The economic crisis gripping the United States began when large numbers of homeowners defaulted on poorly underwritten subprime mortgage loans. Demand from Wall Street seduced mortgage lenders, brokers, and other players to churn out mortgage loans in extraordinary numbers. Securitization, the process of utilizing mortgage loans to back investment instruments, not only fanned the fire; the parties to these deals often handled and transferred the legally important documents that secure the resulting investments—the loan notes and mortgages—in a careless and sometimes fraudulent manner.
The consequences of this behavior are now becoming evident. All over the country, courts are scrutinizing whether the parties initiating foreclosures against homeowners have the right to take this action when authority to enforce the note and mortgage is absent. Without this right, foreclosure sales can be reversed. This concern is most acute in the majority of states where foreclosures occur with little or no judicial oversight before the sale, such as Massachusetts. Due to the recent decision in U.S. Bank N.A. v. Ibanez, in which the Supreme Judicial Court voided two foreclosure sales where the foreclosing parties did not hold the mortgage, Massachusetts is the focal jurisdiction where an important conflict is unfolding.
This article explores the extent to which the Ibanez ruling may influence the jurisprudence in other non-judicial foreclosure states and the likelihood that clear title to foreclosed properties is jeopardized by the shoddy handling of notes and mortgages. I focus on Arizona, California, Georgia, and Nevada because they permit non-judicial foreclosures and they are experiencing high seriously delinquent and foreclosure rates. After comparing the law in these states to that of Massachusetts, I conclude that Ibanez will have little effect in Arizona but should be influential in the other states, to varying degrees. As a result, property title trouble is likely in Georgia and Nevada, and to a lesser extent in California.
The article also provides a roadmap for others to assess the extent to which title to properties purchased at foreclosure sales or from lenders’ REO inventories might be defective in other states. Finally, I address the potential consequences of reversing foreclosure sales and responds to the securitization industry’s worry about homeowners getting free houses.