The foreclosure crisis in Massachusetts is not over. Massachusetts foreclosure rates continue to climb, depressing values of surrounding homes, creating urban blight, decreasing the economic health of predominantly low and moderate income communities, especially communities of color, and generally negatively affecting economic vitality and residential lending in Massachusetts. Foreclosures affect us all. So what can be done? It is time to look seriously at adopting judicial foreclosure.
Almost all foreclosures in Massachusetts go forward without an opportunity for the homeowners to challenge the foreclosure or present important defenses, including: that they do not owe what is claimed; that the foreclosing entity does not own the mortgage or note; or that the mortgage was obtained by fraud.
Oftentimes, challenges to an unlawful foreclosure are not made until the owner is being evicted – the first time there is an opportunity for a hearing before a judge. Ironically, Massachusetts law offers greater protection for rental tenants in Summary Process cases than it does to former homeowners facing foreclosure.
More than sixty percent of the US population benefits from the opportunity to be heard that judicial foreclosure provides. As a state that values transparency and due process, why is Massachusetts so backward in its foreclosure laws?
Non-judicial foreclosure was traditionally allowed only because foreclosing entities exercised strict compliance in every step of the foreclosure proceeding. This was an honor system, predicated upon lenders maintaining high standards of legal precision in writing, conveying and, if necessary, foreclosing upon mortgages. The foreclosure process therefore did not require a judge’s supervision.
As the residential mortgage market became more complex—including through securitization, assignment of mortgages into trusts, and consolidation of banks into large entities—it also became clear that banks and foreclosure firms often foreclosed carelessly and did not strictly follow the foreclosure statutes or power of sale provisions of the mortgages.
This has been made clear by the many SJC cases involving banks and foreclosure firms that did not comply with the strict procedural requirements. Specifically, beginning with U.S. Bank Nat. Ass’n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40 (2011), the Supreme Judicial Court has ruled on a number of foreclosure cases, finding that banks and mortgage holders failed to properly foreclose because: they did not hold the mortgage and note at the time of the foreclosure; they did not send the appropriate notices required by statute; or they failed in some other way to strictly comply with power of sale provisions of the mortgage. The lower court decision in Ibanez stated that many lenders have been allowed “to take someone’s home without any demonstrable right to do so.” Judicial foreclosure is needed to ensure this does not continue to happen. The absence of judicial oversight over foreclosures in Massachusetts has resulted in many foreclosures being invalidated, creating a slew of foreclosed homes with title problems, unnecessarily displacing homeowners, destabilizing neighborhoods, and breeding mistrust and ill-will for mortgage lenders. Despite the legislature adding new notice requirements to Mass. G.L. c.244, this did not cure the problem of unlawful foreclosures. In fact, the number of foreclosures in Massachusetts has been increasing and many continue to be improper.
One study by the Center for Responsible Lending found that, “on average, families affected by nearby foreclosures have already lost or will lose $21,077 in household wealth, representing 7.2 percent of their home value, by virtue of being in close proximity to foreclosures.” Another study by the Alliance for a Just Society estimated lost wealth due to foreclosures at $192.6 billion, an average of $1,700 in lost wealth per U.S. household and that there was a disproportionate effect on communities of color.
The sloppiness and uncertainty created by the non-judicially regulated process has led even some title insurance companies and real estate lawyers in Massachusetts to complain and reconsider the merits of judicial foreclosure. In the wake of some of the recent foreclosure decisions such as Ibanez and Pinti v. Emigrant Mortgage Co., Inc., 472 Mass. 226 (2015), some title insurers said they would change their insurance contracts to require a judicial decision. In fact, some even called for judicial foreclosure. See Rich Vetstein, Title Insurance Companies Balk At Insuring Foreclosed Properties, The Massachusetts Real Estate Blog (Sept. 3, 2015).
In addition, the absence of judicial foreclosure has overburdened the Housing and District Courts that hear Summary Process cases because this is the first opportunity that former homeowners have to challenge the underlying validity of the foreclosure auction and sale. This system clogs up the Summary Process docket and forces often complex litigation into courts that are set up to adjudicate simple and straightforward evictions of tenants. For these cases, this has taken the “summary” out of summary process!
From colonial times, Massachusetts has been a leader in protecting the rights of its residents to due process of law. The Massachusetts Constitution’s due process clause was a model for that of the U.S. Constitution. Yet, regrettably, Massachusetts now lags behind in protecting these rights in the foreclosure process. It is clear the honor system of non-judicial foreclosure has failed: This is especially so for homeowners who have wrongfully been foreclosed upon and for unsuspecting third party buyers who have had to face summary process eviction claims. We urge Massachusetts to join with the over 20 other states that mandate judicial foreclosure in affording homeowners a fair hearing and the right to a day in court, in order to ensure that the law has been followed before they lose their homes. It is a matter of fundamental fairness to extend this basic protection to citizens.
Nadine Cohen is the Managing Attorney of the Consumer Rights Unit of Greater Boston Legal Services. She has been representing homeowners in foreclosure cases since the foreclosure crisis began in 2008.
Todd S. Kaplan is a Senior Attorney at Greater Boston Legal Services. He has worked at GBLS for over 19 years and has worked in the Consumer Rights Unit for over 5 years representing homeowners pre and post-foreclosure. Prior to that he represented tenants facing eviction and was part of a team of attorneys that resulted in a landmark settlement with the MBTA for persons with disabilities.