In two recent separate cases, Massachusetts’ highest court voided the seizure of two homes by Wells Fargo and US Bancorp. The banks failed to show necessary documentation that they held the mortgages at the time they foreclosed. This is the first such decision in the country.
Although the decision only directly affects Massachusetts, Massachusetts has similar laws to other states, and the underlying fact pattern is common. Consequently, this ruling will probably be repeated in other states, and the decision has national importance.
Here are some of the ramifications:
- Foreclosures will slow down while mortgage holders collect the documentation that should have existed all along. Borrowers will more frequently challenge foreclosures to force banks to gather this documentation. Although the banks will likely be able to produce the additional paperwork, this will take additional time. Meanwhile, the foreclosure is stopped and the occupant gets more free time in the home. The effect on bank earnings is obvious.
- Expect title insurers to be more careful in insuring title on home purchased out of foreclosure. This will slow down the process further, which in turn may make foreclosed homes less attractive for would-be buyers.
- Both of these loans were part of securitizations. The Court’s ruling and those like it will improve the claims of those who bought these investments. No doubt, the investments were not accurately described in the securitization contracts.
- Because foreclosed homes will be dealt with more slowly, the effect of these “underwater” homes on the real estate market will take longer to be addresses. While this lessens the short-term effect of forced sales and foreclosures on the real estate market, the effect will be felt for a longer period.