On Friday, the Supreme Judicial Court in Eaton vs. Federal National Mortgage Association issued another important decision concerning the mortgage foreclosure process in Massachusetts.  The Court concluded that if a bank uses the auction process to foreclose a mortgage, then the bank must hold both the mortgage and the note for the foreclosure to be successful.  Importantly, the Court held that its ruling would only apply to future foreclosure sales.

In the era of securitized loans, the party conducting the foreclosure is often not the party that holds the note.  Although a common practice, many attorneys representing borrowers in foreclosure procedures have speculated that Massachusetts law requires unity between the mortgage and the note for the foreclosure to proceed.  The Supreme Judicial Court has agreed.

The Court based its decision on both prior cases and the scheme of the foreclosure statutes.  The Court noted that the instrument creating the debt, and the mortgage that secures the obligation to repay the debt, are so intertwined that a successful foreclosure can only occur if the bank holds both the note and the mortgage.  The Court found further support for this argument in the various statutes governing the foreclosure process.  In particular, the Court noted that many of the statutes contained a legislative understanding or assumption that the use of the term “mortgagee” referred to both the holder of the mortgage and to the holder of the note.

In recent years, attorneys and the lending industry have feared that a ruling of this sort would wreak havoc on the record title to foreclosed properties in Massachusetts.  This is because attorneys had previously assumed that the foreclosing bank did not need to hold the note to conduct a proper foreclosure.  If the decision were applied retroactively, then the title to nearly all foreclosed properties would have been in doubt as there is no way to tell from the registry records whether or not a bank held both the note and the mortgage.  Sensitive to this concern, the Court ordered that its decision would only apply to foreclosures conducted after the date of the decision.

Lastly, this is still not the catastrophe to the lending industry that some had feared.  The Court specifically noted that a foreclosing bank need not have physical possession of the mortgage and the note in order to affect a valid foreclosure.  Instead, the foreclosure may be valid as long as the foreclosing institution acts as the authorized agent of the note holder.  This is good news because foreclosures are frequently conducted on the basis of an agency relationship.  The question remains, however, of how attorneys will prove the required unity between the note and the mortgage going forward?