves as “present holder[s]” of the mortgage. The judge found that it was an important consumer protection that notices of sale list the actual present holder, because properties that appear to have clouded title will fetch lower prices for their original owners. The banks argue that the statute need not be construed so strictly, where they advertised in good faith and the property owners cannot demonstrate any prejudice from a technically incorrect listing for the holder of the mortgage.
3. Retroactive assignment. In the alternative, the banks argue that their confirmatory assignments some ten to fourteen months after foreclosure retroactively repair any deficiency in title. The banks analogize to cases involving agent-principal relationships, essentially arguing that the actual title holders ratified the foreclosures by transferring title. The banks rely on Real Estate Bar Association Title Standard No. 58 as persuasive authority. The judge rejected that authority, holding that it conflicted with the plain requirements of G.L. c. 244, § 14.

1. The banks’ proposed rule for mortgages in blank would essentially allow property to be passed from hand to hand by bearer notes—a chaotic property regime the Court is unlikely to embrace. Nor does it seem that transfer of a note supports exercise of the statutory power of sale. The banks’ best argument (if the record supports it) is that the true mortgage holder assigned the mortgage via the pooling agreements—a claim that the judge, who had access to the agreements, rejected.
2. The banks fare better in the second argument. If indeed they held a power of sale, but not the mortgage itself, it seems neither wise nor mandated by the statute to undo the foreclosure sales because they misidentified themselves as holders of the mortgage in the newspaper advertisements (unless there was some nefarious reason for doing so, which does not seem to be the case).
3. The banks’ argument for retroactive assignment is not persuasive. By their reasoning, any party could foreclose on a property, so long as it later obtained title from the true owner. The requirements of G.L. c. 244, § 14, are not so loose.