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Retroactively Naked?

The Massachusetts Supreme Judicial Court once again finds itself considering a case that may have national implications. For close observers of the foreclosure crisis, you may remember the Massachusetts court’s opinion early last year in Ibanez. We blogged on the significance of that case, as well, for it was the first ruling by a state high court on the issue of whether banks can foreclose on homeowners if they, the banks, can’t prove they hold the mortgages due to shoddy or incomplete documentation.

Now comes Eaton v. Federal National Mortgage Association (Fannie Mae). This case is another in a series challenging the right of a party trying to foreclose on a property when ownership and/or the ability to prove ownership through proper paperwork are in question.

The intriguing wrinkle in Eaton is whether or not the foreclosure can be challenged and compensation enforced retroactively or whether such retroactivity exacts too high a cost or permanently clouds title.

The details of the Eaton case are fairly straightforward:

They involve “a note given by Henrietta Eaton to BankUnited and a contemporaneous mortgage to Mortgage Electronic Registration Systems (MERS).  The mortgage was later assigned by MERS to Green Tree servicing and the assignment did not reference the note.  The Eaton Home was subsequently foreclosed upon by Green Tree which assigned its rights under the foreclosure to Fannie Mae which sought to evict Eaton.  Eaton sued, charging that the loan servicer did not hold the note proving that Eaton was obliged to pay the mortgage.”

Nearly a dozen amicus briefs have been filed in Eaton addressing whether the decision should apply prospectively or retroactively.

In an unprecedented move, the Federal Housing Finance Agency (FHFA) weighed in:

FHFA asked the court to apply any decision to uphold the lower court decision prospectively rather than retrospectively.  It’s argument:  applying a ruling retroactively would be “a direct threat to orderly operation of the mortgage market.”   FHFA also said “Retroactive application of a decision requiring unity of the note and the mortgage for a valid foreclosure would impose costs on U.S. Taxpayers and would frustrate the statutory objectives of Conservatorship.”

“There presently is no mechanism or requirement under Massachusetts law to record the identity of the person entitled to enforce the note at the time of foreclosure,” FHFA said.  “Therefore, a retroactive rule requiring unity of the note and mortgage for a valid foreclosure would potentially call into question the title of any property with a foreclosure in its chain of title within at least the last twenty years.”

Opponents, however, argue that the legal principle that a party cannot foreclose on a “naked mortgage” (one separated from the note) is so well established in property law as to remove it from controversy.

How the Massachusetts court decides could lead to a surge in claims from homeowners looking to overturn seizures, affecting the fate of tens of thousands of homes foreclosed on in that state in the last few years. How this decision could ripple out and influence how other states facing a similar situation handle the matter is also worthy of our attention.

Please be advised that this article does not constitute legal advice nor does it provide any basis to form an attorney-client relationship. Nothing in this article should be copied without the express permission of the author.

Mr. Hounchell has a law degree from The University of Florida College of Law and he is a principal in The Law Offices Charles A. Hounchell, P.A., in Tampa, Florida. Mr. Hounchell earned his undergraduate degree from The George Washington University in Washington D.C. and he obtained his MBA in International Management from the American Graduate School of International Management (“Thunderbird”) in Glendale, Arizona.

Mr. Hounchell is a licensed title insurance agent and a real estate agent with Smith and Associates, Inc. http://www.smithandassociates.com/; http://www.livecasanova.com/. He has lived in many different countries, including Spain, Brazil, Argentina, Mexico and Germany and he speaks Spanish and Portuguese. A significant portion of Mr. Hounchell’s law practice is concentrated on Real Estate Law. He can be reached at 813-230-3376 or charlie@flpropertylaw.com.