Important foreclosure update (hooray!)

In yesterday's post about the foreclosure mess, I made a brief late note to keep an eye on the Massachusetts Supreme Court case (the so-called Ibanez case) regarding the validity of certain foreclosures. I wrote:

Keep an eye on this case in the Massachusetts Supreme Court, which could potentially void certain foreclosures and score a "win" for homeowners' rights in this mess. We can't allow our rights to be trampled in order to ensure short-term economic (and housing market) stability. The rule of law and due process must be preserved at all costs, period; let's hope that's what happens here.

It seems that my prayers have been answered, and quickly at that.

US Bancorp and Wells Fargo & Co. lost a foreclosure case in Massachusetts’s highest court that will guide lower courts in that state and may influence others in the clash between bank practices and state real estate law. The ruling drove down bank stocks.

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts.

“We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote.

Wells Fargo, the fourth-largest U.S. lender by assets, dropped $1.10, or 3.4 percent, to $31.05 at 11:41 a.m. in New York Stock Exchange composite trading. US Bancorp declined 28 cents, or 1.1 percent, to $26.01.

The 24-company KBW Bank Index fell as much as 2.2 percent after the decision was handed down.

Claims of wrongdoing by banks and loan servicers triggered a 50-state investigation last year into whether hundreds of thousands of foreclosures were properly documented as the housing market collapsed. The probe came after JPMorgan Chase & Co. and Ally Financial Inc. said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America Corp. froze U.S. foreclosures.

This ruling is almost certain to be appealed, but that's hardly important. With this decision now on the books establishing precedent, you can reasonably expect a flood of similar "wrongful foreclosure" lawsuits to be raised around the country.

Other states' courts obviously do not need to agree with, honor, or abide by the Massachusetts decision, but the precedent is no less important. The banks are in for a very serious sh**storm, and a well-deserved one at that. It doesn't matter if the homeowners in question were in fact in default on their mortgages (and in this case, they were). The rule of law and due process is what matters, and it must be protected.

The only (and I do mean the only) thing that ultimately separates first-world economies from third-world economies over the long run is viable protection of property rights. For more on that point, I encourage you to read here; the gist of it:

• Not only will a weakened structure lead to a consequent lack of trust in the legal property system, which further encourages informal market activity (black markets), but it also negatively influences investment decisions by an investor or multinational interest for fear of a lost return.
• The degree to which intellectual property is protected also highly influences a country's inventive character as it shapes the flow of innovative ideas and products that are developed, which in turn affects creative and economic wealth.

In essence, if people don't have legitimate reason to believe that they will own (and continue to own) the fruits of their labor, they will be less likely to produce any fruits at all. They'll be even less likely to engage in any type of research and development activity that leads to innovation, lest they invest heavily in a new technology and then see it stolen from them (whether by other individuals, corporations, or the government) before it can become profitable. This is the essence of U.S. patent law.

Housing rights are the most fundamental of all property rights--chip away there, and you'll undermine the economy at large. We can't afford to trade short-term economic stability for long-term economic viability. That's why this ruling is so important.

[Bloomberg]