When purchasing foreclosed properties at foreclosure auctions or later purchasing foreclosed properties from the bank which bought the property back at its own foreclosure sale, the old chestnut caveat emptor (or buyer beware) has taken on new meaning in light of several recent Massachusetts cases challenging the validity of certain foreclosure sales.
The issue raised is whether, at the time of the commencement of the foreclosure process, the foreclosing entity or bank actually owned the mortgage it foreclosed. In the past few decades, many homeowners have experienced the phenomenon of the secondary mortgage market by the receipt of at least one, and perhaps multiple notices that redirect monthly mortgage payments to a new entity. These instructions are the result of mortgages being sold by the original holder to third parties. When these sales occur the underlying loan documentation, including the Promissory Note and the Mortgage Deed, are supposed to be transferred to the new owner as holder. The conventional manner for this transfer is by endorsing the original Promissory Note to the new owner (much like endorsing a check), and by assigning the Mortgage Deed to the new owner or holder by a document known as an Assignment. The Assignment, recorded in the Registry of Deeds, puts the homeowner (and any other interested party wishing to check the public records) on notice as to the identity of the legal owner of the mortgage.
As the practice of securitizing large pools of packaged mortgage loans and then breaking them up into derivative-type securities became increasingly popular among financial institutions in the past few years (the “slicing and dicing” we have all read about in the newspapers), the paperwork documenting these transactions seems often to have gotten lost in the shuffle. The result is that many mortgage foreclosures are being brought by entities which do not have legal title to the mortgage because an Assignment naming them as the owner has not been recorded prior to the commencement of the foreclosure process.
The Massachusetts cases, currently on appeal, held that the foreclosures were defective based on a strict reading of the Massachusetts foreclosure statute since while the mortgage may have been sold to the foreclosing entity, that entity did not have an assignment of the mortgage. Recognizing that mortgage holders have the right to pursue their remedy of foreclosure when homeowners are in default, the Court also emphasized the statute’s consumer-protection feature upholding the requirement that the original notice commencing the foreclosure process identify “the holder of the mortgage” to the homeowner. Concluding that assignments to the foreclosing entity recorded after the foreclosure sale failed to properly identify the owner of the mortgage to satisfy the requirements of the foreclosure statute, the Court invalidated the foreclosure sales.
Certain national title insurance companies which insure titles in both New Hampshire and Massachusetts are currently refusing to insure titles out of foreclosure sales under the circumstances described above. Their position is based on the fact that the New Hampshire foreclosure statute is very similar to the Massachusetts statute Therefore unless the ruling on appeal in the Massachusetts cases reverses the lower court ruling, the underwriting risk is simply too great for the title insurance companies to bear.
In light of the uncertainty of titles to properties sold at or after foreclosure sales in circumstances with “missing” assignments, all interested purchasers would be well advised to consult with legal counsel before entering this arena.
Beth H. Davis is a director at Hamblett & Kerrigan, P.A. Her present practice focuses on real estate and business transactions. You can reach Attorney Davis by e-mail at [email protected].