Two Banks Lose in Foreclosure Cases

The highest court in Massachusetts ruled against Wells Fargo & Co. and U.S. Bancorp in two foreclosure cases that cast doubt over whether some home loans were properly handled when packaged into securitizations.

Justices in the state’s Supreme Judicial Court upheld a lower court’s decision to void foreclosure sales of two homes in Springfield, because owners of the loans couldn’t prove that the mortgages had been assigned to them. Both loans were assembled into mortgage-backed securities sold to investors.
 
A Wells Fargo branch in San Francisco. Shares of the bank fell 2% on the ruling, and other banks saw share-price losses as well.

Bank stocks fell on worries that Friday’s ruling could make it harder for financial firms to foreclose on mortgages that wound up in securities. The defeat also might provide ammunition to mortgage-bond investors who have accused and even sued servicers for what the investors claim is systematically shoddy loan documentation.

The ruling against the fourth- and fifth-largest U.S. banks in assets came amid a delay in the crafting of new standards for mortgage lending as top U.S. regulators clash over protections for homeowners facing foreclosure.

The logjam is a sign of how strongly the financial crisis still looms as regulators work to implement the Dodd-Frank financial-overhaul law passed last summer. To help prevent another housing collapse, lawmakers included a provision requiring issuers of mortgage-backed securities to keep 5% of the risk, since investors would suffer losses when loans go bad.

Six federal agencies must sign off on the provision before it is released for comment, but their tentative goal of completing a proposal by the end of December came and went with no agreement. The delay was caused partly by disagreement about whether to include new protections for homeowners on the brink of foreclosure within this so-called risk-retention rule or separately, people familiar with the negotiations said. The Dodd-Frank law requires that the regulators finalize the risk-retention requirement by April.

The snag indicates that implementing the changes triggered by the new law could be messy as regulators wrestle to reach consensus. Friday’s court ruling brought even more anxiety to the mortgage-securitization market.

The Massachusetts case is a closely watched example of what some mortgage experts describe as “show-me-the-paper” cases over widely used procedures for transferring loans after they are made. Individual loans often are sold to an investor, with the new owner’s name left blank in loan documents to minimize paperwork hassles as the loan subsequently changes hands before being combined with other loans into mortgage-backed securities.

Justice Robert J. Cordy concluded in a concurring opinion that the two banks showed “utter carelessness” when they “documented the titles to their assets.” If the ruling is followed by lower courts in Massachusetts or emboldens borrowers and investors elsewhere, it could delay or even derail some foreclosures. That would make it harder for banks to recoup loan losses by selling homes that are seized through foreclosure proceedings.

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