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Massachusetts high court slaps Wells Fargo, U.S. Bank over improper foreclosures

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The highest court in Massachussetts has invalidated foreclosures initiated by Wells Fargo Bank and U.S. Bank, saying the banks failed to prove in court that they they owned the mortgages and thus had legal standing to seize the homes.

The ruling Friday in twin cases involved mortgages that were sold off and pooled with other loans in complex processes to create mortgage-backed securities, a type of bond widely traded by investors worldwide.

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It’s another setback for the home lending industry, which has been rocked by such disclosures as ‘robosigning’ -- the practice at big banks of having employees certify in court to facts underlying foreclosures without taking the time to read the supporting paperwork.

Lenders including Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc.’s GMAC Mortgage unit say they have been redoing the paperwork in those robosigning cases and are proceeding with the foreclosures.

But the issue of whether ownership was properly transferred to firms foreclosing on securitized mortgages appears potentially more problematic. It could affect states such as California, where foreclosures generally are allowed without court approval.

While the foreclosures at issue in Friday’s ruling were made in the names of Wells Fargo and U.S. Bank, neither of those banks had written the mortgages involved. Instead, they were acting as trustees, or financial caretakers, for pools of loans made and serviced by other lenders.

The ramifications of Friday’s ruling by the Supreme Judicial Court in Boston were unclear. A trade group for the mortgage securities industry said the problems merely involved improper paperwork and not the procedures used. But shares of Wells Fargo & Co. and and other participants in the mortgage securitizing and customer-service business traded sharply lower before recovering somewhat later in the day.

U.S. Bancorp spokeswoman Teri Charest said that since the bank was only the trustee for the pool of loans at issue, not the owner of the mortgage, the ruling would not affect its bottom line. Wells Fargo did not immediately respond to a request for comment.

Walter H. Hackett, a Walnut attorney who has represented aggrieved homeowners in mortgage cases, said the principles involved in Massachusetts may well apply in California.

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Hackett said he hoped such rulings would make it easier for distressed borrowers to obtain loan modifications while the mortgage ownership issues are sorted out. He cautioned homeowners, though, not to interpret the court’s opinion as a ‘free house’ ruling absolving delinquent borrowers of their debts.

Christopher Whalen, co-founder of the bank research firm Institutional Risk Analytics, saw less significance in the ruling, calling it ‘media hype over substance.’

‘It will be a mess for banks but in general is not nearly as big a deal as other issues,’ he said.

-- E. Scott Reckard

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