Foreclosure ruling could be setback for banks

The highest court in Massachusetts agreed with a lower court ruling that two home foreclosures were invalid and found that lenders Wells Fargo Bank and US Bank had failed to prove they owned the mortgages.

The case, which dealt with loans that had been pooled into mortgage-backed securities, could be another significant setback for the home lending industry.

“Since this is the first real state supreme court ruling, you can bet that an awful lot of judges will be looking at this case,� said Rebel A. Cole, a DePaul University professor of finance and real estate. “This is really going to cause a lot of problems� for mortgage lenders.

Shares of major home lenders slumped early Friday when the ruling became public but erased more than half of those declines by the end of trading.

The two foreclosures were made in the names of Wells Fargo and US Bank. Neither of the banks, however, had written the mortgages. Instead, they were acting as trustees, or financial caretakers, for pools of loans made and serviced by other lenders.

The principles underlying the ruling by the Supreme Judicial Court in Boston may apply in other states, including California, said Walter H. Hackett, a Walnut, Calif., attorney who has represented aggrieved homeowners in mortgage cases.

Such rulings could make it easier for distressed borrowers to obtain loan modifications while mortgage ownership issues are sorted out, Hackett said. But he cautioned homeowners not to interpret the case as a “free house� ruling absolving delinquent borrowers of their debts.

Christopher Whalen, co-founder of bank research firm Institutional Risk Analytics, saw less significance in the ruling, calling it “media hype over substance.�

“It will be a mess for banks but in general is not nearly as big a deal as other issues,� he said.

The American Securitization Forum, a trade group for the mortgage securities industry, said the problems with the two mortgages in the case involved improper paperwork but not flawed procedures and suggested the decision would not have widespread effects.

A spokeswoman for US Bank’s parent company, US Bancorp, said the court’s decision wouldn’t affect the company’s bottom line because the firm was only the trustee for the pool of loans at issue, not the owner of the mortgage. Both banks said that as trustees they were acting only on behalf of the mortgage-servicing firms in foreclosing on the loans.

Shares of parent Wells Fargo & Co. closed Friday down 2%, while US Bancorp lost 0.8%. JPMorgan Chase & Co. dropped 1.9%, and Bank of America Corp. fell 1.3%.

The Massachusetts ruling came months after the mortgage industry was rocked by disclosures of widespread “robo-signing� — the practice at big banks of having employees certify in court to facts underlying foreclosures without taking the time to read the supporting paperwork.

Lenders including Bank of America, JPMorgan and Ally Financial Inc.’s GMAC Mortgage unit say they have been redoing paperwork and are proceeding with the foreclosures.

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