The Supreme Judicial Court of Massachusetts upheld a lower court's decision to void two foreclosures where the mortgage backed security trust failed to properly demonstrate that it owned or "held" the mortgage note at the time it started the foreclosure process.  While this case is not binding upon California courts and involved Massachusetts law, the holding demonstrates the same legal concepts in play in California.  If you are not familiar with this high level ruling, check out the article below with summarizes the case holding at http://www.msnbc.msn.com/id/40965934/ns/business-real_estate/from/toolbar. 

The laws that address how mortgages are supposed to be legally transferred vary from state to state but are rooted in English common law.  Laws related to the transfers of "negotiable instruments" are codified in the Uniform Commercial Code [UCC].  California has adopted most of the law contained in the UCC and the California Commercial Code can be viewed at:  http://www.leginfo.ca.gov/cgi-bin/calawquery?codesection=com&codebody=&hits=20.

Transferring a mortgage Note is like transferring a personal check.  If you hold someone's check, you can indorse it and deliver it to another person who can than cash it.  Mortgage securitization typically involves pooling 5,000 or so mortgage Notes under the ownership of a mortgage trust.  Trust investors may pay a billion dollars for the right to receive the combined stream of mortgage payments for 30 or 40 years into the future.  Therefore, each of the 5000 notes are supposed to be indorsed and delivered to the investment trust.

To protect the investors from the potential bankruptcy of the loan originator, generally speaking, securitized Notes are supposed to be transferred 3 times within 120 days from the time you signed your loan docs, with each ending up in the investment trust.  Each of the 3 transfers of each of the 5,000 mortgages is supposed constitute a real sale.  That's a lot of transactions in a short amount of time all of which involve a lot of labor expenses, fees, notaries, accountants and other costs that have to be paid by the sponsors or creators of the mortgage trust investment and which eat into profit.  What we are learning now....is that the trust sponsors, typically the large lenders like CHASE, Bank of America, Wells Fargo, GMAC and others....kind of skipped these steps.  Instead, the collectively created MERS or the Mortgage Electronic Registration System....a massive database of 65 Million loans.  Instead of following state laws, the mortgage industry decided to create its own, cost effective system for transferring and tracking loans.  As needed, MERS produces "evidence" of loan ownership used to facilitate foreclosure, as is the case in California, "proof" that an investment trust has "standing" in your bankruptcy case.  Courts are only now beginning to question this illegal practice.

The legal doctrines and concepts raised in the Massachusetts case apply in California.  Unfortunately, California judges are only beginning to grasp these concepts.  Remember, California is a non-judicial foreclosure state....therefore no court order is required to foreclose. Its up to you to initiate the fight and petition your local judge to require these investment trusts to prove legal standing to foreclose by demonstrating that they properly and legally acquired your mortgage Note.

http://www.msnbc.msn.com/id/40965934/ns/business-real_estate/from/toolbar.

In a decision that may affect foreclosures nationwide, Massachusetts' highest court voided the seizure of two homes by Wells Fargo & Co and U.S. Bancorp after the banks failed to show they held the mortgages at the time they foreclosed.

Bank shares fell, dragging down the broader U.S. stock market, after the Supreme Judicial Court of Massachusetts on Friday issued its decision, which upheld a lower court ruling.

The unanimous decision is among the earliest to address the validity of foreclosures done without proper documentation. That issue last year prompted an uproar that led lenders such as Bank of America Corp, JPMorgan Chase & Co and Ally Financial Inc to temporarily stop seizing homes.

"A ruling like this will slow down the foreclosure process" for banks, said Marty Mosby, an analyst at Guggenheim Securities. "They're going to have to be really precise and get everything in order. It doesn't leave a lot of wiggle room."

Wells Fargo and U.S. Bancorp lacked authority to foreclose after having "failed to make the required showing that they were the holders of the mortgages at the time of foreclosure," Justice Ralph Gants wrote for the Massachusetts court.

In a concurring opinion, Justice Robert Cordy lambasted "the utter carelessness" that the banks demonstrated in documenting their right to own the properties.

Massachusetts Secretary of State William Galvin said he agrees with the ruling, which he said demonstrates the need for judicial review of foreclosures in the state to give homeowners more protections.

It's up to lawmakers to take action to remove the uncertainty over mortgages raised by the decision, he said. Without legislative action, the court's ruling will have a "chilling effect" on the real estate market, he said.

"The effect is that it throws a monkey wrench into foreclosures," Galvin said. "This is an urgent situation."

Courts in other U.S. states are considering similar cases, and all 50 state attorneys general are examining whether lenders are forcing people out of their homes improperly.

"This decision is going to raise serious problems in hundreds of thousands of foreclosure cases," said homeowner-defense attorney Thomas Cox, a Maine attorney who was one of the first to put the issue in the spotlight. "It has the potential to require that foreclosures be done over, and I think there's going to be significant turmoil nationally. There's going to be major uncertainty."

Leaving paperwork behind
Analysts said the decision may also threaten banks' ability to package mortgages into securities, and may raise the specter that loans transferred improperly will need to be bought back.

"What they were doing was peddling these mortgages and leaving the paperwork behind," said Michael Pill, a partner at Green, Miles, Lipton & Fitz-Gibbon LLP in Northampton, Mass., who represents homeowners and is not involved in the case.

The banks argued that the securitization documents they submitted were sufficient to prove they owned the mortgages before the publication of the notices of sale and the foreclosure sales.

Wells Fargo said in a statement Friday that as trustee of a securitized pool of loans, it expected those servicing the loans to abide by all applicable state laws, including those governing foreclosure sales. The San Francisco bank was a trustee of the securitized trust in question. American Home Mortgage Servicing Inc., was the servicer.

In a separate statement U.S. Bancorp said the judgment has no financial impact on the company. "The issues addressed by the court revolved around the process of servicing the loan on behalf of the securitization trust, which was performed in this case by the servicer, American Home Mortgage," the bank, which is based in Minneapolis, said.

U.S. Bancorp late Friday issued another statement saying that as a trustee of the securitization trust it "has no responsibility for the terms of the underlying mortgage, foreclosure procedure, the conduct of the servicer, the process by which the mortgage is transferred to the trust, or the sufficiency of the mortgage documentation."

American Home Mortgage Servicing, which is based in Coppell, Texas, said in a statement that the "decision is of limited applicability because it is based on law that is unique and specific to Massachusetts. The decision does not extend to foreclosures in other states."

Not immune
In the Massachusetts case, U.S. Bancorp and Wells Fargo had said they controlled through different trusts the respective mortgages of Antonio Ibanez and the married couple Mark and Tammy LaRace, who lost their homes to foreclosure in 2007.

The banks bought the Springfield, Mass., homes in foreclosure, and sought court orders confirming they had title. A lower court judge ruled against them in March 2009, and Friday's decision upheld this ruling.

Massachusetts is one of 27 U.S. states that do not require court approval to foreclose.

"It is the first time the supreme court of a state has looked straight at securitization practices and told the industry, you are not immune from state statutes and homeowner protections," Paul Collier, a lawyer for Ibanez, said in an interview.

The Supreme Judicial Court also rejected the banks' request that the ruling apply only in the future, leaving homeowners who had already been foreclosed upon without a remedy.

"I'm ecstatic," Glenn Russell, a lawyer for the LaRaces, said in an interview. "The fact the decision applies retroactively could mean thousands of homeowners can seek recovery for homes wrongfully foreclosed upon."

Russell said the LaRaces moved back to their home after the 2009 ruling, while Collier said Ibanez has not. "U.S. Bancorp will have to compensate him in exchange for the deed, or will have to walk away," Collier said.

The cases are U.S. Bank N.A. v. Ibanez and Wells Fargo Bank NA v. LaRace et al, Supreme Judicial Court of Massachusetts, No. SJC-10694.