A recent ruling from the Massachusetts Supreme Court sent Wells Fargo stock falling on Wall Street, as the court ruled that the bank had failed to prove that it actually owned the promissory notes which it had already used to foreclose on homes – resulting in the properties being returned to the owners.

A Massachusetts lower court had initially allowed the foreclosures to proceed, giving Wells Fargo seven months to locate and bring forward the documentation confirming its claim of ownership of the notes.  To the judge’s dismay, even after that lengthy time, the bank could not produce the legally required documentation to show that it owned the notes, or to show that it had confirmed its status on the public land records.  The bank pointed to the now common practice of loans being made by one bank, then bundled for sale and repeated resale in the market for what are called mortgage-backed securities.  Those securities are now infamous for their boom-and-bust cycle that fueled the country’s plunge into a deep recession in 2008.

What banks have been doing is appointing a company that specializes in serving as the nominated representative for note holders, even though that company, Mortgage Electronic Registration Systems (“MERS”), typically cannot state at any given time who the current owner of a mortgage is.  The Massachusetts court did not bar the practice of reliance upon MERS, but did rule that if banks chose to ignore the law’s requirements for documenting and recording transactions on the public records for business reasons, they may put their ability to enforce their rights as secured creditors at risk.

While this ruling was highly publicized, it is far from the first court ruling of its kind.  In 2009, MeyerGoergen successfully represented a private lender who sought to foreclose on a property subject to a deed of trust to secure the homeowners’ note to the lender.  Unknown to the private lender, the homeowners had forged a release of their deed of trust and recorded it at the courthouse.  The homeowners then took out a new loan from a bank, pocketing the new money without paying off the private lender first.  The forgery was not discovered until the homeowners eventually stopped making their monthly payments to the private lender.

Initially, we successfully argued that the private lender’s rights were still intact, because the fraudulent release had no legal effect.  But when our client started foreclosure proceedings, Countrywide Home Loans came forward to claim that it had acquired the second commercial mortgage loan, and that it believed its rights were superior to those of the private lender.  New Kent Circuit Court Judge Thomas Hoover ruled, however, that Countrywide’s failure to file a notice of its acquisition of the loan on the land records until after his prior ruling meant that Countrywide’s lien was inferior to the court order he had previously issued – essentially binding Countrywide to the prior ruling even though it had not been a party before the court at that time.

Countrywide chose not to appeal Judge Hoover’s ruling at that time, largely because Countrywide’s collapse and bankruptcy overtook our local events.  As a result, this case did not get the nationwide publicity that the Massachusetts ruling has received.

But when it comes to discussion of which state was first to hold lenders and MERS accountable for their documentation in foreclosures, as has so often been the case throughout history, Virginia got there ahead of Massachusetts.

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