Lenders must have paperwork to foreclose, SJC rules

Says future seizures require paperwork

The state’s highest court ruled Friday that lenders must have proper paperwork in hand at the time they complete a foreclosure, but the decision does not apply to seizures that have already taken place, removing a cloud of uncertainty over the status of property titles for thousands of Massachusetts homes.

The state Supreme Judicial Court’s finding came as a relief to real estate industry specialists, who said a retroactive ruling would have created chaos. Because so many home loans were bundled and sold between lenders multiple times during the housing boom, they said, it would be virtually impossible to prove that all paperwork was in place for every transaction.

Lenders said they were following common practices at the time, but housing advocates said banks were simply cutting corners by taking back homes without proper documentation.


“Virtually every mortgage foreclosure that had been done since the enactment of the foreclosure statute could have been thrown into question,” said Christopher Pitt, president of the Real Estate Bar Association for Massachusetts.

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The case the seven justices ruled on Friday, Eaton v. Federal National Mortgage Association, or Fannie Mae, centered on two documents borrowers sign to get a home loan. The first is the mortgage itself, which establishes a lender’s right to take back a property; the second is the promissory note signed by a borrower that says they agree to pay the debt. The servicer had the mortgage at the time it foreclosed on the borrower, but didn’t possess the note.

A lower court ruled last year a lender must physically hold the note, but Justice Margot Botsford, who authored the high court’s unanimous decision, said the lender only has to prove it is an “authorized agent of the note holder.”

Botsford also said the court decided to apply the ruling to foreclosures from today forward because the state’s “recording system has never required mortgage [promissory] notes to be recorded” and that regulations governing foreclosure proceedings were “not free of ambiguity.” Many real estate lawyers have argued that lenders didn’t believe they needed to possess the notes at the time of a property take-back.

In a statement, Fannie Mae said, “Today’s ruling will, hopefully, bring clarity and certainty to the foreclosure process in Massachusetts, which will help the state work through its ongoing housing challenges.”


Sam Levine, an attorney who formerly worked for the Harvard Legal Aid Bureau — which represented the homeowner in the case — said he was disappointed that the finding was not made retroactive. But Levine still considers it a victory for homeowners.

“It will prevent abuses in the future,” he said.

Thousands of Massachusetts homeowners are still struggling to save their homes from foreclosure. In the first five months of this year, lenders filed 7,822 petitions to foreclose, a 77 percent increase compared with the same period in 2011, according to Warren Group, a Boston-based company that tracks local real estate. A petition is the first step in the process.

Massachusetts Attorney General Martha Coakley said the ruling bolsters arguments she made in a pending Suffolk Superior Court case against national banks regarding unlawful foreclosures.

“The SJC once again has reeled in overzealous national banks from foreclosing on a person’s home without following the statutory protections guaranteed to borrowers,” Coakley said. “We are moving forward with our case to hold banks accountable for prior bad conduct and to make clear what constitutes unlawful foreclosure practices moving forward.”


But Framingham attorney Richard Vetstein, author of the Massachusetts Real Estate Law Blog, said the decision will deflate the “show-me-the-note” efforts of housing advocates seeking to contest foreclosures. Still, he said, the top court left enough issues unclear that lawyers will find ways to fight property seizures.

“There’s going to be lots more litigation coming after this,” Vetstein said.

Nantucket attorney Jamie Ranney, who represents clients trying to stave off foreclosure, said many loans “have been securitized, sold, transferred, assigned, etc., multiple times and many pieces of the ‘chain’ are missing or involve bankrupt, shuttered, and defunct entities.” Ranney said that when a lender says it has the right to foreclose, he always responds the same way: “Prove it.”

Indeed, finding that documentation can be difficult. The Eaton issue began when Henrietta Eaton, 57, of Roslindale, refinanced her mortgage in September 2007 with BankUnited, according to the ruling. BankUnited named the Virginia-based company Mortgage Electronic Registration Systems Inc., or MERS, as the official holder of the mortgage.

Two years later, MERS transferred the mortgage to Green Tree in Minnesota and recorded the change in the Suffolk County Registry of Deeds. But the record does not show any transfer of the note, the court said.

When Eaton failed to pay her mortgage, Green Tree foreclosed upon the property and sold it to Fannie Mae. The lender moved to evict Eaton and she appealed, claiming the seizure was invalid because Green Tree did not hold the note when it foreclosed, as required by state law. A lower court judge ruled in her favor.

Botsford said the new ruling — although not retroactive — does apply to Eaton’s case and sent her appeal back to the lower court.

Thomas L. Guidi, chairman of the Massachusetts Bar Association’s Property Law Section, said the note issue was just a tactic used by desperate homeowners to attack foreclosures on a technicality. A retroactive ruling, he said, would have been disastrous.

“It would have been an absolute nightmare with no way to cure it,’’ he said. “Now anybody starting a foreclosure from today going forward has to find a way to indicate on record that the mortgage holder is holding the note or acting on behalf of the note holder.”

Jenifer B. McKim can be reached at