CORRECT: Mass. Court Rules Against US Bancorp, Wells Fargo
January 07 2011 - 7:23PM
Dow Jones News
A court in Massachusetts raised questions about the mortgage
foreclosure process when it ruled against U.S. Bancorp (USB) and
Wells Fargo & Co. (WFC) Friday in two mortgage foreclosure
cases. The ruling affirmed a lower court decision that the banks,
acting on behalf of investors in trusts of securitized mortgages,
failed to show they held the mortgages at the time of the
foreclosure.
The Massachusetts ruling involves just one of many litigations
winding their way through courts across the country. In another
case in nearby Maine, the Supreme Judicial Court ruled Thursday in
favor of the bank, J.P. Morgan Chase & Co. (JPM), in a
foreclosure dispute that also involved documentation issues.
In the stock market Friday, uncertainty was a negative.
Investors worried the Massachusetts ruling suggests trouble for
banks in foreclosing on mortgages that had been packaged into
asset-backed securities. Many questions remained, but with bank
stocks up sharply since the end of November, investors reacted to
the ruling with concern.
Bank stock investors decided to "sell first and ask questions
later," said Peter McCorry, a senior trader at Keefe, Bruyette
& Woods Inc., which specializes in financial stocks.
Wells Fargo and U.S. Bancorp said they had not originated the
mortgages, nor serviced them. The investors who bought the
mortgage-backed securities own the foreclosed properties. As such,
"this judgment has no financial impact on U.S. Bancorp," a
spokesman said. "Our role in this case is solely as trustee."
Wells Fargo said it "expects the entities who service these
loans to abide by all applicable state laws, including those laws
that govern foreclosure sales." In the Massachusetts cases, those
mortgages were serviced by Option One Mortgage Corp., then unit of
H&R Block Inc. (HRB).
American Home Mortgage Servicing Inc., the independent servicing
company that services the mortgages now, said Friday's ruling
"confirms that the securitization processes...are sound" and the
"decision is of limited applicability because it is based on law
that is unique and specific to Massachusetts."
Paul Miller, a bank stock analyst at FBR Capital Markets, said
the court's decision cast uncertainty on how lingering foreclosure
issues will affect banks. Miller had previously estimated an
industry cost of $10 billion related just to the resolution of the
robo-signing issue raised last fall. The Massachusetts court
decision may encourage other homeowners to contest their
foreclosures, raising the overall potential litigation costs to the
industry. There are many other such cases pending in other states,
Miller added. "This is really the first high profile case where the
foreclosure process is coming under scrutiny," Miller said in an
interview.
In the Massachusetts decision, the judges pointed out the
long-standing rules involving procedures for lenders to follow in a
state in which the courts are not required to sign off on
foreclosures. The banks failed to follow the rules, they said. One
justice criticized the "utter carelessness with which the
plaintiffs documented the titles to their assets."
Stuart Rossman, the director of litigation at the National
Consumer Law Center, which filed a friend of the court brief in the
Massachusetts case, said it's not simple quibbling over whether
banks dotted the i's and crossed the t's. Lack of attention to
details "throws the legitimacy of the entire process into
question," he said. "It's like being a little pregnant."
In contrast, the court in Maine was willing to overlook a
procedural problem in a foreclosure. The Maine court agreed that
J.P. Morgan improperly filed a foreclosure complaint on the
homeowner in 2009 a month before it was assigned the loan, but
since it fixed that deficiency before moving for summary judgment
in 2010, and the homeowner didn't object, it could move
forward.
Some analysts said the Massachusetts ruling wouldn't set a
precedent. Betsy Graseck, an analyst with Morgan Stanley, wrote
Friday, "this is a procedural judgment, not a systemic judgment...
This judgment is not saying the foreclosure process is flawed." As
such, investors overreacted, she wrote.
The ruling by The Supreme Judicial Court in Boston affirmed a
lower court ruling. The banks, acting as trustees on behalf of the
investors in mortgage-backed securities, had sought to clarify that
the two foreclosures were proper to obtain title insurance.
In the ruling, the court said, "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."
-By Matthias Rieker and Liz Moyer, Dow Jones Newswires;
212-416-2471; matthias.rieker@dowjones.com
--Corrie Driebusch in New York contributed to this article.
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