Although the California Supreme Court decision in February in Yvanova vs. New Century Mortgage Corp. was explicitly termed a “narrow one,” it is likely to have broader implications for the lending and foreclosure industries. The expectation is that this single decision is significant and will inevitably “lead to more litigation and confusion and create far greater expense for borrowers, lenders, servicers and foreclosure trustees.”

Jonathan Fink and Robert Finlay, partners at Wright, Finlay and Zak, discuss the court’s decision in an article for housingwire.com, and predict that it will further clog an already overburdened court system.

The decision affirmed the right to sue for wrongful disclosure in instances where a foreclosure procedure was void at its inception. The court left open a number of legal considerations, however, and the ruling did not in any way address other considerations which have a bearing on packaged loans and the investment market.

California is a non-judicial foreclosure state, which sets it apart from others that require judicial proceedings prior to foreclosure action. What the ruling indicates is that investors and institutions must exercise great care when assuming control over loans on distressed properties to assure that there is a paper trail back to the original lender. Lower courts in California had previously ruled that the right to file a suit charging wrongful foreclosure was extremely limited. The supreme court decision set those previous rulings aside by clarifying the “ownership” of a debt and insisting that that ownership must be clearly established.

The supreme court ruling states: “The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security.” The specific case that prompted this Supreme Court ruling will now be returned to a state Court of Appeals or a trial court to be decided on its merits, but the message is clear.

It is the assessment of many attorneys and analysts that a clear directive has been issued: What was previously accepted as “broad latitude” to reassign and transfer debt has been questioned if not revoked, and it is incumbent on financial institutions and loan bundlers to maintain extensive and impeccable records or face legal consequences.

There are remaining questions, to be sure, and the arguments on each side may be compelling, but in the short term, at least, the California Supreme Court has issued a decision which should be viewed as a warning by everyone involved in packaging. selling and servicing distressed loans.

The 30-plus-page ruling on this “narrow” issue continues, “A homeowner who has been foreclosed on by one with no right to do so has suffered an injurious invasion of his or her legal rights at the foreclosing entity’s hands. No more is required for standing to sue.” That is definitely a ruling to take seriously.