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Image: Boston Real Estate Observer On June 22nd, 2012 the Massachusetts supreme court ruled on a very simple principle, that is to say a foreclosure by sale requires the foreclosing mortgagee, at the time of the sale, to hold both the mortgage and the underlying mortgage note.  the Case is Henrietta Eaton vs. Federal National Mortgage Association.

 

This may seem simple enough to the casual reader, except virtually no entities foreclosing on securitized mortgages in Massachusetts or elsewhere in the last five years (when the question has been especially relevant) possessed both of these items.

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KranzConsoleOn Oct. 18th, 2011 the Massachusetts Supreme Judicial Court handed down their decision in the FRANCIS J. BEVILACQUA, THIRD vs. PABLO RODRIGUEZ – and in a moment, essentially made foreclosure sales in the commonwealth over the last five years wholly void. However, some of the more polite headlines, undoubtedly in the interest of not causing wide spread panic simply put it "SJC puts foreclosure sales in doubt" or "Buyer Can't Sue After Bad Foreclosure Sale"

 

In essence, the ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years), did not in fact have title to those properties.

 

Given the fact that more than two-thirds of all real estate transactions in the last five years have also been foreclosed properties, this creates a small problem.

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Background: A post Ibanez world

 

In January the Massachusetts supreme judicial court held in US Bank National Association vs. Antonio Ibanez that a note holder may not foreclose on a property in order to redeem a debt, if they are not also the holder of a valid mortgage (that is to say also with a valid assignment). We outlined the details of this case and its implications in our article "Ibanez – Denying the Antecedent, Suppressing the Evidence and one big fat Red Herring" on January 11th, 2011.

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ethics_signIs it ethical for the American homeowner whose mortgage has been securitized to default, even If they are not financially distressed?  

 

First, consider it is unlikely that marketable, fee simple, insurable title can be obtained as a result of fulfilling the obligations of the related promissory note.  On the contrary the titles to some 60 million homes in America are badly clouded.  Secondly, encouraging investment in an asset class that has been artificially inflated, then deliberately destroying the price of the asset, as part of a separate profit making scheme is unethical, and any agreement based on this type of fraud is grounds to consider the original debt instrument used in the agreement null and void.  Fortunately these grounds are unnecessary, as increasingly US courts are ruling that these mortgages are already invalid for numerous other reasons.

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red_herring_1The recent decision by the Massachusetts Supreme Judicial court helped focus a few important questions on the foreclosure crisis in America, but it is also being used as a Red Herring, amongst other things, by the American Securitization Forum and their Bank owners.   The Massachusetts land court decision, which was affirmed by the Supreme Judicial Court were correct, but only addressed a narrow specter of the foreclosure crisis in our country and the underlying violations of long standing property law.   The case does point however to much more fundamental issues.  

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pyramid_scheme We had planned to write a blog post on systemic fraud in the US financial infrastructure, particularly as it relates to the mortgage industry, mortgage origination and servicing fraud.  However, today a very good article was published by Matt Taibbi of Rolling Stone which includes colorful first-hand accounts that vividly illustrates the problem on both a macro and micro scale. 
 
 
The plan was to outline these same points regarding the device of “securitization” of mortgage lending through derivatives that allow the formation of a traditional “pyramid” scheme, or what we prefer to call in the US a “Ponzi” scheme – perhaps, within a few years we may just opt to drop the name “Ponzi” altogether in favor of something like “business model for US banks in the early 21st century”.  However, rather than reproduce what Rolling Stone has already done, we thought it would be a better to simply promote the existing article, with a few additional and brief thoughts on what we feel is likely the only solution.
 
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Current “Clean-Tech” enterprises present few “break-through” technologies. Rather there seems to be an improvement in overall efficiency of existing technologies, many of which (e.g. windmills, solar power) are quite old.

 

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The internet may even pose a more precise analogy to “Clean-Tech” businesses than others insofar as the product is fundamentally important to us, and not merely a “want” which gives rise to consumption. In the case of the internet, the promise of the technology itself has more than been fulfilled, even if the promises of a great number of commercial concerns related to it have not. 

 

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I venture to say that an economic movement which is based on our survival and well being as humans may be fundamentally too important to approach merely as a capitalist endeavor. Historically, novel technologies, even when related to existing demand, are difficult to efficiently monetize. Shifts in behavior however, (as they relate to those technologies) are a better bet.  How difficult will it be to create a substantial economic enterprise in an industry which is neither novel, nor benefited by consumption per sae?

 

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