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The Note Is All a Lender Needs to Foreclose

Recently, the issue of a lender's authority and right to pursue foreclosure on defaulted residential mortgage loans has become a subject of national interest. It is at the heart of the $25 billion settlement agreed to recently between the Federal government, 49 state attorneys general and the nation's five largest loan servicers.

Mortgage foreclosure practices are also the focus of suits brought by certain state attorney generals against several major banks in the past few months. The propriety of mortgage foreclosure processes are defenses commonly raised by defaulting borrowers in contested foreclosure litigation.

The courts are clogged with people asking the same question: does this bank have the right to foreclose on this home?

Two documents are critical to a residential lending relationship, and therefore to foreclosure on a defaulting borrower's loan: the note and the mortgage (or deed of trust).

The note identifies the amount of the loan, and the repayment terms. The mortgage provides security for the loan. To have the authority to foreclose the mortgage (what lawyers call "standing"), a plaintiff must be the "holder" or "assignee" of the note. In the current environment where mortgage loans have frequently been bought, sold and securitized, confusion has sometimes ensued over who is the proper party to commence the foreclosure — or at least over a bank's ability to prove its authority.

Counsel for borrowers often demand that lenders prove that both the note and mortgage are held by the foreclosing lender before a residential mortgage foreclosure may proceed, and some courts have, mistakenly, agreed. Certain courts have gone so far as to say that lenders who cannot provide exacting evidence of when and how the note and mortgage were transferred to the bank cannot maintain a foreclosure action, thereby allowing borrowers to reside at the mortgaged home "payment free," without making mortgage payments and without the risk of foreclosure.

Proving the right to foreclose, however, should not be as difficult as those attorneys and courts claim. Under the Uniform Commercial Code, a note is a negotiable instrument (just like a check), freely transferable by endorsement to a specific entity or by physical delivery of the note endorsed in "blank" to a new party, who becomes the "holder" of the note. The holder of the note (or check) whether or not he is the owner of the instrument can enforce it. Thus the party who "holds" the note has standing to enforce the note. This is no different from a check. You can receive a check payable to you and then endorse it by signing the back. If a check is payable to you, your signature on the back makes the check enforceable by any person in possession.

Here, however, is the important part when it comes to the transfer of a note. When a note has been transferred, the mortgage securing it automatically follows. This rule is codified in the UCC section 9-203. The maxim that the "mortgage follows the note" has been followed in most states, including  Florida, New York, Ohio, Texas and California.

Though UCC law is long established, it is often forgotten or ignored in the mortgage foreclosure context. Applying this simple, clear rule to foreclosure cases would quiet much of the uproar about who has the right to foreclose because the focus would, correctly, be on the note only.

Disputes about whether mortgages were properly assigned to the foreclosing lender by Mortgage Electronic Registration System — commonly known as MERS — could be put to the side. Lenders designate MERS as their nominee and grant MERS the authority to transfer mortgages within its network of lenders, without recording the assignments publicly. MERS has become a favored whipping boy of borrower lawyers who regularly challenge the validity of mortgage assignments executed by or on behalf of MERS. But an assignment by MERS, and whether it legally transfers the mortgage or not, is irrelevant because possession of the endorsed note is all that matters.

Another issue that arises repeatedly is the claim that assignments of mortgages were "robo-signed." Borrowers claim that the mortgage assignments are invalid because they were improperly notarized or signed by someone without verifying the facts in the document. Again, this issue regarding the assignment of the mortgage does not affect the legal right of the lender to foreclose if the UCC is followed.

These issues regarding assignments and documentation of mortgage transfers have become serious distractions in many cases and on the national political stage, causing delay and expense for foreclosing parties, burdening courts unnecessarily and wastefully expending taxpayer money to address an "issue" which is not an issue at all.

Lawyers and judges need to keep their eye on the ball, and here all that is needed to prove the right and authority to foreclose is proper transfer and physical possession of the loan note.

Lenders would be well-served to check their files and confirm that they have possession of the original note, either endorsed in blank or endorsed specifically to them, before commencing their next foreclosure action. If a lender can walk into court waiving the original note, the lender has standing to foreclose and nothing about the assignment of the mortgage, robo-signing, faulty notary stamps, and so on, matter. If the lender has possession of a properly indorsed note, the law will do the rest.

David Dunn and Allison J. Schoenthal are partners at Hogan Lovells.


(8) Comments



Comments (8)
The uproar that you and all of us are witnessing is the result of the biggest fraud ever perpetrated on this country and its people. You are very well aware that majority (if not 100%) of the mortgages originated in the last ten years are fraudulent and the ownership can not be proved. The banks/servicers don't posses the original notes (they can keep checking their files, but I've been waiting for over a year to get a proof that "my lender" has the original note), they never transferred mortgages to REMIC trusts, and on top of this all, the chain of assignments are broken! Step by step this fraud is being uncovered and we, the victims, are patiently waiting for our day in court :)

The following text citation from MA Practice Series: Real Estate Law with Form (4th ed. 2004 & Supp. 2009-2010)
- A leading Massachusetts treatise, Howard J. Alperin, 14C Massachusetts Practice: Summary of Basic Law, chapter 15.126 (4th ed. & Supp. 2009-2010), summarizes rules as follows:
BOTH, the obligation (the note) and the security interest (the mortgage) MUST be transferred to the same person, because "a transfer of the mortgage without the debt is a nullity, and no interest is acquired by ti. The security cannot be separated from the debt and exist independently of it."

And let me remind you of the most important law for MBS:
Relevance of New York Trust Law - EPT. LAW S 7-2.1: NY Code - Section 7-2.1
The endorsement on the most Notes purportedly held in private Mortgage Backed Security (MBS) Trusts are in blank and missing the endorsement to the "Depositor". Such understatement are not complaint wit the conveyance law of New York Trust which is the controlling law of most private MBS Trusts.
Pursuant to EPT. LAW S 7-2.1: NY Code - Section 7-2.1: Extent of trustee's estate, subsection (c)
"A trust as described in sections 9-1.5, 9-1.6 and 9-1.7 of the estates, powers and trusts law, including a business trust as defined in subdivision two of section two of the general associations law, may acquire property in the name of the trust as such name is designated in the instrument creating said trust."
Notes endorsed in blank can not be lawfully the asset of the private MBS Trust established under New York trust law. Consequently the alleged servicer of the Trust has no entitlement to enforce the Note.
Posted by Senka | Thursday, May 03 2012 at 10:22PM ET
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Posted by SL Fiddler | Friday, October 26 2012 at 6:09PM ET
I am in the trenches fighting this fraud. Banks and their foreclosure-mill law firms feel very comfortable forging assignments of mortgage and filing them with the courts. QUESTION TO THE AUTHOR: "If the assignments of mortgage are unnecessary, why did Wells create THREE ASSIGNMENTS, one 14 months after filing of foreclosure, one in the BK proof-of-claim post filing, and one that was alleged to have been made 8 years ago, but never seen until the 2nd proof-of-claim? I have both Wells and HSBC claiming to be creditor (neither of them are-the money came from Deutsche Bank). Attorneys plead the "crime-fraud" exception does not apply, and misrepresentations to the courts are at an all time high! The note is gone, my friends. Copies, forgeries, endorsed-in-blank notes differing from those used in foreclosure, when will it end? The banksters have been caught with their pants down, and as time goes by, all the lesions and sores are being exposed to the world.
What's the solution? Make the fraudsters take the loss, give the homeowners back their homes, and kick the National Banks and their Foreign National Bank accomplices (Deutsche, HSBC, Barclays, PNC, etc.) to the curb. But I know American Banker will continue to obfuscate the facts and belittle the homeowners who were scammed.
Posted by usedkarguy | Wednesday, August 21 2013 at 11:42AM ET
UCC 9 goes to the secured party who is also obligated under the contract. That means the BANK! If the bank lent its "credit" instead of it's "money", they are in violation of Wisconsin Statute 134.15. Wisconsin is one of a few states in the union that has a law against banks lending CREDIT. In my opinion, they're SCREWED. But what do I know? 5 years of protracted litigation costing the investors over $200,000 to take my crappy little $100k house. WHY? Why didn't they modify under HAMP? They don't want my mortgage payments, and they certainly don't want to wait thirty years. Just service the homeowner into default (losing payments,inspections, BPO's, late fees) and collect on the insurance products. OOPS! The bond insurer filed bankruptcy (TRIAD). Now what?
Posted by usedkarguy | Wednesday, August 21 2013 at 11:57AM ET
Objection! I know this article is a couple years old, however, these two Bankster clowns need to be smacked into reality. The note never in a million years, will be the only proof of claim needs to steal someones home.

The "holder" or "assignee" must have material fact the that the original note has not been bifurcated from the actual allonge. Unfortunately, these crooked judges (Lawyer's in a black robe)in these inferior courts always rules for the criminal banks for "summary judgment", that is evidence alone that the judges and banks are in a "public and private partnership," engaging in extortion, blackmail and racketeering.

Now your "theory" that the the negotiable instrument (note) is 'standing' for foreclosure is pure baloney. Please read Ucc S 3 - 102 sub-paragraph (b)carefully. Then read this article again, and you start to get the gist that these Bankers and Lawyers are nothing more than liars and mafia thugs dressed in suits.


(a) This Article applies to negotiable instruments. It does not apply to money, to payment orders governed by Article 4A, or to securities governed by Article 8.

(b) If there is conflict between this Article 3 and Article 4 or 9, Articles 4 and 9 govern.

(c) Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this Article to the extent of the inconsistency.

In addition, the 8th circuit court ruled Jan 2013, that foreclosure attorney's are subject to the FDCPA and are nothing more than "debt collectors", and should be treated as such.

Your honor, I rest my case!
Posted by igot1thatcansee | Tuesday, September 02 2014 at 10:49PM ET
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