By: Phoebe S. Winder
In a long-anticipated decision, the Massachusetts Supreme Judicial Court (“SJC”) ruled in Eaton v. Federal National Mortgage Ass’n, 2012 WL 2349008 (June 22, 2012) (“Eaton”) that when conducting a non-judicial foreclosure in Massachusetts, a foreclosing entity must not only hold the mortgage – it also must hold the note or be authorized to act on behalf of the note holder. But if the goal of consumer advocates was to void a large volume of foreclosures, then they failed in that goal, and Eaton should be seen as a victory for those who have foreclosed, or who are seeking to foreclose, on mortgage loans in Massachusetts.
Until now, most – if not all – local real estate practitioners had construed the Massachusetts foreclosure notice statute, Mass. Gen. L. ch. 244, § 14, as requiring a foreclosing entity to hold only the mortgage. While the SJC rejected this interpretation in Eaton, the court’s ruling is only prospective in application, and as a result, consumer advocates did not achieve the wide-scale unwinding of past foreclosures that they had hoped for. Instead, on a going-forward basis, a foreclosing entity must be able to demonstrate its status as a note holder, or alternatively, that it has the authority to act on behalf of the note holder. Many foreclosure statutes outside of Massachusetts require foreclosing entities to demonstrate their connection to the note (either as note holder or servicer for the note holder), so as a practical matter, Eaton should not impose additional burdens on servicers and investors. It is simply a matter of foreclosing entities revising their internal procedures to ensure that, in the future, they follow the note-related documentation requirements imposed by the SJC’s new interpretation of the foreclosure notice statute. Eaton seems to contemplate that this can be achieved, as a matter of record (at least with respect to unregistered land), “by filing an affidavit in the appropriate registry of deeds pursuant to G. L. c. 183, § 5B. The statute allows for the filing of an affidavit that is ‘relevant to the title to certain land and will be of benefit and assistance in clarifying the chain of title.’ Such an affidavit may state that the mortgagee either held the note or acted on behalf of the note holder at the time of the foreclosure sale.” Id., p. 12, n. 28.
The prospective application of the Eaton decision is key. If the decision had been applied retroactively, it undoubtedly would have created chaos by opening the door to challenges to long-completed foreclosures. It has never been the practice for Massachusetts registries of deeds to record mortgage notes, or any information relating to a foreclosing entity’s status as note holder. Therefore, it would have been time consuming, expensive, and in some cases, impossible – for courts, foreclosed borrowers, and purchasers of foreclosed properties – to reconstruct the mortgagee’s status vis-á-vis the note, especially for foreclosure sales that occurred years ago. The SJC recognized as much in declining to apply its decision retroactively: “[T]here may be significant difficulties in ascertaining the validity of a particular title if the interpretation of ‘mortgagee’ that we adopt here is not limited to prospective application, because of the fact that our record system has never required mortgage notes to be recorded.”
In reaching its decision in Eaton, the SJC also appeared to sanction the industry practice of having an authorized agent of the note holder foreclose in its name. It is commonplace for servicers to foreclose on behalf of GSEs and other investors, and the SJC acknowledged this reality when it held that foreclosure by sale is not limited to foreclosing entities that have possession of the note. Id. at p. 5. (“Contrary to the conclusion of the motion judge, … we do not conclude that foreclosing mortgagee must have physical possession of the mortgage note in order to effect a valid foreclosure.”). Rather, the SJC interpreted the definition of “mortgagee,” within the meaning of the Massachusetts foreclosure notice statute, to include “one who, although not the note holder himself, acts as the authorized agent of the note holder, to stand ‘in the shoes’ of the ‘mortgagee’….” Id. This agency carve-out should give some comfort to GSEs and other investors that elect not to foreclose in their names.
Eaton will not create the havoc that some had feared it might. But those seeking to foreclose in Massachusetts should still proceed with caution. In Massachusetts, there is common law which holds, notwithstanding state UCC provisions to the contrary, that the mortgage does not automatically follow the note, and therefore, foreclosing entities should take care to ensure that, in accordance with Eaton, they hold the note or have authority to act on behalf of the note holder, and also that, in accordance with Ibanez and its precursors, they have all necessary assignments of mortgage in hand prior to the initiation of foreclosure.