Massachusetts Court Voids Two Foreclosures

The Massachusetts Supreme Court has overturned the foreclosures on two homes in the Bay State, sending a shock wave through the banking industry.

The Massachusetts justices ruled that neither U.S. Bancorp nor Wells Fargo have proved they had a legal right to evict homeowners when they filed foreclosure papers on the two properties in 2007.

Legal experts were quick to point out that the issues raised by the justices were specific to the two cases in question and won't impact other foreclosures, but it was nonetheless viewed as a legal shot across the bow of the banking industry. Bank stocks sold off sharply in Friday's trading after the decision was made public.

But just as in the "robo-signing" controversy," undue haste and sloppy paperwork appear to have been the banks' undoing. When the two banks went to court in 2008 seeking clear title to the properties, the court uncovered a problem.

Didn't own the mortgages

The courts ruled that both Wells Fargo and U.S. Bancorp had not actually been assigned the mortgages before they filed papers to foreclose. Instead, the banks began the foreclosure proceedings, then gained ownership of the mortgages.

The lower courts ruled the hasty action circumvented the law and therefore, the foreclosures were not valid. The Supreme Court upheld that lower court ruling.

The ruling comes at a bad time for banks, but provides some measure of hope for homeowners fighting foreclosure. Revelations of lender abuses and sloppiness have triggered a number of investigations. In fact, late last year all 50 state attorneys general launched a joint investigation into foreclosure practices. In addition, some states have unilaterally sued various loan servicers.

As a result, fewer homes are the subject of foreclosure, reducing the inventory of foreclosure properties coming to the market. The U.S. Government reports foreclosure activity fell 21 percent from October to November, the largest one-month drop in five years.

Ironically, a slowdown in foreclosures could actually provide a respite for the beleaguered housing market, which has struggled to gain traction over the last two years. With fewer foreclosures coming to market, most of which are priced well before other homes, housing experts say it could help real estate prices recover faster.