William & Mary Business Law Review


The economic crisis gripping the United States began when large numbers of homeowners defaulted on poorly underwritten subprime mortgage loans. Demand from Wall Street seduced mortgage lenders, brokers, and other players to churn out mortgage loans in extraordinary numbers. Securitization, the process of utilizing mortgage loans to back investment instruments, fanned the fire. The resulting volume also caused the parties to these deals to often handle and transfer the legally important documents that secure the resulting investments—the loan notes and mortgages—in a careless and sometimes fraudulent manner.

The consequences of this behavior are now becoming evident. All over the country, courts are scrutinizing whether the parties initiating foreclosures against homeowners have the right to take this action when the authority to enforce the note and mortgage is absent. Without this right, foreclosure sales can be reversed. This concern is most acute in the majority of states, such as Massachusetts, where foreclosures occur with little or no judicial oversight before the sale. Due to the recent decision in U.S. National Bank Association v. Ibanez, in which the Massachusetts Supreme Judicial Court voided two foreclosure sales because the foreclosing parties did not hold the mortgage, Massachusetts is the focal jurisdiction where an important conflict is unfolding.

This Article explores the extent to which the Ibanez ruling may influence the jurisprudence in other non-judicial foreclosure states and the likelihood that clear title to foreclosed properties is jeopardized by the shoddy handling of notes and mortgages. This Article focuses on Arizona, California, Georgia, and Nevada because they permit non-judicial foreclosures and they are experiencing high “seriously delinquent” and foreclosure rates. After comparing the law in these states to that of Massachusetts, the Article concludes that Ibanez may have little effect in Arizona and California, unless the state’s highest court intervenes in this latter state, but should be influential in Georgia and Nevada.

This Article also provides a roadmap for others to assess the extent to which title to properties purchased at foreclosure sales or from lenders’ REO inventories might be defective in other states. Finally, the Article addresses the potential consequences of reversing foreclosure sales and responds to the securitization industry’s worry about homeowners getting free houses.