Top Massachusetts court limits foreclosure relief
(Reuters) - The highest court in Massachusetts ruled that lenders must have proper paperwork to conduct foreclosures but said its decision applies only to future property seizures, averting a potential flood of problems for banks trying to take possession of homes.
Friday's unanimous decision by the Massachusetts Supreme Judicial Court, in a case that had drawn national attention, avoids the prospect that title could be clouded on thousands of recently foreclosed properties in the state.
It said a lender must in the future have a borrower's underlying note, or act on behalf of someone who does, in order to foreclose. The court rejected a lower court ruling that the lender possess both a borrower's mortgage and note.
The decision should prompt "a big sigh of relief" for lenders, said Adam Levitin, a Georgetown Law School professor.
"Had foreclosures been ruled invalid retrospectively, there could have been tremendous liability" for lenders, he said. "They would have been liable for selling thousands of properties they did not own, and thousands of wrongful evictions."
The decision is also a victory for the Federal Housing Finance Agency, which oversees mortgage financiers Fannie Mae and Freddie Mac.
It had argued that a ruling that applied retroactively threatened the orderly operation of the mortgage market, and could have imposed "dramatic" costs on taxpayers.
Banks often split notes from mortgages when packaging loans into securities, and it sometimes becomes difficult to track the documentation after this occurs.
With hundreds of thousands of homes going into foreclosure each year, the securitization process has led to many lawsuits by homeowners who complain that their lenders lack the paperwork, and thus the legal right, to foreclose.
The Massachusetts case had been brought by Henrietta Eaton, who sought to void a 2010 foreclosure proceeding by arguing that Green Tree Servicing LLC, which collected payments on a $145,000 loan for her Boston home, had her mortgage but not the underlying promissory note.
While Friday's decision applies only in Massachusetts, it is a precedent that homeowners in other states may now use.
"It is a victory for homeowners going forward, and can help them in reaching settlements or loan modifications to avoid foreclosure," said Sam Levine, a recent Harvard Law School graduate who argued Eaton's appeal.
"But we are disappointed that people who already lost their homes to foreclosure will not have any recourse."
An FHFA spokeswoman said the regulator is pleased that the rule will not apply retroactively, which "would have wreaked havoc with the operation of title recording after foreclosures."
Falling housing prices and elevated foreclosure rates remain drags on the U.S. economy despite February's $25 billion settlement among five big mortgage lenders and state and federal officials to address alleged mortgage abuses.
Foreclosure starts, defined as default notices or scheduled auctions, were filed on 109,051 U.S. properties in May, up 12 percent from April, according to RealtyTrac Inc. An average of 1.6 million starts were brought annually in the last five years.
RELYING ON OLD LAW
In Friday's decision, Justice Margot Botsford wrote that applying the new rule retroactively could cause "significant difficulties" in deciding who has good title to a property.
She also said she had no reason to doubt that lenders had been exercising good faith in earlier foreclosures, and relying on existing law.
"There may be particular reason to give a decision prospective effect where -- as the argument is made here -- prior law is of questionable prognosticative value," she wrote.
The Massachusetts court did grant relief to Eaton, saying the new rule should apply to her because she had brought the case, and that she may renew her efforts to keep her home.
Levine said Massachusetts homeowners could also be aided if state legislators were able to pass a bill requiring mediation of lender-homeowner disputes.
The case is Eaton v. Federal National Mortgage Ass'n et al, Massachusetts Supreme Judicial Court, No. SJC-11041.
(Reporting By Jonathan Stempel in New York; Editing by Kenneth Barry and Dan Grebler)
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