Massachusetts Homeowners May Not Challenge Mortgage Assignments Due to “Securitization Fail”
In a definitive decision from the Massachusetts Appeals Court, the court held that homeowners may not challenge faulty mortgage assignments in securitized loans.
Mortgages are often securitized, bundled into packages containing hundreds or thousands of other mortgages, which are then sold to investors. The securitization process has strict steps that must be complied with, otherwise, arguably, the mortgages were never assigned.
The securitization agreements are called Pooling and Servicing Agreements, or “PSA’s.”
This failure of the mortgage assignment to comply with a PSA is often referred to as “securitization fail.” If an assignment is invalid, then the bank cannot foreclose.
One expert, Adam Levitin, describes this securitization failure as follows:
A residential mortgage securitization is a transaction that involves a series of transfers of two types of documents: mortgage notes (the IOUs made by mortgage borrowers) and mortgages (the security instrument that says the lender may foreclose on the house if the borrower defaults on the note). Ultimately, both the notes and mortgages need to be properly transferred to a trust that will pay for them by issuing securities (backed by the mortgages and notes, hence residential mortgage-backed securities or RMBS). If the notes and mortgages aren’t properly transferred to the trust, then the securities that the trust issues aren’t mortgage-backed and are worthless.
So what this means is that if a securitization transaction did not meet the requirements of the PSA, it is void ….
Despite securitization fail occurring in so many mortgage assignments, the Appeals Court has, with this case, finally and unequivocally rejected homeowners’ right to challenge these bad assignments.
Why? Homeowners do not have “standing” to do so because they are not parties to the securitization agreements. The court explained:
Although a borrower may in some situations “have standing to challenge the validity of the assignments by which [the
foreclosing entity] claims to have acquired the mortgage,” Sullivan v. Kondaur Capital Corp., 85 Mass. App. Ct. 202, 206 (2014), to date these situations have involved an assignor’s asserted lack of authority under State law to make an assignment, not an assignee’s lack of authority under a PSA to accept it. Kondaur Capital Corp. recognized such borrower standing in two circumstances: (1) where the assignor did not also simultaneously hold the note, in claimed violation of Massachusetts law, id. at 209-210, or (2) where the signatory for the assignor was alleged not to have been one of the persons authorized by G. L. c. 183, § 54B, to execute such an assignment. Kondaur Capital Corp., 85 Mass. App. Ct. at 211-213. See Culhane v. Aurora Loan Servs. of Neb., 708 F.3d 282, 291 (1st Cir. 2013) (under Massachusetts law, mortgagor has “circumscribed” standing “to challenge a mortgage assignment as invalid, ineffective, or void [if, say, the assignor had nothing to assign or had no authority to make an assignment to a particular assignee]”); Woods, 733 F.3d at 354.
This decision is probably the final nail in the coffin of homeowners’ ability to make this argument. Indeed, the Appeals Court even said that people who make this argument might be sanctioned!
There are still plenty of ways to challenge an illegal foreclosure, but securitization fail is no longer one of them.
The case is here: Ressler v. Deutsche Bank
If you are facing foreclosure or having problems with your mortgage, bank, or mortgage servicer, contact Culik Law to see if we can help.