Shock waves

This is pretty big. There’s lots of talk on the econoblogs as to whether other states like California, which like Massachusetts, also operates under a non-judicial foreclosure system, are going to follow the lead of Friday’s Massachusetts Supreme Court ruling. The court has a stellar reputation, and that’s going to hold weight on a lot of other judicial circuits. That means that while the repercussions of the ruling are limited to Massachusetts, odds are high that this will quickly be adopted as a template for other states :

NEW YORK, Jan 7 (Reuters) – In a decision that may slow foreclosures nationwide, Massachusetts’ highest court voided the seizure of two homes by Wells Fargo & Co (WFC.N) and US Bancorp (USB.N) after the banks failed to show they held the mortgages at the time they foreclosed.

Bank shares fell, weighing on broader stock indexes, on fears the decision could threaten lenders’ ability to work through hundreds of thousands of pending foreclosures.

The Supreme Judicial Court of Massachusetts’ unanimous decision on Friday upheld a lower court ruling. It is among the earliest cases to address the validity of foreclosures done without proper documentation.

That issue, including the use of “robo-signers” who approved foreclosure documents without reviewing them, last year prompted an uproar that led lenders such as Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N) and Ally Financial Inc to temporarily stop seizing homes.

“A ruling like this will slow down the foreclosure process” for lenders, said Marty Mosby, an analyst at Guggenheim Securities in Memphis, Tennessee. “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.

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.

Friday’s decision applies in Massachusetts, and need not be followed by federal judges or by courts in other states.

This is going to mean a HUGE legal mess for a lot of people in the Bay State — except homeowners facing foreclosure, who will get to hit the reset button.

Mortgage companies who lent money to buyers purchasing foreclosed homes with this type of title defect, and the title insurers on those deals? Not so good. (By the way, the decision was applied retroactively.)

If you bought a foreclosed home that has this kind of title issue, you no longer own your home. The previous owner still does. If you don’t have title insurance, you’re doubly screwed. You probably can’t sell or get an equity loan for a long, long time. You can sue the banks, or the attorneys, or try to get the owner to sign over the deed. If you do have title insurance, you can file a claim. Go find a good lawyer.

A tiny bit of wiggle room in the ruling means some mortgages with proper documents may survive.

We’re going to see a lot of class action suits against the banks the lawyers who were supposed to draft the documents, and the foreclosure attorneys. And as I said, the investors of mortgage backed securities will be looking to sue the mortgage trusts — and the companies that were servicing the pools.