What Florida Homeowners Need to Know About Mortgage Assignments

05 Thursday Dec 2013

Posted by BNG in Affirmative Defenses, Banks and Lenders, Case Laws, Case Study, Foreclosure Defense, Fraud, Judicial States, MERS, Non-Judicial States, Pro Se Litigation, Your Legal Rights

≈ Leave a comment

Tags

Article 9 of the Japanese Constitution, Assignment (law), Business, Florida Supreme Court, Promissory note, Securitization, UCC, Uniform Commercial Code

Today, a mortgage originator might make hundreds of loans and assign them as collateral to borrow money from a bank in a “mortgage warehouse facility.” The borrowed money is used to originate more mortgages. A mortgage warehouse is often only temporary, so the mortgages might be transferred from one facility to another. When the mortgage originator has a sufficiently large pool of mortgages, it may permanently “securitize” them by assigning them to a newly formed company that issues securities that are then sold to investors. In the end, the company owns the mortgages, and the investors receive payments on the securities which are based on the collections from the mortgage pool. In this manner, mortgages are effectively packaged as securities, which can more easily be traded than individual mortgages — hence the name “securitization.”

The recorded form assignment I prepared as a young associate is not well-suited to use in these transactions. Because transactions involve the assignment of hundreds or even thousands of mortgages, there is a temptation to skip the step of recording an assignment in the public records, particularly when the assignment is only a temporary collateral assignment. Transactions sometimes take the form of nothing more than an unrecorded pledge of the mortgages in bulk to the bank, together with delivery of the original notes to the bank for perfection. In many instances, even the task of holding possession of the notes is outsourced to a bailee who holds the notes for the bank’s benefit. The mortgages might be transferred many times by unrecorded assignment in bulk without physically moving the notes, but with the bailee simply signing a receipt changing the name of the lender for whom it holds the notes.

The attorneys who pioneered these transactions were comforted that the structure would work by legal conclusions they drew from Article 9 of the Uniform Commercial Code (UCC), the Official Comments to the UCC (Comments),² and favorable case law.³ The law was clear enough that attorneys were able to give legal opinions concerning perfection, but as the amount of securitized mortgages reached into the trillions of dollars, the uniform law commissioners decided to revisit Article 9 and make it safe for securitizations by officially sanctioning these practices.

It is useful to observe the simplicity of a mortgage assignment in its purest form. F.S. §673.2031(1) (2010), governing negotiable instruments, states that “[a]n instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.” Even before the UCC, the Florida Supreme Court ruled that a mortgage can be transferred without a written assignment simply by delivering the note with intent to assign it.⁴ So at its core, between the parties to the assignment, assigning a mortgage is very much like selling a used lawn mower. What makes it more complex in practice is the potential for disputes and the precautions that must be taken to protect the parties. There are a number of contexts in which mortgage assignments might be considered:

1) The rights of a mortgage assignor and assignee vis-a-vis each other;

2) The rights of a mortgage assignee relative to the rights of its creditors, including lien creditors and bankruptcy trustees;

3) The rights of a mortgage assignee relative to the rights of a subsequent assignee;

4) The obligation of a mortgagor to make payment to the mortgage holder;

5) The right of the mortgage holder to foreclose in the event of default; and

6) The rights of a person acquiring an interest in the real estate.

The drafters of Article 9 focused primarily on problems one through three because these related to the issues that most concerned securitization participants and their attorneys. The rules the drafters set up treated mortgages as personal property that could be transferred without regard to the real estate records.⁵ Article 9 extends to sales of promissory notes, as well as assignments for security purposes.⁶ Although Article 9 recognizes some differences between collateral assignments and sales of notes, the UCC does not provide rules to distinguish a collateral assignment from an absolute assignment.⁷ Thus, the term “secured party” includes a collateral assignee as well as a purchaser of promissory notes,⁸ and the term “debtor” includes both an assignor of promissory notes for security and a seller of promissory notes.⁹

Problem 1 — Attachment
Article 3 governs the transfer of negotiable instruments. Article 9 governs security interests in and sales of both negotiable and nonnegotiable promissory notes. Thus, there is some overlap. The principal effect of extending Article 9 to sales of promissory notes was to apply the perfection and priority rules to those transactions.

F.S. §679.2031 (2010) determines when an assignment “attaches” or in other words, when it becomes effective between the assignor and assignee. That section requires that a) value be given; b) the debtor has rights in the collateral; and c) either the debtor has “authenticated a security agreement” describing the collateral or the secured party is in possession of the collateral pursuant to the security agreement.¹⁰

In the case of an assignment of a promissory note, the promissory note is the “collateral”¹¹ and the assignment is the “security agreement.”¹² Thus, the assignment becomes enforceable between the assignor and assignee when value is given, the assignor has assignable rights in the promissory note, and the assignor has either executed a written assignment describing the promissory note or the assignee has taken possession pursuant to the agreement of the assignor to assign the promissory note. Attachment of the security interest to the promissory note also constitutes attachment of the security interest to the mortgage, effectively adopting the pre-Article 9 case law that the mortgage follows the promissory note.¹³

A written assignment of the promissory note will satisfy the “security agreement” requirement whether the assignment is made pursuant to a sale or for the purpose of collateral. Similarly, an indorsement pursuant to Article 3 should satisfy that requirement.¹⁴ However, the implication of F.S. §§673.2031 and 679.2031 (2010), and of Johns v. Gillian, 184 So. 140 (Fla. 1938), is that the security agreement need not be in writing, so long as there is intent to assign and the promissory note is delivered to the assignee.¹⁵

Problem 2 — Perfection
Third parties lacking notice are not bound merely because the assignor and assignee have agreed among themselves that the mortgage has been transferred to the assignee. To protect the assignee from claims of third parties dealing with the assignor, the assignment must be perfected. Perfection of the security interest in the promissory note operates to perfect a security interest in the mortgage.¹⁶ The assignee may perfect its rights against the conflicting rights of a lien creditor (including a judgment lien holder, bankruptcy trustee, or receiver)¹⁷ by taking possession of the original promissory note¹⁸ or by filing a financing statement in the applicable filing office¹⁹ (which for a debtor located in Florida is the Florida Secured Transactions Registry).²⁰ Possession may be effected by means of a bailee, provided that the bailee authenticates a writing acknowledging that it holds possession for the benefit of the secured party.²¹ However, not all modes of perfection are equal. As discussed below in connection with priority, possession of the promissory note generally offers more protection than filing a financing statement. All modes of perfection, however, provide protection against the rights of a subsequent lien creditor.²²

In the case of a sale of the promissory note (as opposed to a collateral assignment), perfection is automatic upon attachment.²³ Thus, neither possession nor filing is needed to perfect against the rights of subsequent lien creditors, provided that the assignment is a true sale rather than a secured transaction. However, for several reasons, absolute assignees often perfect by possession of the promissory note and/or filing, even though perfection is automatic in the case of a sale.²⁴

Problem 3 — Priority
The question of whether an assignee prevails over another assignee is one of priority. Pursuant to F.S. §679.322(1)(a) (2010), if both assignments are perfected, then priority is generally determined by the time of filing or perfection. Perfection is accomplished by filing automatically in the case of sales, or by possession of the promissory note. However, §679.322(3) refers to F.S. §679.330 (2010), which states in part: “[A] purchaser of an instrument has priority over a security interest in the instrument perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party.”

Regardless of whether the assignee receives absolute ownership pursuant to a true sale or merely an assignment for the purpose of security, the assignee is considered a “purchaser.”²⁵ If the second assignee takes possession for value in good faith and without knowledge that it violates the first assignee’s rights, then the second assignee takes priority over an assignment perfected without possession. Mere filing of a financing statement by the first assignee (and even actual knowledge by the second assignee of such a filing) is not enough to charge the second assignee with a lack of good faith or knowledge that the second assignment violated the first assignee’s rights.²⁶ It is not clear precisely what facts might disqualify the assignee in possession from relying on §679.330(4) for its priority, but F.S. §671.201(20) (2010) provides a general definition of “good faith,” which requires honesty in fact (an actual knowledge standard), and observance of reasonable commercial standards of fair dealing. Given this nebulous standard, the party who perfects by filing or automatically should assume that it will not be protected against a subsequent assignee who takes possession.

The foregoing principles are demonstrated in American Bank of the South v. Rothenberg, 598 So. 2d 289 (Fla. 5th DCA 1992). In that case, the bank took a security interest in a note and mortgage, perfected by possession. The assignor then sold the same note to a second assignee. The second assignee recorded his assignment in the public records before the bank did, but received only a copy of the note. The court held that though he recorded first, the second assignee lost because the bank had possession. Although the case did not involve a UCC filing by the losing assignee, that would not have changed the result since possession generally trumps a UCC filing. In fact, because the mortgage was sold (rather than assigned as collateral), the second assignee’s interest was perfected automatically. However, like filing, automatic perfection does not generally protect the assignee from a conflicting assignment perfected by possession.

If the assignment is intended only as secondary collateral on unspecific assets, then possibly the assignee would be satisfied with such ethereal rights as are created by merely filing, but if the assignee is giving new value to acquire specific mortgages, then greater protection is usually required — namely, possession of the promissory note.

Problem 4 — Who Does the Mortgagor Pay?
Comment 6 to UCC §9-308 explains that Article 3 (not Article 9) dictates who the maker of a negotiable instrument must pay. F.S. §673.6021(1) (2010) states that with limited exceptions (knowledge of injunction or theft, etc.), the instrument is discharged upon payment to “a person entitled to enforce the instrument.”

F.S. §673.3011 (2010) states:

The term “person entitled to enforce” an instrument means:

(1) The holder of the instrument;

(2) A nonholder in possession of the instrument who has the rights of a holder; or

(3) A person not in possession of the instrument who is entitled to enforce the instrument pursuant to s. 673.3091 or s. 673.4181(4).

A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.

In general, it is the “holder” who is entitled to enforce the instrument. “The person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession” is a “holder.”²⁷ In some instances, a nonholder may enforce the instrument. The comment to UCC §3-301 states that a “person who under applicable law is a successor to the holder or otherwise acquires the holder’s rights” can enforce the instrument under subsection (2), even though not a holder. This would include an assignee from the holder who for some reason did not become a holder, perhaps because it did not receive a proper indorsement.²⁸ Subsection (3) would include an assignee who is not a holder because the instrument was lost.

One might wonder whether these provisions make any sense. The mortgagor cannot be expected to ascertain the holder by demanding exhibition of the promissory note whenever it makes a payment,²⁹ nor would the lender likely accommodate such a demand, even if made. Usually, the note expressly waives presentment, so that the original need not be exhibited on demand for payment.³⁰ In the real world, the mortgagor simply pays whomever the note says should be paid (often a servicer), until the mortgagor receives a notice to pay someone else. The law of contract and agency will often lead a court to give effect to payments made in this manner, despite Article 3.³¹ Nevertheless, unless the parties have expressly or impliedly agreed otherwise, Article 3 requires the mortgagor to ascertain the status of the payee as holder by demanding exhibition of the promissory note, and the holder must comply as a condition for demanding payment.

Article 3 does not control payment of nonnegotiable notes.³² The common law of contract generally applies. The common law rule is that payment of a nonnegotiable promissory note can be made to the payee without demanding delivery of the original promissory note, and will be effective so long as the maker does not have notice that the payee has transferred the promissory note to a third person.³³ In other words, the result is not very different from the “real world” practice of making payment on a negotiable promissory note, as described above.

Problem 5 — Who Has Standing to Foreclose the Mortgage?
The provisions of Article 3 speak in terms of who is entitled to “enforce” an instrument. Thus, the solution to problem four must also be the solution to problem five. Unlike problem four, however, there are a number of reported cases concerning standing in foreclosures that must be considered. It should come as no surprise that the holder of the promissory note has standing to maintain a foreclosure action.³⁴ Further, an agent for the holder can sue to foreclose.³⁵ The holder of a collateral assignment has sufficient standing to foreclose.³⁶

Failure to file the original promissory note or offer evidence of standing might preclude summary judgment.³⁷ Even when the plaintiff files the original, it might be necessary to offer additional evidence to show that the plaintiff is the holder or has rights as a nonholder. In BAC Funding Consortium, Inc. v. Jean-Jacques, 28 So. 3d 936 (Fla. 2d DCA 2010), for example, the court reversed a summary judgment of foreclosure, saying the plaintiff had not proven it held the note. The written assignment was incomplete and unsigned. The plaintiff filed the original note, which showed an indorsement to another person, but no indorsement to the plaintiff. The court found that was insufficient. Clearly, a party in possession of a note indorsed to another is not a “holder,” but recall that Johns v. Gillian holds that a written assignment is not needed to show standing when the transferee receives delivery of the note. The court’s ruling in BAC Funding Consortium was based on the heavy burden required for summary judgment. The court said the plaintiff did not offer an affidavit or deposition proving it held the note and suggested that “proof of purchase of the debt, or evidence of an effective transfer” might substitute for an assignment.³⁸

In Jeff-Ray Corp. v. Jacobson, 566 So. 2d 885 (Fla. 4th DCA 1990), the court held that an assignment executed after the filing of the foreclosure case was not sufficient to show the plaintiff had standing at the time the complaint was filed. In WM Specialty Mortgage, LLC v. Salomon, 874 So. 2d 680 (Fla. 4th DCA 2004), however, the court distinguished Jeff-Ray Corp., stating that the execution date of the written assignment was less significant when the plaintiff could show that it acquired the mortgage before filing the foreclosure without a written assignment, as permitted by Johns v. Gilliam.³⁹

When the note is lost, a document trail showing ownership is important. The burden in BAC Funding Consortium might be discharged by an affidavit confirming that the note was sold to the plaintiff prior to foreclosure. Corroboratory evidence of sale documents or payment of consideration is icing on the cake, but probably not needed absent doubt over the plaintiff’s rights. If doubt remains, indemnity can be required if needed to protect the mortgagor.⁴⁰

In the case of a defaulting mortgagor, someone presumably has a right to foreclose. Excessively strict standing requirements might result in a windfall to the mortgagor at the expense of the lender. At the same time, courts must ensure that the mortgagor is not subjected to double liability. A review of the cases shows that while there are a few cases in which mortgagors paid the wrong party and were later held liable to the true holder, there is a dearth of cases in Florida where a mortgagor was foreclosed by one putative mortgagee, and later found liable to another who was the true holder. The lack of such nightmare cases is a testament to the fine job courts have done in enforcing the standing requirements, but it also begs the question whether the risk of double liability may be overstated. Given the long foreclosure process in Florida, a defaulting borrower is unlikely to remain unaware of conflicting demands long enough to complete a foreclosure. It seems that in such an event, either the borrower must have ignored conflicting demands, or one of the putative mortgagees sat on its rights. While both are plausible scenarios, they each present clear equities that should assist a court in positioning the loss.

Problem 6 — Real Estate Transactions
The UCC deals with problems one through five, but the Article 9 Comments expressly disclaim intent to deal with problem six because it is an issue of real estate law beyond Article 9’s scope.⁴¹ In Florida, a mortgage is not an interest in real estate, but rather personal property.⁴² On the other hand, the statutes permit persons taking an interest in real estate to rely on the real estate records to determine ownership of a mortgage without regard to the UCC. F.S. §701.02 (2010) says in part:

701.02. Assignment not effectual against creditors unless recorded and indicated in title of document; applicability

(1) An assignment of a mortgage upon real property or of any interest therein, is not good or effectual in law or equity, against creditors or subsequent purchasers, for a valuable consideration, and without notice, unless the assignment is contained in a document that, in its title, indicates an assignment of mortgage and is recorded according to law.

(2) This section also applies to assignments of mortgages resulting from transfers of all or any part or parts of the debt, note or notes secured by mortgage, and none of same is effectual in law or in equity against creditors or subsequent purchasers for a valuable consideration without notice, unless a duly executed assignment be recorded according to law.

*****

(4) Notwithstanding subsections (1), (2), and (3) governing the assignment of mortgages, chapters 670-680 of the Uniform Commercial Code of this state govern the attachment and perfection of a security interest in a mortgage upon real property and in a promissory note or other right to payment or performance secured by that mortgage. The assignment of such a mortgage need not be recorded under this section for purposes of attachment or perfection of a security interest in the mortgage under the Uniform Commercial Code.

(5) Notwithstanding subsection (4), a creditor or subsequent purchaser of real property or any interest therein, for valuable consideration and without notice, is entitled to rely on a full or partial release, discharge, consent, joinder, subordination, satisfaction, or assignment of a mortgage upon such property made by the mortgagee of record, without regard to the filing of any Uniform Commercial Code financing statement that purports to perfect a security interest in the mortgage or in a promissory note or other right to payment or performance secured by the mortgage, and the filing of any such financing statement does not constitute notice for the purposes of this section. For the purposes of this subsection, the term “mortgagee of record” means the person named as the mortgagee in the recorded mortgage or, if an assignment of the mortgage has been recorded in accordance with this section, the term “mortgagee of record” means the assignee named in the recorded assignment.

One can accept that a person taking an interest in real estate should be charged with notice only of what appears from the real estate records. However, the statute seems overly broad in that it says an assignment must be recorded to be effectual against creditors and purchasers. Subsections (1) and (2) seem to contradict the rules of Article 9, which permit perfection against lien creditors merely by taking possession of the note or filing a financing statement. Also, under Article 9, a good faith purchaser with possession takes free of a prior assignment, even if recorded. Although subsection (4) says the statute does not alter the perfection requirements of Article 9, what does the statute mean if not that an unrecorded assignment of mortgage is not enforceable against creditors of the assignor?

One might argue that §701.02 means that an absolute assignment must be recorded in the real estate records, while a collateral assignment need not be recorded.⁴³ Subsection (4) discusses perfection of a “security interest,” but it does not specifically mention a sale of the mortgage.However, the term “security interest” in the UCC includes an assignment pursuant to a sale,⁴⁴ and the term “assignment” in subsections (1) and (2) is not, on its face or in the case law, limited to absolute assignments.⁴⁵ Such a limitation would undercut the §701.02 protections given to real estate purchasers (particularly considering the case law holding that a collateral assignee in possession may enforce the mortgage). Likewise, requiring a sale to be recorded in the real estate records for validity against subsequent purchasers from the mortgagee would undermine the protections for purchasers of mortgages under the UCC. Clearly, the statute says that an assignment need not be recorded to be perfected under the UCC, but that does not necessarily mean that an unrecorded assignment will be effective against a person taking an interest in the realty in reliance on the real estate records.

Perhaps the term “creditors” refers only to creditors of the fee title owner of the land — not to creditors of the mortgage assignor. There is no need to protect creditors of a mortgage assignor with this statute. The priority of a lien creditor of the assignor is adequately addressed by Article 9. By contrast, creditors of the fee title owner are not protected by Article 9 and might rely on the real estate records in acquiring an interest in or lien on the real estate.⁴⁶ Also, the subsection (5) phrase “purchaser of real property” supports that interpretation. There is no mention of purchasers of the mortgage.

If that is the intent of the statute, then the unqualified use of the term “creditors” is unfortunate. The statute should say the protection extends to creditors, purchasers, or other persons acquiring an interest in the real property, but not to persons acquiring a mortgage from the mortgagee (whose rights are determined instead by the UCC). Even though it could be clearer, the foregoing interpretation is not plainly refuted by the statutory language. Moreover, there is case law support. In American Bank of the South v. Rothenberg, 598 So. 2d 289 (Fla. 5th DCA 1992), also discussed above, the bank received a collateral assignment and took possession of the note. However, the note was sold to a second assignee who recorded first in the real estate records and argued that §701.02 gave him better title. The court disagreed, stating:

The confusion in this case arises from the failure of both parties to recognize that section 701.02…is inapplicable. This case, involving as it does the competing interests of successive assignees of a note and mortgage, is governed by negotiable instruments law, not the recording statute. Section 701.02 was enacted to protect a creditor or subsequent purchaser of land who has relied on the record satisfaction of a prior mortgage, which satisfaction was executed by the mortgagee after he made an unrecorded assignment of the same mortgage. Manufacturers’ Trust Co. v. People’s Holding Co., 110 Fla. 451, 149 So. 5 (Fla. 1933).⁴⁷

The court’s reading is unduly narrow in that §701.02 protects more than just persons relying on mortgage satisfactions, but the idea that it governs only real estate transactions seems correct.⁴⁸

However, some courts have confused the rules applicable to problem six with those applicable to problems one through five. In JP Morgan Chase v. New Millennial, LC, 6 So. 3d 681 (Fla. 2d DCA 2009), rev. dism., 10 So. 3d 632 (Fla. 2009), for example, the closing agent in a real estate transaction telephoned AmSouth Bank concerning two mortgages that it appeared to own of record and was told they had been paid. AmSouth Bank faxed a printout to the closing agent showing a balance of $0 and stating “PD OFF.” In fact, AmSouth Bank had merely sold the loans to JP Morgan, which failed to record an assignment. The transaction closed in reliance on the fax. Later, JP Morgan sought to foreclose, and the purchaser argued that JP Morgan’s unrecorded assignment was ineffective under §701.02. JP Morgan argued that §701.02 protected only assignees of the mortgagee, not grantees of the land owner, and the court agreed.⁴⁹ In other words, the court’s interpretation was exactly opposite that in American Bank of the South. Yet, the idea that persons acquiring the land may rely on §701.02 seems required by the statute and the case law.⁵⁰

Although JP Morgan Chase’sinterpretation of §701.02 seems wrong,one might argue the case was correct for another reason. The court said the closing agent never received a satisfaction, but simply relied on the fax. Although F.S. §701.04 (2010) permits the purchaser to rely on an estoppel letter, the court said the fax did not qualify for that protection. Arguably, the true holding of JP Morgan Chase is that the party relying on the real estate records must obtain a satisfaction, and informal assurances are inadequate. Nevertheless, JP Morgan Chase will add to the confusion until the Florida Supreme Court rules decisively on the meaning of §701.02.

Even if one accepts the interpretation in American Bank of the South, one must admit there is inherent tension between §701.02 and Article 9. The tension is demonstrated in Rucker v. State Exchange Bank, 355 So. 2d 171 (Fla. 1st DCA 1978). In that case, South 41 Corp. gave a mortgage to Harrell and deeded the land to Rucker. Harrell assigned the mortgage to the bank as collateral, which recorded the assignment, but did not notify Rucker. Rucker then paid the mortgage to Harrell. After not receiving payment, the bank foreclosed on Rucker. On appeal, Rucker argued the collateral assignment was not perfected under Article 9. The court erroneously said that Article 9 does not govern a collateral assignment, but came to an arguably correct result, affirming the judgment of foreclosure.

A threshold issue not discussed was whether Rucker, having acquired the real estate from South 41 Corp., was entitled to rely on the real estate records, or whether she simply paid the mortgage pursuant to the UCC. Clearly, Rucker did acquire the real estate, but that was months earlier, so perhaps by the time of payment, the real estate records were no longer relevant.

The Rucker court seemed to rely on both problems one through five and problem six rules. The court said that Rucker did not demand surrender of the mortgage,⁵¹ which is irrelevant under §701.02. However, the court also relied on the assignment recorded in the real estate records, which is not important to problems one through five, but is important to problem six. Even though the court did not clearly state which rules applied, it came to the correct result. Rucker lost because she did not comply with either set of rules. She would have become aware of the assignment to the bank if she had checked the real estate records, and she would have (presumably) discovered that Harrell did not have the note, if she had demanded surrender of the note. The court did not discuss when it is that a person acquiring an interest in the land (entitled to rely on the real estate records) ceases to be such a person and becomes instead a person acquiring or paying the promissory note who must follow the UCC, but the case shows the issue will inevitably arise, creating tension between §701.02 and the UCC.

Summarizing, the UCC attempts to solve problems one through five and §701.02 attempts to solve problem six. There is some overlap and potential for conflict, causing confusion in the cases. Courts should interpret those statutes so that they are consistent, limiting the protection of §701.02 to persons taking an interest in the real estate, and the protection of the UCC to persons taking an interest in the promissory note and mortgage.

Conclusion
Ironically, while the drafters of Article 9 sought to make mortgage assignments as simple and foolproof as possible, the handling of mortgage assignments is now at the center of the foreclosure crisis that has gripped the nation’s financial system. To be fair, the changes to Article 9 did not really cause the problem. In fact, the changes mostly codified existing case law and served to lessen the chaos by eliminating uncertainty. However, the revisions to Article 9 fostered confidence that the “simple, foolproof” rules intended to protect parties’ rights in mortgages would in fact do so. The false sense of certainty led to an increase in the number of transactions accomplished with minimal documentation designed to meet the attachment and perfection requirements of Article 9, but not the standing requirements in foreclosures. Moreover, missing or irregular indorsements or lost instruments compounded the problem by leaving gaps even in this minimal documentation. The result was a deluge of disputed cases fortuitously stopping or delaying foreclosures while the mortgagees struggled to reconstruct a document trail proving ownership.

Despite the sloppy practices of the mortgage industry, attorneys practicing in this area should not find themselves on the losing end of a court decision holding that their client does not have standing to foreclose. The question of whether the client has standing should be addressed before filing the case. If the documentation is inadequate, then missing documents should be located, or if necessary, re-executed before filing suit. An attorney unavoidably faced with ambiguous documentation might take comfort that, as shown by Johns v. Gillian and the UCC, Florida law concerning standing is not very demanding. Nevertheless, the requirements for standing must be proved, and the attorney should determine before filing that these requirements can be met.

¹SeeFla. Stat. §673.2041 (2010).

²See National Bank of Sarasota v. Dugger, 335 So. 2d 859, 860-861 (Fla. 2d D.C.A. 1976), cert. den., 342 So. 2d 1101 (Fla. 1976) (citing Comments as interpretive guide).

³ Florida has long held an assignment of a note includes an assignment of the mortgage. See Taylor v. American Nat. Bank, 57 So. 678, 685 (Fla. 1912); First Nat. Bank of Quincy v. Guyton, 72 So. 460 (Fla. 1916); Collins v. W.C. Briggs, Inc., 123 So. 833 (Fla. 1929); Miami Mortgage & Guaranty Co. v. Drawdy, 127 So. 323 (Fla. 1930); and Warren v. Seminole Bond & Mortgage Co., 172 So. 696, 697 (Fla. 1937). Thus, a recorded assignment seemed surplusage. By contrast, a mortgage assignment without the note has been held ineffectual. Sobel v. Mutual Development, Inc., 313 So. 2d 77, 78 (Fla. 1st D.C.A. 1975).

⁴Johns v. Gillian, 184 So. 140, 143 (Fla. 1938).

⁵Fla. Stat. §679.1091(4)(k)(1) (2010) (Article 9 extends to a transfer of a lien in real property).

⁶Fla. Stat. §679.1091(1) (2010).

⁷See UCC §9-109, Comment 5.

⁸Fla. Stat. §679.1021(1)(sss) (2010).

⁹Fla. Stat. §679.1021(1)(bb) (2010).

¹⁰Fla. Stat. §679.2031(2) (2010).

¹¹Fla. Stat. §679.1021(1)(l) (2010).

¹²Fla. Stat. §679.1021(1)(ttt) (2010) and §671.201(38) (2010) (“security interest” includes the interest of a buyer of a promissory note).

¹³Fla. Stat. §679.2031(7) (2010).

¹⁴Fla. Stat. §673.2041(1) (2010), defining “indorsement.” Fla. Stat. §673.2011 (2010) requires an indorsement for a transferee to become a “holder,” if the instrument is payable to a specific person, but even a nonholder transferee may often enforce the instrument. SeeFla. Stat. §673.2031(2) (2010).

¹⁵ The delivery requirement has also been weakened by some cases. See Beaty v. Inlet Beach, 9 So. 2d 735 (Fla. 1942); Harmony Homes, Inc. v. United States, 936 F. Supp. 907, 913 (M.D. Fla. 1996), aff’d,124 F.3d 1299 (11th Cir. 1997).

¹⁶Fla. Stat. §679.3081(5) (2010).

¹⁷Fla. Stat. §679.1021(1)(zz) (2010).

¹⁸Fla. Stat. §679.3131(1) (2010). Florida law applies to a security interest perfected by possession if the promissory note is located in Florida. SeeFla. Stat. §679.3011(2) (2010).

¹⁹Fla. Stat. §679.3121(1) (2010) (perfection by filing where the collateral is instruments). The term “instrument” under Article 9 includes non-negotiable promissory notes, unlike the same term defined in Article 3. CompareFla. Stat. §679.1021(1)(uu) (2010) withFla. Stat. §673.1041(2) (2010), and see Comment 5(c) to UCC §9-102.

²⁰Fla. Stat. §679.5011(1)(b) (2010). A registered organization organized in Florida is deemed “located” in Florida. SeeFla. Stat. §679.3071(5) (2010).

²¹Fla. Stat. §679.3131(3) (2010).

²²Fla. Stat. §679.3171(1)(b) (2010) (security interest is junior to the rights of a person who became a lien creditor prior to perfection).

²³Fla. Stat. §679.3091(4) (2010). This is one of the few areas wherein collateral assignments and sales are different. Purchasers of promissory notes had not in the past been required to file financing statements, and the drafters of Article 9 wanted to continue that practice. See Comment 4 to UCC §9-309.

²⁴ First, the priority rules determine if the assignee prevails over another assignee, and possession is more protective than automatic perfection. Second, courts may find what appears to be a sale is actually security that cannot be perfected automatically. See, e.g., Torreyson v. Dutton, 198 So. 796 (Fla. 1940); Hulet v. Denison, 1 So. 2d 467 (Fla. 1941); Howard v. Goodspeed, 135 So. 294 (Fla. 1931). Also, the assignee usually wants possession to ensure standing to foreclose. See Abbott v. Penrith, 693 So. 2d 67 (Fla. 5th D.C.A. 1997); Pastore-Borroto Development, Inc. v. Marevista Apartments, M.B., Inc., 596 So. 2d 526 (Fla. 3d D.C.A. 1992); Figueredo v. Bank Espirito Santo, 537 So. 2d 1113 (Fla. 3d D.C.A. 1989).

²⁵See definitions of “purchase” and “purchaser” at Fla. Stat. §§671.201(32) and (33) (2010).

²⁶See Comment 7 to UCC §9-330 (“a purchaser who takes even with knowledge of the security interest qualifies for priority under subsection (d) if it takes without knowledge that the purchase violates the rights of the holder of the security interest”). Fla. Stat. §679.3171(2) (2010) seems to adopt a different rule, saying that a “buyer, other than a secured party” takes free of a security interest if the buyer gives value and takes delivery “without knowledge of the security interest” and before it is perfected. However, a “buyer, other than a secured party” under Fla. Stat. §679.3171(2) (2010) is not a “purchaser” under Fla. Stat. §679.330(4) (2010). Comment 6 to UCC §9-317 says that unless the sale is excluded from Article 9, the buyer is a “secured party,” and §679.3171(2) does not apply, adding “[r]ather, the priority rules generally applicable to competing security interests apply.”

²⁷Fla. Stat. §671.201(21)(a) (2010).

²⁸C.f., Ederer v. Fisher, 183 So. 2d 39, 42 (Fla. 2d D.C.A. 1965) (unauthorized indorsement deprived plaintiff of holder in due course status, thus, permitting defense on instrument). As in Ederer, inability to prove holder status does not necessarily mean the plaintiff lacks standing under Fla. Stat. §673.3011 (2010), but may expose the plaintiff to additional defenses.

²⁹SeeFla. Stat. §673.5011(2)(b)(1) (2010), permitting the maker to make such demand.

³⁰SeeFla. Stat. §673.5041(1) (2010), giving effect to such waivers.

³¹See, e.g., Scott v. Taylor, 58 So. 30 (Fla. 1912) (payment effective if made to authorized agent); McChesney v. Herman, 176 So. 565 (Fla. 1937); Posey v. Hunt Furniture Co., Inc., 43 So. 2d 343 (Fla. 1949); Fla. Stat. §671.103 (2010) (UCC does not displace law of agency).

³²Fla. Stat. §673.1041 (2010) determines negotiability. See, e.g., Locke v. Aetna Acceptance Corp., 309 So. 2d 43 (Fla. 1st D.C.A. 1975) (note stating “pay to seller” not negotiable because not payable to order of seller); City Bank, N.A. v. Erickson, 18 FLW Supp. 283 (Fla. Cir. Ct. 2011) (home equity agreement not negotiable where amount not fixed); Holly Hill Acres, Ltd. v. Charter Bank, 314 So. 2d 209 (Fla. 2d D.C.A. 1975) (note incorporating terms of mortgage not negotiable).

³³Johnston v. Allen, 22 Fla. 224 (Fla. 1886).

³⁴Philogene v. ABN AMRO Mortgage Group, Inc., 948 So. 2d 45 (Fla. 4th D.C.A. 2006); Fla. Stat. §673.3011(1) (2010).

³⁵Juega v. Davidson, 8 So. 3d 488 (Fla. 3d D.C.A. 2009); Mortgage Electronic Registration Systems, Inc. v. Revoredo, 955 So. 2d 33, 34, fn. 2 (Fla. 3d D.C.A. 2007) (stating that MERS was holder, but not owner and “We simply don’t think that this makes any difference. See Fla. R.Civ. P. 1.210(a) (action may be prosecuted in name of authorized person without joining party for whose benefit action is brought)”).

³⁶Laing v. Gainey Builders, Inc., 184 So. 2d 897 (Fla. 5th D.C.A. 1966) (collateral assignee was a holder); Cullison v. Dees, 90 So. 2d 620 (Fla. 1956) (same, except involving validity of payments rather than standing to foreclose).

³⁷See Fla. Stat. §673.3091(2) (2010); Servedio v. US Bank Nat. Ass’n, 46 So. 3d 1105 (Fla. 4th D.C.A. 2010).

³⁸BAC Funding Consortium, Inc. v. Jean-Jacques, 28 So. 3d at 938-939 (Fla. 2d D.C.A. 2010). See also Verizzo v. Bank of New York, 28 So. 3d 976 (Fla. 2d D.C.A. 2010) (Bank filed original note, but indorsement was to a different bank). But seeLizio v. McCullom, 36 So. 3d 927 (Fla. 4th D.C.A. 2010) (possession of note is prima facie evidence of ownership).

³⁹See also Glynn v. First Union Nat. Bank, 912 So. 2d 357 (Fla. 4th D.C.A. 2005), rev. den., 933 So. 2d 521 (Fla. 2006) (note transferred before lawsuit, even though assignment was after).

⁴⁰Fla. Stat. §673.3091(2) (2010); Fla. Stat. §69.061 (2010).

⁴¹See Comment 6 to UCC §9-308.

⁴²Shavers v. Duval County, 73 So. 2d 684 (Fla. 1954); City of Gainesville v. Charter Leasing Corp., 483 So. 2d 465 (Fla. 1st D.C.A. 1986); Southern Colonial Mortgage Company, Inc. v. Medeiros, 347 So. 2d 736 (Fla. 4th D.C.A. 1977).

⁴³See, e.g.,Thomas E. Baynes, Jr., Florida Mortgages (Harrison Co. 1999), §7-2 (West pocket part for 2009), stating “[s]ection 4 was added to establish that perfection of a security interest in a mortgage…would be governed by the Florida Uniform Commercial Code…. This type of assignment of mortgage, sometimes characterized as a ‘collateral assignment,’ does not need to be recorded under F.S. §701.02.”

⁴⁴Fla. Stat. §671.201(38) (2010).

⁴⁵See, e.g., Gardner v. McPherson, 151 So. 390 (Fla. 1933) (dismissing foreclosure by unrecorded collateral assignee where mortgage had been satisfied by record mortgagee); Williams, Salomon, Kanner & Damian, as Trustee v. American Bankers Life Assurance Co., 379 So. 2d 119 (Fla. 3d D.C.A. 1979) (subordination unenforceable where recorded collateral assignee had not agreed). However, these cases predated subsection (4).

⁴⁶See, e.g., Manufacturers’ Trust Co. v. People’s Holding Co., 149 So. 5 (Fla. 1933).

⁴⁷American Bank of the South v. Rothenberg, 598 So. 2d at 290 (Fla. 5th D.C.A. 1992).

⁴⁸See also Chandler v. Davis, 190 So. 873 (Fla. 1939) (assignee from record mortgagee took subject to holder in possession of note); Karn v. Munroe, 6 So. 2d 529 (Fla. 1942) (subsequent assignee with possession prevailed over first); Vance v. Fields, 172 So. 2d 613 (Fla. 1st D.C.A. 1965) (first assignee recorded first, but took possession of wrong note; court correctly ruled for the second assignee with possession without discussing distinction between a real estate transaction and note sale). CompareTamiami Abstract & Title Co. v. Berman, 324 So. 2d 137 (Fla. 3d D.C.A. 1976), cert. den., 336 So. 2d 604 (Fla. 1976) (purchaser of original mortgagee’s assets did not own mortgage assigned of record to another by collateral assignment that later became absolute upon default). Because the buyer purchased the mortgage (not the real estate), the court should have applied rules regarding transfer of the mortgage as personal property, but focused instead on the land records. Yet the court said the defendant “claimed outright possession of said mortgage,” which left the possibility that his claim also arose from possession. Otherwise, it seems at odds with Cullison, cited in fn. 36.

⁴⁹ The court cited Kapila v. Atlantic Mortgage & Investment Corp. (In re Halabi), 184 F.3d 1335 (11th Cir. 1999), and Bradley v. Forbs, 156 So. 716 (Fla. 1934). In Kapila, 184 F.3d at 1338, the court held the assignee’s failure to record did not render the mortgage unperfected in the mortgagor’s bankruptcy. The court said §701.02 protects only an assignee of the mortgagee, not a person acquiring the real estate. However, the question of who owns a mortgage is distinct from whether it is perfected against grantees of the real estate owner. Bradley includes some ambiguous language, but stands primarily for the proposition that a purchaser cannot rely on informal assurances by the record mortgagee, but must obtain a satisfaction. See Bradley, 156 So. at 717. The Kapila court also said the Florida Supreme Court may have implicitly receded from Bradley in Hulet v. Denison, 1 So. 2d 467, 468-469 (Fla. 1941), presumably because it discussed the statute as though it applied to persons acquiring the land, even though its decision was on other grounds, i.e., actual notice. The purchasers relied on a satisfaction by the mortgage assignee of record. However, the original mortgagee’s surviving widow claimed the assignment was for collateral and had been discharged. The court said the purchasers had “actual notice,” but cited the failure of the purchaser to demand surrender of the note as the basis. If that is what is meant by “actual notice,” then what is the point of the recording statute?

⁵⁰ In addition to American Bank of the South v. Rothenberg, Gardner v. McPherson, Bradley v. Forbs, and Manufacturers’ Trust Co. v. People’s Holding Co., see Housing Authority v. Macho, 181 So. 2d 680 (Fla. 3d D.C.A. 1966).

⁵¹Rucker v. State Exchange Bank, 355 So. 2d at 172 (Fla. 1st D.C.A. 1978). The court spoke of surrender of the mortgage, but it is surrender of the promissory note that is important under the UCC. See also Perry v. Fairbanks Capital Corp., 888 So. 2d 725, 726 (Fla. 5th D.C.A. 2004).

If you find yourself in an unfortunate situation of losing or about to your home to wrongful fraudulent foreclosure, visit: http://www.fightforeclosure.net

What Homeowners Needs to know About Mortgage Assignments and Endorsements

04 Thursday Jul 2013

Posted by BNG in Affirmative Defenses, Appeal, Foreclosure Defense, Fraud, MERS, Mortgage Laws, Non-Judicial States, Note - Deed of Trust - Mortgage, Your Legal Rights

≈ Leave a comment

Tags

IOU, MERS, Mortgage Electronic Registration System, Mortgage law, Mortgage loan, Promissory note, Trust deed (real estate), Uniform Commercial Code

When a potential homeowner takes out a loan to purchase a home, you are required to sign two documents: a promissory note and a mortgage (or deed of trust).

Assignments and endorsements are the ways that these documents are transferred between banks. Read on to learn the difference between an assignment of mortgage (or deed of trust) and an endorsement of the note.

How To Understand Mortgage Transactions

To fully understand the difference between an assignment of mortgage (or deed of trust) and endorsement of the note, you must understand the basic terms and documents involved in a residential mortgage transaction.

Mortgagee and mortgagor. A “mortgagee” is the lender. The mortgagee gives the loan to the “mortgagor,” who is the homeowner/borrower.

Loan documents. The loan transaction consists of two main documents: the mortgage (or deed of trust) and a promissory note. The mortgage (or deed of trust) is the document that pledges the property as security for the debt and permits a lender to foreclosure if you fail to make the monthly payments, whereas the promissory note is the IOU that contains the promise to repay the loan. The purpose of the mortgage (or deed of trust) is to provide security for the loan that is evidenced by a promissory note.

Loan Transfers. Banks often sell and buy mortgages from each other. An “assignment” is the document that is the legal record of this transfer from one mortgagee to another. In a typical transaction, when the mortgagee sells the debt to another bank, an assignment is recorded and the promissory note is endorsed (signed over) to the new bank.

These documents are separate and each has its own distinct set of rules that govern how they are exchanged between banks.

Assignments of Mortgage (or Deed of Trust)

An assignment transfers all of the interest the original mortgagee had under the mortgage (or deed of trust) to the new bank. Generally, the mortgage (or deed of trust) is recorded shortly after the mortgagors sign it and, if the mortgage is subsequently transferred, each assignment is to be recorded in the county land records.

The Role of MERS in the Assignment Process

When mortgages are transferred frequently, assignments are sometimes neglected. MERS (the Mortgage Electronic Registration System, Inc.), a company created by the mortgage banking industry, was developed to track ownership of mortgages. This eliminates the need for separate assignments when the loan is transferred. In some mortgage transactions, the mortgage will designate MERS as the mortgagee (solely as a nominee for the lender). These loans are referred to as MERS as Original Mortgagee (MOM) loans. In other cases, the loan may be assigned to MERS (solely as a nominee for the lender) at some point later in its life cycle after the loan closes. MERS then acts as an agent for the owner of the loan, but it never owns the mortgage loan or services it.

Promissory Notes

When a loan changes hands, the promissory note is endorsed (signed over) to the new owner of the loan. In some cases, the note is endorsed in blank which makes it a bearer instrument under Article 3 of the Uniform Commercial Code. This means that any party that possesses the note has the legal authority to enforce it.

Assignments and endorsements prove which bank owns the debt and may bring the foreclosure action. If the documentation was not proper, this can be a defense to foreclosure in some cases.

To find out how you can effectively use solid mortgage assignments and endorsement arguments and case laws for wrongful foreclosure defense visit: http://www.fightforeclosure.net

What Homeowners Needs To Know About MERS

03 Wednesday Jul 2013

Posted by BNG in Affirmative Defenses, Appeal, Federal Court, Foreclosure Defense, Fraud, Litigation Strategies, MERS, Non-Judicial States, Pleadings, Securitization, Trial Strategies

≈ Leave a comment

Tags

Lien, MERS, Mortgage Electronic Registration System, Mortgage law, Mortgage loan, Promissory note, Real property, United States

In 1993, key residential mortgage lending industry participants1 gathered in order to bring then current developments in technology to the forefront in the establishment of a central, electronic registry for tracking interests in mortgage loans, thereby facilitating the transfer, acquisition and identification of those interests for custodians, servicers, investors and other participants in the industry. The goal was to eliminate the need and administrative expense for paper assignments of various mortgage-related rights as much as possible. The result of these efforts was the creation of the Mortgage Electronic Registration System, known as the MERS® System.2

Prior to the development of the MERS® System, when an interest in a mortgage loan was transferred, the parties would often change the mortgagee by assigning and recording the security instrument in the land records.3 Mortgage loans were frequently originated in the name of one lender and then transferred to aggregators, which might transfer contractual servicing rights to still another party. In each case, an assignment was recorded so that the purchaser or servicer would appear in the land records4 so that they would receive service of process and other legal notices as the lienholder in the public land records. To complicate matters further, when the servicing remained with the seller, the seller often remained mortgagee of record. If servicing changed hands, the land records were updated only if the new servicer wanted to receive service of process.5 This process could take a long time to complete—up to six months for a modest loan portfolio. County recorder offices struggled to manage the volume of filings, which threatened the integrity of the land title recordation system and jeopardized the ability of consumers to obtain residential mortgage loans. Error rates as high as 33% were common, with assignments recorded in the wrong sequence or missing altogether—clouding title to properties.6

The founders of the MERS® System intended for it to be a system that was open and available to mortgage industry participants, applying information technology to reduce costs and streamline the process, similar to implementation by the securities industry of book entry systems.

The stated benefits of the initially proposed MERS® System concept7 were:

a. Elimination of the need for subsequent assignments of the mortgage lien following closing of a loan.

b. Significant simplification of the loan tracking process.

c. Improvement of the lien release process.

d. Assistance in fraud reduction.

e. Simplification of procedures for delivering legal notices to mortgagees by providing an accurate database of beneficial owners of mortgage rights.

f. Cost reduction through voluntary immobilization of the mortgage note.8

The MERS® System was put into effect with the organization of Mortgage Electronic Registration Systems, Inc. (“MERS Inc.”), which serves as “mortgagee”, “grantee” or “beneficiary” (depending on state law; we will use the term “mortgagee” to refer to all three) in the security instrument, as nominee for the original lender and subsequent beneficial owners of the secured note. MERS Inc. is a wholly owned subsidiary of MERSCORP Holdings, Inc. (“MERSCORP Holdings”), which is owned by certain member financial institutions that utilize its services. The industry leaders, having worked hard to develop and achieve these laudable and practical goals, clearly had no idea what would befall the residential mortgage industry, nor how their motives and intentions would be twisted and vilified by critics in the current economic downturn.9

The Principles of MERS

The principles behind the MERS® System were derived from similar principles governing the establishment and function of the book entry registration and transfer system for securities established by The Depository Trust Company (“DTC”). Like the MERS® System, DTC is a member-owned institution that was created for the benefit of broker-dealer participants to facilitate transfers of securities in the securities markets. The benefits to the efficiency of securities transfers brought about by DTC have been clearly demonstrated and widely accepted.10 Much as “Cede & Co.” (the nominee holder of title to securities for DTC) does for beneficial owners of securities in the securities markets, MERS Inc. acts as the nominee of the lender (and its successors and assigns), who are beneficial owners of mortgage loans in the mortgage industry. In so doing, MERS Inc. becomes the mortgagee or beneficiary of record for the related mortgages and/or deeds of trust, for the benefit of the lender participants in the MERS® System.

To understand how the MERS® System operates, it is important to clarify the basic elements of a mortgage loan, which typically consists of two documents: (i) a promissory note between the lender and the borrower that sets forth the terms of the loan and establishes the obligation of the borrower to repay the loan secured by real property; and, (ii) a security instrument, which may be called a “mortgage,” “deed of trust” or a “security deed” (depending on state law; we will use the term “mortgage” to refer to all three), evidencing the pledge of the purchased or refinanced property as collateral or security for the loan. The mortgage is recorded in the real property records in order to provide public notice to third parties of the security interest encumbering the property. Sometimes the terms “note” and “mortgage” have been used interchangeably, resulting in confusion. They represent two different documents with separate but interrelated functions. For that reason, as discussed below and based on long-standing case law and regulations, it is not necessary that both documents be in the name of the same person or entity.

It is also important to understand what the MERS® System is and what it is not. Under the MERS® System, MERS Inc. and its parent, MERSCORP Holdings, serve two distinct functions. First, MERSCORP Holdings owns, operates and maintains the MERS® System, which is an electronic database or registry of mortgage loans that tracks changes in servicing rights and beneficial ownership interests in residential mortgage loans. Second, MERS Inc. serves as the mortgagee or beneficiary of record, or holder of the mortgage lien, in the public land records for the benefit of its members.

MERS Inc. claims no right to retain payments made on the promissory notes. It is not a mortgage banker. MERS Inc. does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance or provide any loan servicing functions. MERS Inc. does not lend money or acquire the right to receive payments on mortgage loans. MERS Inc. does not receive compensation from consumers, just fees from its members.11

The bifurcation of roles and parties was not instituted by MERS Inc., rather it has a long history in mortgage finance and other developing commercial operations and in fact has been incorporated into state laws and regulations as will be discussed below.12 Where the mortgage (or an assignment thereof) names MERS Inc. as the mortgagee (or assignee of the mortgagee), then MERS Inc. has legal title13 to the real estate interest serving as collateral for the repayment of the loan, and the owner(s) of the note owns the beneficial interest in the loan secured by the mortgage. In such capacity, MERS Inc. remains the mortgagee of record, and pursuant to its contractual agreements with its members who are owners of the notes or servicers acting on behalf of the owners, any transfer of ownership or servicing must be communicated to the MERS® System to enable it to track such changes in order to provide the owner and servicer with filings and communications that MERS Inc. receives in its capacity as mortgagee of record. The borrower deals with the loan servicer—not MERS Inc.—in all matters of payment, modification or default on the loan.

In mortgage (non-deed of trust) states, the operative document defining MERS Inc.’s rights and functions is the mortgage. MERS Inc. is neither a party to, nor named in, the promissory note. Representative language can be found in a typical form of mortgage naming MERS Inc. as the original mortgagee14, which identifies three parties: the borrower, the lender and MERS Inc. MERS Inc. is further described as a separate corporation that is acting as mortgagee solely as a nominee for lender and lender’s successors and assigns. Under the mortgage, the borrower mortgages, grants and conveys to MERS Inc. (solely as nominee for lender and lender’s successors and assigns) and to the successors and assigns of MERS Inc., the property described therein. Furthermore, the mortgage includes an acknowledgment from the borrower that MERS Inc. holds only legal title15 to the interests granted by the borrower, but if necessary to comply with law or custom, MERS Inc. (as nominee for lender and lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the rights to foreclose and sell the mortgaged property; and to take any action required of the lender, including, but not limited to, releasing and canceling the mortgage. Thus, the express language of the mortgage instrument authorizes MERS Inc. to act on behalf of the lender in serving as the legal titleholder and exercising any of the rights granted to the lender thereunder.

In deed of trust states, the operative document defining MERS Inc.’s rights and functions is the deed of trust. Representative language can be found in a typical form of deed of trust naming MERS Inc. as the original beneficiary16, which identifies four parties: the borrower, the lender, the trustee and MERS Inc. MERS Inc. is described as a separate corporation that is acting solely as a nominee for lender and lender’s successors and assigns. In addition, MERS Inc. and the successors and assigns of MERS Inc. are further designated as the beneficiary of the deed of trust (solely as nominee for lender and lender’s successors and assigns). Under the deed of trust, the borrower grants and conveys to the trustee, in trust, with power of sale, the property described therein. Furthermore, the deed of trust includes an acknowledgment from the borrower that MERS Inc. holds only legal title to the interests granted by the borrower, but if necessary to comply with law or custom, MERS Inc. (as nominee for lender and lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the rights to foreclose and sell the property; and to take any action required of the lender, including, but not limited to, releasing and canceling the deed of trust. Thus, the express language of the deed of trust also authorizes MERS Inc. to act on behalf of the lender in serving as the legal titleholder and exercising any of the rights granted to the lender thereunder.

The Myths of MERS

In this section, we will address some of the more prevalent myths surrounding the MERS® System that have been perpetuated by various MERS’ critics and we will explain the facts and legal analysis that clarify and dispel such myths.

MYTH: The MERS® System is fraudulent and illegal.

FACT: The MERS® System is based upon sound legal principles and its legal validity has been upheld by a vast majority of the courts.17 The MERS® System relies on established principles of real property law, the law of negotiable instruments, and basic contract law that will be discussed herein.18 Rules governing security interests in personal property under the Uniform Commercial Code (UCC) also support the legal model for the MERS® System.19 Courts have long recognized the validity of using a nominee or agent as mortgagee as may appear in the mortgage instrument for recording purposes on behalf of the note owner.20 Agency relationships may be established by private contract, and common law principles of principal and agent shall supplement the rules governing secured transactions pursuant to UCC §1-103(b). Under Article 9 of the UCC, it is not necessary to record a mortgage assignment when the mortgage note is transferred or sold.21 Moreover, under real estate law, legal title can remain in a mortgagee (such as MERS Inc.) without invalidating the security instrument even though another party owns or holds the related promissory note.22 Significantly, the original recorded mortgage remains in place and provides sufficient notice of the lien to third parties, which is the primary purpose of such lien recording provisions.23

State legislatures have also recognized the validity and appropriateness of the MERS® System. For example, as a result of questions raised about the MERS® System, the Minnesota Legislature passed an amendment to the Minnesota Recording Act that expressly permits nominees to record “[a]n assignment, satisfaction, release, or power of attorney to foreclose.”24 The amendment, frequently called “the MERS statute,” went into effect on August 1, 2004.25

The Minnesota “MERS statute” provides that:

“An assignment, satisfaction, release, or power of attorney to foreclose is entitled to be recorded in the office of the county recorder or filed with the registrar of titles and is sufficient to assign, satisfy, release, or authorize the foreclosure of a mortgage if:

(1) a mortgage is granted to a mortgagee as nominee or agent for a third party identified in the mortgage, and the third party’s successors and assigns;

(2) a subsequent assignment, satisfaction, release of the mortgage, or power of attorney to foreclose the mortgage, is executed by the mortgagee or the third party, its successors or assigns; and

(3) the assignment, satisfaction, release, or power of attorney to foreclose is in recordable form.”26

In addition, under the Texas Property Code, the definition of “mortgagee” expressly includes a “book entry system,” which is defined as a national book entry system for registering a beneficial interest in a security instrument that acts as a nominee for the grantee, beneficiary, owner, or holder of the security instrument and its successors and assigns. 27 The definition of “book entry system” has been construed by several Texas courts to specifically include the MERS® System.28

MYTH: MERS Inc. lacks authority to act as mortgagee/beneficiary of record.

FACT: The authority of MERS Inc. to act as mortgagee/beneficiary of record is delegated by MERS’ members pursuant to well-established principles of property and agency law. Under general agency law, an agent has authority to act on behalf of its principal where the principal “manifests assent” to the agent “that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests or otherwise consents to so act.”29 Under the terms of the FNMA/FHLMC Uniform Security Instrument form of mortgage, MERS Inc. has the right to exercise any or all rights of the lender and its successors and assigns, including, but not limited to, the rights to foreclose and sell the mortgaged property, and to take any action required of the lender including, but not limited to, releasing and canceling the mortgage. Courts throughout the country have recognized that a lender who holds the beneficial interest in a loan may lawfully designate MERS Inc. as its nominee to hold legal title to the mortgage and serve as mortgagee of record, and have routinely enforced the provisions of mortgages in which MERS Inc. is named the mortgagee of record.30

MYTH: MERS Inc. does not have standing or authority to foreclose or seek relief from an automatic stay in bankruptcy.31

FACT: The concept of standing means that a party must have a legal interest or claim or the right to seek judicial enforcement of an obligation or action for relief in order to initiate a lawsuit or proceed in a legal action. Numerous courts have considered whether MERS Inc. is a real party in interest with standing to foreclose on a property or to move for relief from the automatic stay in bankruptcy (which prohibits creditors from pursuing any remedies upon a debtor’s bankruptcy filing). MERS Inc. has such interest and authority both (1) by express contractual terms, and (2) by law. First, the form of mortgage that appoints MERS as mortgagee and the MERS member agreement each grants MERS Inc. the authority to take action on behalf of a lender and its successors and assigns, including the enforcement of the rights and remedies under the mortgage. Specifically, the express language of a typical mortgage (where MERS Inc. is the mortgagee) provides that “if necessary to comply with law or custom, MERS Inc. (as nominee for lender and lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the [mortgaged property]; and to take any action required of lender including, but not limited to, releasing and canceling this [mortgage].” Second, Section 5.4(c) of the Restatement (Third) of Property (Mortgages) specifically provides that “[a] mortgage may be enforced only by, or on behalf of, a person who is entitled to enforce the obligation the mortgage secures”.32 Courts throughout the country have routinely and consistently held that MERS Inc. has both standing and authority to foreclose and seek relief on behalf of the beneficial owners of mortgage loans.33 The court in In re Huggins identified four reasons why MERS Inc. has standing to seek relief from an automatic stay in bankruptcy. “First, MERS is acting as nominee for [the noteholder], which holds the note . . . second, MERS is the record mortgagee under the Mortgage with the powers expressly set forth therein, including the power of sale . . . third, the Massachusetts foreclosure statute expressly authorizes the exercise of sale powers by a mortgagee, or person authorized to sell, precisely the position occupied by MERS . . . finally, a denial of MERS foreclosure right as mortgagee would lead to anomalous and perhaps inequitable results, to wit, if MERS cannot foreclose though named as mortgagee, then either [the noteholder] can foreclose though not named as a mortgagee or no one can foreclose, outcomes not reasonably or demonstrably intended by the parties.”34

However, there are also several minority decisions that, in some form, have taken issue with MERS Inc.’s authority to foreclose.35 None of them, to our knowledge, has invalidated a mortgage for which MERS is the nominee, and none of these decisions has challenged MERS Holdings’ ability to operate as a central system to track changes in the ownership and servicing of loans. Several decisions adverse to MERS Inc. have been reversed upon appeal, vacated or clarified by other court decisions.36

Notwithstanding the foregoing, in July 2011, MERS revised its Rules of Membership to prohibit the initiation of foreclosures in the name of MERS Inc. Under the revised rule37, MERS members are required to cause MERS Inc., through a MERS signing officer, to execute an assignment of the mortgage lien from MERS Inc. to the servicer, investor or a third party, prior to the initiation of a foreclosure proceeding or the commencement of an action for relief of an automatic stay in bankruptcy.

MYTH: The MERS® System creates an impermissible “split” between the mortgage and the note.

FACT: There is no “split” between the mortgage and the note because MERS Inc. holds the mortgage as mortgagee and nominee or agent for the Lender and its successors and assigns.38 MERS Inc. only appears in the security instrument and acts as a mortgagee of record in a nominee or agency capacity for the beneficial owner of the note.39

While litigants and critics continue to raise the issue that the use of MERS Inc. results in a purported impermissible split of the note from the mortgage, thereby rendering both unenforceable, their arguments have been consistently rejected by the courts. For example, in a recent Ninth Circuit case, Cervantes v. Countrywide Home Loans Inc., et al.,40 the plaintiff class alleged conspiracies by their respective lenders and others to use MERS Inc. to commit fraud as a sham beneficiary, among other things. The court found that plaintiffs failed to identify any representations made about the MERS® System and its role in their loans that were false and material; none of the plaintiffs’ allegations indicated that they were misinformed either about MERS Inc.’s role as a beneficiary or the possibility that their loans would be resold and tracked through the MERS® System; and they failed to show that the designation of MERS Inc. as beneficiary caused them any injury by, for example, affecting the terms of their loans, their ability to repay the loans or their obligations as borrowers.41 The court reviewed the express language of the documents the borrowers signed containing the substance of disclosure explained above and found that by executing the documents the plaintiffs agreed to the terms and were on notice of their content.42 “[T]he notes and deeds [mortgages] are not irreparably split: the split only renders the mortgage unenforceable if MERS or the trustee, as nominal holders of the deeds, are not agents of the lenders.”43 This distinction goes to the crux of the argument and the MERS critics. If a debt represented by a note is secured by collateral, then such collateral may not be separated from the note; although it may be held in the name of a different party as nominee or agent for the owner of the note; that is, the security follows the debt and in fact is released upon payment in full of such debt. MERS Inc. does not contend it acts in any capacity other than as mortgagee holding as agent or nominee for the lender. In a similar vein, recently a multi-district litigation (MDL) case involving MERS Inc. in Arizona was dismissed, citing in part the plaintiffs’ express agreement in the mortgages that MERS Inc. is the lienholder of record as agent for the lender and its assigns.44

The use of an agent to hold legal title in the mortgage while another holds a beneficial interest in the mortgage loan has a long history in the residential housing industry. For example, starting in the 1930s, mortgage lenders would originate and sell mortgage loans to investors under the Federal Housing Administration’s (“FHA”) insured loan program. The originating lenders would service and hold the mortgage loans, as mortgagee of record on behalf of the beneficial owners, whose names were not recorded in the county land records. Prior to the advent of residential mortgage securitization in the 1960s, it was common for two or more savings and loan associations to acquire a portfolio of mortgage loans and take participation interests therein. The participated mortgage loans were typically serviced by a mortgage loan servicer, as mortgagee of record on behalf of the various participants, whose names were also not recorded in the county land records. With the development of residential mortgage securitization in the late 1960s and early 1970s, Ginnie Mae, under its guarantee agreement, became the equitable owner of pooled loans while the originator or aggregator of the loans either remained or became the mortgagee of record and serviced the loans as an independent contractor for the benefit of investors in the Ginnie Mae mortgage-backed securities.45 Fannie Mae and Freddie Mac followed suit using a similar model.

In addition, the Restatement (Third) of Property (Mortgages) confirms that an agent may be used to enforce a mortgage on behalf of a note owner and even instructs that “[c]ourts should be vigorous in seeking to find such [an agency] relationship, since the result is otherwise likely to be a windfall for the mortgagor and the frustration of [the note owner’s] expectation of security.”46

Moreover, even the U.S. Bankruptcy Code accounts for this bifurcated structure by making it clear that a mortgage that is recorded in the name of a servicer that becomes a debtor in bankruptcy while it holds bare legal title to the mortgage does not become an asset of that servicer/debtor’s bankruptcy estate: “property in which a debtor holds . . . only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise . . . becomes property of the estate . . . only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.”47

MYTH: A transfer of the note requires a corresponding assignment of the mortgage.

FACT: A transfer of the mortgage note does not require a corresponding assignment of the mortgage. Under the MERS® System, MERS Inc. is named in the mortgage as nominee for the lender and its successors and assigns. The UCC, which has been adopted, with slight variations, by all 50 states, governs the transfer or sale of notes (whether they are determined to be negotiable or non-negotiable).48 However, the recordation of mortgages and requirements for their enforcement are governed by real estate law. This bifurcation of applicable law does not render their application mutually exclusive; rather, both the UCC and applicable real estate law in the respective jurisdiction must be complied with in order to have an enforceable note representing an obligation to pay, and an enforceable lien on the real property that is collateral for the note.

Under the UCC, a note sale or transfer is effective and enforceable upon meeting three criteria: (i) the buyer giving value, (ii) to a seller with rights in the note and (iii) execution of a security or purchase agreement that either describes the note or is accompanied by possession of the note.49

Once the note is sold or transferred such that the conveyance is enforceable or “attaches” as described above, there is a corresponding automatic transfer of the seller’s interest in the mortgage to the buyer. Section 9.203(g) of the UCC states “The attachment of a security interest [which includes the right of a buyer of the note] in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage or other lien.”50 These UCC rules do not address priorities of the security interest in the underlying property, enforcement of the mortgage, or the impact of filing or non-filing.51 Those issues are governed by the real estate law of the jurisdiction in which the property is located. But it is clear that under the UCC, the transfer or sale of the note includes conveyance of seller’s interest in the underlying mortgage.52 In order for the buyer of the note to be comfortable about its ability to foreclose or take any other necessary steps to realize on the collateral, it must have a contractual relationship with the mortgagee of record. Under the MERS® System, that contractual relationship exists, and MERS Inc. has been granted the right and authority to act on behalf of the owner(s) of the note as well as the servicer of the note. The roles are outlined by contract among the parties which specifies their duties and responsibilities under both the UCC framework as well as the real property recordation system.

MYTH: The MERS® System makes it harder for home owners to identify the servicer and beneficial owners of their mortgage loans.

FACT: The MERS® System actually makes it easier for home owners to identify the servicer and beneficial owner of loans that are registered on the MERS® System. The servicer is the party primarily responsible for negotiating loan modifications and conducting foreclosure proceedings. If a mortgage loan has been securitized, the “owner” of the mortgage loan will typically be a trust, which under the terms of the related pooling and servicing agreement, has delegated all loan servicing authority to the servicer. Consequently, the servicer is the crucial contact for homeowners seeking to modify or renegotiate the terms of their loans due to financial hardships, and the identity of the servicer is readily available to troubled borrowers if their mortgage loan is registered with the MERS® System. The MERS® System maintains a toll-free number (888.679.6377) and an Internet website (www.mers-servicerid.org) that enable borrowers to identify the servicer, and in most cases, the beneficial owner of their mortgage loan, if their mortgage loan is registered on the MERS® System.53 New servicers and beneficial owners of a loan are required to identify themselves on the MERS® System within days of the actual transfer of interests.

In addition, homeowners have other statutorily-mandated access to such information. Under the Real Estate Settlement Procedures Act (RESPA)54, mortgage loan servicers are required to notify borrowers when the servicing of their loan changes, and under recent changes to the Truth in Lending Act (TILA)55, transferees of mortgage loans are now required to notify borrowers when the ownership of their mortgage loan changes. This seems axiomatic since otherwise the borrower would not know where to send payments. Furthermore, the Dodd–Frank Wall Street Reform and Consumer Protection Act56 amended RESPA to require mortgage loan servicers to respond to qualified written requests from borrowers for the identity and address of the owner, or assignee, of their loan within ten business days after receipt thereof.57 These legislative and regulatory provisions validate and preserve the goals and intent of the original MERS system concept.

MYTH: MERS signing officers lack authority to act on behalf of MERS Inc.

FACT: MERS Inc. is a Delaware corporation and its actions are governed by its bylaws and the Delaware General Corporation Law (DGCL). Under the DGCL, there is no requirement that an officer of a corporation be an employee of that corporation.58 In addition, under the DGCL, there is no requirement that individuals serving as officers of a corporation be employed or compensated by that corporation.

Under Delaware law, a corporation may by board resolution appoint officers to carry out the corporation’s business.59 In addition, Section 142(a) of the DGCL provides that “any number of offices may be held by the same person unless the certificate of incorporation or bylaws otherwise provide.”

Since MERS Inc. has no employees, a majority of the actions taken by MERS Inc. in its capacity as mortgagee under mortgages and/or deeds of trust are taken by designated officers commonly referred to as “certifying or signing officers.” The signing officers are generally officers of MERS’ members that are responsible for carrying out servicing functions on behalf of such MERS members.

The MERS Inc. signing officers are appointed pursuant to a corporate resolution, duly adopted pursuant to authority granted by the Board of Directors of MERS Inc. Pursuant to the corporate resolution, these signing officers are appointed as assistant secretaries, assistant vice presidents and vice presidents of MERS Inc. and their authority is limited to: (1) executing lien releases, (2) executing mortgage assignments, (3) executing foreclosure documents, (4) executing proofs of claims and other bankruptcy related documents (e.g., motions for relief of the automatic stay), (5) executing modification and subordination agreements needed for refinancing activities, (6) endorsing over checks made payable to MERS Inc. (in error) by borrowers, (7) taking such other actions and executing documents necessary to fulfill the MERS member’s servicing duties, and (8) taking such ministerial actions and, in such ministerial capacity, executing and delivering all such instruments and documents as the officer(s) of MERS Inc. deem necessary or appropriate in order to effectuate fully the purpose of each and all of the foregoing powers, in each case only with respect to the loan owned by the related member.60 In order to be eligible for appointment as a signing officer of MERS Inc., a person must demonstrate a basic knowledge of the MERS® System and pass an annual certifying examination administered by MERSCORP Holdings.

We are not aware of any relevant case law that would suggest that the MERS Inc. business model of appointing signing officers is either inappropriate or illegal. In fact, several courts have upheld the MERS Inc. signing officer business model.61

The propriety of the MERS Inc. signing officer business model has also been upheld in an ethics opinion from the New York State Bar Association62 which found that no conflict of interest exists in violation of New York state bar professional conduct rules when an attorney serves as an officer of the mortgagee of record/assignor for the purpose of executing a mortgage assignment and also represents the assignee in the prosecution of the subsequent foreclosure action.

Courts have consistently upheld the authority of MERS Inc., in its capacity as mortgagee, to assign mortgages.63 When plaintiffs have challenged the authority of MERS Inc. signing officers to execute assignments in connection with foreclosure or bankruptcy proceedings, courts have consistently found that such plaintiffs lack standing to challenge such assignments because they are not parties thereto and are not the intended beneficiaries thereof.64 Significantly, such plaintiffs have failed to articulate any correlation between the alleged lack of authority and a resulting harm to the plaintiff occasioned thereby.

MYTH: The MERS® System creates a cloud on real estate titles.

FACT: The servicer (acting on behalf of the beneficial owner(s) of the note) is the entity responsible for initiating and completing foreclosure actions and, as such, the servicer (not MERS Inc.) is the entity that is responsible for assuring that mortgage assignments and mortgage notes are properly assigned to the real party in interest (i.e., the servicer or the note owner) prior to the commencement of foreclosure proceedings. MERS® System members have a substantial interest in providing accurate and current information because they rely on the MERS® System to obtain current information about note owners and servicers, as well as to obtain or receive legal notices served on MERS Inc. as mortgagee of record.65 Using MERS Inc. as the mortgagee of record actually reduces the possibility of missed or incorrect assignments that would create an unclear “chain of title” as to who is the actual mortgagee or beneficiary of the security instrument. When MERS Inc. serves as mortgagee, the recorded chain of title to the mortgage starts with MERS Inc. at origination and ends with MERS Inc. when it either releases the lien or assigns the lien to another entity.66 The MERS® System also streamlines the lien release process, reducing research time and recording fees.

MYTH: The MERS® System usurps the function of local recording officials to track changes in ownership of real property.

FACT: The land records have never been an authoritative source for who owns beneficial interests in and servicing rights to mortgages.67 The primary purpose of land records was not to track mortgage loan ownership rights, but to provide public notice of liens filed against the property in order to protect the lienholder (and not the debtor).68 A mortgage and any assignment of mortgage is typically recorded to protect the lienholder, and is generally not required by the county; rather there are incentives to record and disincentives for not recording.69 When a loan is registered on the MERS® System, the MERS member is required to record the mortgage (or assignment of mortgage) in the name of MERS Inc., at the loan owner’s expense, in the appropriate recording office.70 Thus, the public is placed on notice that MERS Inc. is the mortgagee of record for the benefit of its members, and MERS Inc., in its capacity as lienholder, holds a perfected security interest in the real property that is valid against other lenders, judgment creditors or potential purchasers of the mortgaged property. More importantly, the role of the MERS® System is not to record or track changes in ownership of real property; rather the MERS® System tracks non-recordable contract interests in servicing rights and ownership of promissory notes secured by the related property for the benefit of MERS Inc. members. Consequently, the land records system continues to perform the services of recording ownership changes without usurpation by MERS Inc., and MERS Inc. performs the functions its members designed and created, both of which facilitate real estate ownership and financing by fulfilling their separate but interrelated roles.

One court considering the allegation of usurpation of a government function concluded: “Since the law does not require payment of a recording fee when new assignments are not recorded, and since the public is not using the ‘MERS private recording system’ to determine the true nature of encumbrances upon real estate, MERS is not usurping any governmental authority or power.”71

MYTH: The MERS® System is a revenue evasion tool that deprives counties of needed revenues.

FACT: Recording fees are paid upon filing the original mortgage naming MERS Inc. as mortgagee. The MERS® System merely reduces the need to pay additional recording fees associated with subsequent transfers of mortgage loans or mortgage loan servicing rights among MERS members. Avoidance of these fees (which is not illegal) does not constitute revenue evasion. Fees are paid in exchange for a service. If the service is not required or necessary, then there is no “lost” revenue.72 As even one of the most vocal critics of MERS acknowledges, the real property records have become voluminous and difficult and expensive to search.73 Many county recording offices have not kept up with advances in technology or efficiency as other industries have, and simply were unable to efficiently and effectively handle the increasing volume of mortgage transactions as access to capital markets gave more consumers the ability to buy homes. Thus spawned the innovations and creativity of the private market and the development of the MERS® System. However, it is also important to note that the transaction volume for which county recorders would receive a fee should not decrease due to the use of the MERS® System from pre-securitization levels. MERS facilitates transfers of the note from originator to aggregator to depositor to trust—a minimum of three transfers in a short period of time—that did not occur prior to the development of the securitization market. A new mortgage or a release of mortgage must still be recorded any time that the borrower refinances or pays off her mortgage. Therefore, filing fees will still be paid for the several ongoing transactions requiring a filing in the public records. In a recent case brought against MERS Inc. by a county to recover damages for alleged intentional failure to record assignments and claiming unjust enrichment and civil conspiracy, the District Court held that, “There is simply no requirement to record assignments under Iowa law. To the extent the County’s claims rely on such a requirement, they fail to state a claim upon which relief can be granted.”74

MYTH: The MERS® System created or enabled securitization.

FACT: Securitization existed long before the development of the MERS® System. The earliest securitized transactions date back to the early 1970s and were the sales of pooled mortgage loans by the Government National Mortgage Association (Ginnie Mae). These transactions were followed by the Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) in the early 1980s. The MERS® System did not originate until the mid-1990s. It is true that the MERS® System has facilitated the ease and efficiency with which securitization transactions are conducted, and this has been positive for bringing affordable financing options to more people. Securitization itself is not an evil to be vilified or destroyed. As Treasury Secretary Timothy Geithner said in announcing the Term Asset-Backed Securities Loan Facility (TALF) in February 2009, “No financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses.”75

The Merits of MERS

To hear some commentators characterize the MERS® System,76 one might think that it is a nefarious scheme of the financial oligarchy to obfuscate real property records, deprive tax-paying citizens of knowledge concerning the ownership of their mortgage loans and divest overburdened county recorders of direly needed revenue from recording fees. That is simply not the case. The MERS® System is a perfectly legal and valid system for the electronic registration and tracking of beneficial ownership of mortgage loans and servicing rights. It was created by some of the leading participants in the mortgage industry77 for the purpose of facilitating the operation of the secondary mortgage market. It has substantially increased the efficiency of mortgage loan transfers within the secondary mortgage market, and has played a significant role in establishing the U.S. housing market, despite recent troubles, as the envy of the free market world.78

Since its inception in 1995, the MERS® System has become a critical component of the American mortgage finance industry.79 More than 74 million mortgages have been recorded in the name of MERS Inc., of which 27 million are currently active. The MERS® System has streamlined the way residential and commercial mortgage loans are sold, traded and securitized by eliminating the need to prepare and record separate assignments of the mortgage lien. By doing so, the MERS® System has saved consumers, investors, and the mortgage industry millions of dollars each year in recording fees and related costs as well as reduced the problems and errors associated with multiple filings, and reduced delays in transactions.80

In addition to providing an electronic registration and tracking system to track conveyances of mortgage loans and servicing rights in the secondary market, the MERS® System creates accountability and transparency, helps reduce recordation costs (which may ultimately benefit the borrower), reduces the risk of errors in recordkeeping, eliminates breaks in the chain of title and makes it easier to keep track of liens as loans are sold to other investors.81 In addition, the MERS® System fills an information void that county recorders cannot provide—the identity of the current servicer and beneficial owner of the mortgage loan. Furthermore, the current and easily accessible information on the MERS® System assists homeowners, lenders and title insurers in arranging for consolidations, loan modifications, payoff statements, deeds in lieu of foreclosure, short sales and releases.

The MERS Mortgage Identification Number, or “MIN”, which assigns a unique identifying number to each loan for the life of the loan, and the MERS® System have been fully integrated into the U.S. mortgage loan industry, and together they are the single most important existing tools for tracking loan level data in the home loan process.82 Through its use of MIN, the MERS® System helps:

Identify for homeowners the servicer and, in most cases, the beneficial owner of their mortgage loans;
Investors and credit rating agencies analyze the credit quality of mortgaged-backed securities;
Regulators monitoring compliance with the law;
Public agencies track housing and economic trends;
Local governments identify the parties responsible for maintaining vacant properties in connection with neighborhood preservation efforts;83
Keep distressed borrowers in their homes by speeding up the modification process; and
Law enforcement officials fight fraud by tracking down criminals who attempt to obtain multiple loans secured by the same property.

Conclusion

While the recent recession brought one of the worst economic calamities experienced in several generations, it is disingenuous to attribute its cause, even in part, to a process and structure designed to facilitate efficiency and home ownership and bring about modernization long overdue in the mortgage finance industry, particularly one that had been modeled after a similar system successfully implemented by DTC in the securities industry. Homeowners who are facing foreclosure for failure to pay their respective mortgage loans may present a sympathetic cause, but the fact of the matter is that many participants in the residential mortgage process share in the blame for an overheated and unsustainable market. But none of this should overshadow the legitimate benefits brought to the mortgage industry by the MERS® System.

In sum, through thousands of lawsuits, many of which were held to be without merit, MERS Inc. has established that the process and structure of the MERS® System are based upon sound legal principles. Mistakes have been made, and improvements to the process have been implemented to ensure that the MERS® System will continue to serve and advance the goal of providing efficient and effective mortgage tracking. But those detractors who allege deceptive practices, flawed systems, and conspiracies have been, and will continue to be, proven without merit. In some cases, they seem to be more interested in obfuscating the issue of a lender pursuing its rightful claim to collateral upon default of a loan rather than bringing transparency or improvement to a process that, while not perfect, functioned fairly well. In those areas where deficiencies have been discovered or improvements identified, MERS Inc. and its members have been quick to respond. We would all do well to learn the lessons from the recent fiscal calamity and work to bring about prudent and appropriate changes to rebuild a vibrant and transparent mortgage finance market that continues to include, and benefit from, the MERS® System.

1. Participants included the Mortgage Bankers Association (MBA), the Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginnie Mae), the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA).

2. See Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration System, 31 Idaho Law Review 805 (1995).

3. Allen H. Jones, Setting the Record Straight on MERS, MORTGAGE BANKING 34 (May 2011).

4. Slesinger & Mclaughlin, supra note 2, at 809.

5. Jones, supra note 3 at 36.

6. R.K. Arnold, Yes, There is Life on MERS, 11 PROB. & PROP. 33, 34 (1997); Jones, supra note 3, at 36.

7. Slesinger & Mclaughlin, supra note 2, at 817.

8. Id. Under the initial MERS concept, the mortgage note would be immobilized through the development of standardized document custodian eligibility requirements or ratings to increase confidence in any particular custodian. Due to resistance by mortgage loan servicers, this aspect of the MERS concept was eliminated.

9. See Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory, 53 William and Mary Law Review 1 (October 2011); see also, Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 University of Cincinnati Law Review 4 (Summer 2010); David. E. Woolley and Lisa D. Herzog, MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners, 8 Hastings Business Law Journal, 365 (Summer 2012).

10. According to its website (www.dtcc.com/about/business), DTC provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at US$36.5 trillion. In 2010, DTC settled nearly US$1.66 quadrillion in securities transactions.

11. See Mortgage Electronic Registration Systems, Inc. v. Nebraska Department of Banking and Finance, 704 N.W.2d 784, 787 (Neb. Oct. 21, 2005).

12. See infra notes 24-28 and accompanying text.

13. As described below, in deed of trust states, the trustee technically holds legal title to the property, in trust, and MERS Inc. is named as beneficiary in the deed of trust, in a nominee capacity for the owner of the note. For purposes of this discussion, it is important to understand that one party may hold legal title to a mortgage while another party owns the beneficial interest therein. See infra note 15 and notes 38-47 and accompanying text.

14. A sample form of the FNMA/FHLMC Uniform Instrument with MERS as original mortgagee is available on the FHLMC’s website at http://www.freddiemac.com/uniform/unifmers.html.

15. According to BLACK’S LAW DICTIONARY (9th ed. 2009), “legal title” is “a [form of] title that evidences apparent authority but does not necessarily signify full and complete title or beneficial interest” in property. This differs from equitable title, or beneficial ownership, which gives the holder thereof the right to the use and economic benefit of the property.

16. A sample form of the FNMA/FHLMC Uniform Instrument with MERS as original beneficiary is available on the FHLMC’s website at http://www.freddiemac.com/uniform/unifmers.html.

17. See, e.g., MERSCORP, Inc. v. Romaine, 861 N.E.2d 81 (N.Y. 2006) (N.Y. court of appeals found that recording MERS instruments did not violate New York recording statutes and ordered the county clerk to accept MERS mortgages, MERS assignments and other MERS instruments); Jackson v. Mortgage Electronic Registration System, Inc., 770 N.W.2d 487 (Minn. 2009) (court held that case law establishes that a party can hold legal title to the security instrument without owning the promissory note; the cases demonstrate that an assignment of only the promissory note, which carries with it an equitable assignment of the security instrument, is not an assignment of legal title that must be recorded for purposes of a foreclosure [under the Minnesota statutory foreclosure scheme]); In re Mortgage Electronic Registration Systems (MERS) Litigation, 744 F. Supp. 2d 1018, 1029 (D. Ariz. 2010) (court dismissed plaintiff’s claims alleging that the MERS system was fraudulent and that the MERS system facilitated fraudulent activity); In re Tucker, 441 B.R. 638 (Bankr. W.D. Mo. 2010) (finding that the language of the deed of trust clearly authorized MERS to act on behalf of the lender in serving as the legal title holder); Cervantes v. Countrywide Home Loans Inc., et. al., 656 F.3d 1034 (9th Cir. 2011) (court upheld that MERS is a legitimate system for tracking transfers of home mortgage loans and that MERS’ interposition as record title holder to the deed of trust does not invalidate the transaction); Taylor v. Deutsche Bank Nat’l Trust Co., 44 So. 3d 618 (Fla. 5th DCCA 2010) (found that the mortgage granted to MERS legal status as mortgagee, which MERS could assign to the foreclosing bank under the UCC); Mortgage Elec. Registration Sys., Inc. v. Bellestri, 2010 WL 2720802 (E.D. Mo. 2010) (finding that Bellistri’s failure to provide notice to MERS violated MERS’ constitutional due process rights); Deutsche Bank Natl. Trust Co. v. Traxler, 2010-Ohio-3940 (court recognized MERS’ authority to assign mortgage when designated as both nominee and mortgagee); Fuller v. Mortgage Elec. Registration Sys. Inc., United States District Court, Middle District of Florida, Jacksonville Division (Case No. 3:11-cv-1153-J-20MCR) (June 27, 2012) (court found that “MERS has not committed an unlawful act, or a lawful act by unlawful means” and that “the Florida courts have consistently affirmed the use of MERS as the designated mortgagee of record and the principle that MERS may serve as mortgagee or as nominee for the lender and the lender’s successors and assigns.”); Smith v. Saxon Mortgage, 446 Fed. Appx. 239 (11th Cir. 2011) (appellate court found that district court correctly held that the Security Deed granted MERS the power of sale and the authority to assign the security deed); Volkes v. BAC Home Loans Servicing LP f/k/a Countrywide Home Loans Servicing, LP, 2012 WL 642673 (appellate court found that district court correctly held that the MERS assignment was valid).

18. Clark and Clark, MERS Under Attack: Perspective on Recent Decisions from Kansas and Minnesota, CLARKS’ SECURED TRANSACTIONS MONTHLY, February 2010, at p.2.

19. Id.

20. Id. at 2, citing In re Cushman Bakery, 526 F.2d 23 (1st Cir. 1975), cert. denied, 425 U.S. 937 (1976). See also, Residential Funding Co., v. Saurman, 490 Mich. 909; 805 N.W.2d 183 (Mich. 2011) (“It has never been necessary that the mortgage should be given directly to the beneficiaries. The security is always made in trust to secure obligations, and the trust and the beneficial interest need not be in the same hands. The choice of a mortgagee is a matter of convenience.”) (quoting Adams v. Niemann, 46 Mich. 135, 137 (Mich. 1881)); Jackson v. MERS, Inc., 770 N.W.2d 487 (Minn. 2009) (“A party can hold legal title to the security instrument without holding an interest in the promissory note.”); Boruchoff v. Ayvasian, 323 Mass. 1, 10 (Mass. 1948) (“[W]here a mortgage and the obligation secured thereby are held by different persons, the mortgage is regarded as an incident to the obligation, and, therefore, held in trust for the benefit of the owner of the obligation.”); First Nat’l Bank v. Nat’l Grain Corp., 131 A. 404, 406-07 (Conn. 1925) (“[A] mortgage may be held for the security of the real creditor, whether he is the party named as mortgagee or some other party, for the provisions of a mortgage are not necessarily personal to the mortgagee named. The real party in interest may be an assignee of the mortgagee or someone subrogated to his rights under the mortgage, or even a third person not answering either of these descriptions.”); Commercial Germania Trust and Sav. Bank v. White, 81 SO. 753, 754 (La. 1919) (“a mortgagor may make a mortgage in favor of a nominal . . . mortgagee”); Ogden State Bank v. Barker, 40 P. 769, 769 (Utah 1895) (“The mere fact that the mortgagee was not the real owner of the notes, but was simply a trustee or agent for the owners, does not affect the validity of the mortgage.”); Lawrenceville Cement Co. v. Parker, 15 N.Y.S. 577, 578 (Sup.Ct. 1891) (holding that bank official could hold mortgage, as mortgagee, for bank, which held the underlying promissory note).

21. See §9-203(g) of the UCC, which codifies the common law principle that the “mortgage follows the note.” In addition, by analogy, §9-310(c) of the UCC provides that if a secured party assigns a perfected security interest, an Article 9 filing is not required to continue the perfected status of the security interest against creditors from the original debtor. The original filing provides sufficient notice of the lien.

22. See infra notes 38-47 and accompanying text.

23. See Clark and Clark, supra note 18, at p. 3; Plymouth County, Iowa v. Merscorp, Inc. et. al. (Case No. C-12-4022-MWB) (U.S. Dist. Ct., No. Dist. of Iowa, Western Div.) (Aug. 21, 2012) (there is no statute in Iowa that requires the recording of mortgages or assignments of mortgages, but the failure to record will render the mortgage or assignment void in favor of subsequent purchasers and existing creditors who are without notice). See also infra note 68 and accompanying text.

24. Act of Apr. 6, 2004, ch. 153, §2, 2004 Minn. Laws 76, 76-77 (codified at Minn. Stat. §507.413 (2008)).

25. Id.

26. Minn. Stat. §507.413(a).

27. See Tex. Prop. Code §§51.0001(4) and 51.0001(1).

28. See e.g., Richardson v. CitiMortgage, 2010 WL 4818556 (E.D.Tex. Nov. 22, 2010).

29. RESTATEMENT (THIRD) OF AGENCY §1.01 (2006).

30. See, e.g., Romaine, 861 N.E.2d 81, 97 (MERS is a “proper mortgagee” and MERS Mortgages are “proper conveyance[s]’ for purposes of the recording statute.”); Deutsche Bank National Trust Co. v. Pietranico, 928 N.Y.S.2d 818 (Sup. Ct. Suffolk Cty. 2011) (The mortgage “expressly grants MERS the right to act on behalf of the lender as required by law and custom, including, but not limited to, the right to foreclose and sell the property and the right to take any action required of the Lender such as releasing and canceling the mortgage.”); U.S. Bank N.A. v. Flynn, 897 N.Y.S.2d 855, 857 (Sup. Ct. Suffolk Cty. 2010) (“MERS is acting as the nominee of the owner of the note and mortgage in which MERS is additionally designated as the mortgagee of record.”); Trent v. Mortg. Elec. Reg. Sys., Inc., 288 F. Appx. 571 (11th Cir. 2008) (“[MERS] is the mortgagee.”); In re MERS Litig., 744 F. Supp. 2d 1018, 1027 (D. Ariz. 2010) (“”[F]rom the very language of the deeds of trust, to which Plaintiffs agreed in entering into their home loan transaction, MERS is still acting as the nominee for the current holder of the promissory note . . . Nevada case law universally holds that [MERS security instruments] are enforceable.”); Calif. ex. rel. Bates v. Mortg. Elec. Reg. Sys., 2011 WL 892646, at *3 (E.D. Cal. Mar. 11, 2011) (The mortgage is “recorded in the public land records, making MERS the mortgagee of record.”); In re Tucker, 441 B.R. 638, 645 (Bankr. W.D. Mo. 2010) (“The language of the recorded Deed of Trust clearly authorizes MERS to act on behalf of the Lender in serving as the legal title holder to the beneficial interest under the Deed of Trust and exercising any of the rights granted to the Lender thereunder.”); Wade v. Meridias Cap., Inc., 2011 WL 997161, at *2 (D. Utah Mar. 17, 2011) (“MERS was appointed as the beneficiary and nominee for the Lender and its successors and assigns and granted power to act in their stead.”); Ciardi v. Lending Co., 2010 WL 2079735, at *3 (D. Ariz. May 24, 2010) (“To the extent Plaintiffs rely on a theory that the beneficiary must have an interest in the actual note, Plaintiffs have failed to cite any law so requiring.”).

31. As of July 22, 2011, MERS formally amended and implemented its Rules of Membership to provide that members are no longer authorized to initiate foreclosures in the name of MERS Inc. and an assignment of the mortgage from MERS Inc. to the foreclosing party must be recorded (informally suspended in February 2011).

32. Supra note 29 (emphasis added).

33. See, e.g., Eaton v. Federal National Mortgage Association, SJC-11041, 2012 WL 2349008 (Mass. June 22, 2012) (In order to exercise the statutory power of sale in Massachusetts, a mortgagee must either be the holder of the underlying promissory note or be acting under the authority of the note holder; physical possession of the mortgage note is not required in order to foreclose); Residential Funding Co. v. Saurman, 490 Mich. 909; 805 N.W.2d 183 (2011) (MERS Inc. is the owner of an interest in the indebtedness secured by the mortgage for purposes of Michigan statutory requirements and may thus conduct nonjudicial foreclosures by advertisement); Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, at 1156-57 (Cal. Ct. App. 2011) (The court concluded that even if there was a legal basis for an action to determine if MERS had the authority to initiate foreclosure, the language in the deed of trust granted MERS authority to initiate a nonjudicial foreclosure); Payette v. Mortgage Elec. Registration Sys., Inc., No. PC-2009-5875 (R.I. Supp. Ct. Aug. 22, 2011) (As a matter of contract, the mortgage signed by plaintiffs recognized MERS’ rights to act as nominee for IndyMac and for IndyMac’s “successors and assigns”); In re Mortgage Elect. Registration Sys., Inc. (MERS) Litig., No. 2:09-md-2119, 2010 WL 4038788, at *8 (D. Ariz. Sept. 30, 2010) (“Plaintiffs have not cited any legal authority where the naming of MERS . . . was cause to enjoin a non-judicial foreclosure as wrongful.”); Commonwealth Property Advocates, LLC v. Mortgage Elect. Registration Sys., Inc., Nos. 10-4182, 10-4193, 10-4215, 2011 WL 6739431, at *7 (10th Cir. Dec. 23, 2011) (affirming that MERS may foreclose as nominee for lender and its successors and assigns); Trent v. Mortg. Elec. Reg. Sys., Inc., 288 Fed. Appx. 571, 572 (11th Cir. 2008) (“Under the mortgage contracts, [MERS] has the legal right to foreclose on the debtors’ property. [MERS] is the mortgagee.”); Johnson v. Mortg. Elec. Reg. Sys., Inc., 252 Fed. Appx. 293, 294 (11th Cir. 2007) (affirming summary judgment to MERS on foreclosure of plaintiff’s property); Nicholson v. OneWest Bank, 2010 WL 2732325, at *4 (N.D. Ga. April 20, 2010) (“[T]he nominee of the lender has the ability to foreclose on a debtor’s property even if such nominee does not have a beneficial interest in the note secured by the mortgage.”); Orzoff v. Mortgage Elec. Registration Sys., 2009 WL 4643229, at *9-10 (D. Nev. March 26, 2009) (“This Court has previously determined that MERS does have such standing [to participate in foreclosure proceedings, and] . . . Courts around the country have held the same.”); Swanson v. EMC Mort. Corp., Case No. CV F 09-1507 LJO DLB (E.D. Cal. Oct. 29, 2009) (“MERS correctly notes that as [deed of trust] beneficiary, MERS is empowered to commence foreclosure proceedings . . .”); In re: Sina, No. A06-200, 2006 WL 2729544, at *2 (Minn. App., Sept. 26, 2006) (“Because MERS is the record assignee of the mortgage, we conclude that MERS had standing to foreclose); Silvas v. GMAC Mortgage, LLC, No. CV-09-265-PHX-GMS, 2009 WL 4573234, at *8 (D. Ariz. Jan. 5, 2010) (MERS empowered to foreclose where MERS is designated on deed of trust as beneficiary); Diessner v. Mortgage Elec. Registration Sys., 618 F. Supp. 2d 1184, 1187-91 (D. Ariz. 2009) (MERS and trustee under deed of trust are authorized to institute non-judicial foreclosure proceeding); Reynoso v. Paul Financial, LLC, No. 09-3225 SC, 2009 WL 3833298, at *2 (N.D. Cal. Nov. 16, 2009) (naming of MERS as initial beneficiary under deed of trust, as nominee for the lender, and the subsequent transfer of the deed of trust from MERS to a transferee was effective and did not hinder transferee’s right to foreclose); Blau v. America’s Servicing Co., No. CV-08-773, 2009 WL 3174823, at *8 (D. Ariz. Sept. 29, 2009) (MERS authorized under deed of trust to act on behalf of lender and transfer its interests); Farahani v. Cal-Western Recon. Corp., No. 09-194, 2009 WL 1309732, at *2-3 (N.D. Cal. May, 2009) (MERS authorized to pursue non-judicial foreclosure action); Vazquez v. Aurora Loan Servs., No 2:08-cv-01800-RCJRJJ, 2009 WL 1076807, at *1 (D. Nev. Apr. 20, 2009) (loan documents sufficiently demonstrate MERS’ standing “with respect to the loan and the foreclosure”); Pfannenstiel v. Mortgage Elect. Registration Sys., Inc., No. CIV S-08-2609, 2009 WL 347716, at *4 (E.D. Cal. Feb. 11, 2009) (dismissing plaintiff ’s claim that MERS lacked authority to foreclose); Trent v. Mortg. Elec. Reg. Sys., Inc., 288 Fed. Appx. 571, 572 (11th Cir. 2008) (MERS “has the legal right to foreclose on the debtors’ property” and “is the mortgagee”); Peyton v. Recontrust Co., No. TC021868, Notice of Ruling, at 2 (Cal. Super. Ct. County of Los Angeles S. Cent. Dist. Oct. 15, 2008) (MERS may foreclose under California law); Johnson v. Mortgage Elect. Registration Sys., Inc., 252 Fed. Appx. 293, 294 (11th Cir. 2007) (summary judgment for MERS on its action for foreclosure of plaintiff ’s property); In re Smith, 366 B.R. 149, 151 (Bankr. D. Colo. 2007) (MERS has standing to conduct foreclosure on behalf of the beneficiary); Mortgage Elect. Registration Sys., Inc. v. Revoredo, 955 So.2d 33, 34 (Fla. Dist. Ct. App. 2007) (“Because, however, it is apparent – and we so hold – that no substantive rights, obligations or defenses are affected by use of the MERS device, there is no reason why mere form should overcome the salutary substance of permitting the use of this commercially effective means of business.”); Mortgage Elect. Registration Sys., Inc. v. Ventura, CV054003168S, 2006 WL 1230265, at *1 (Conn. Super. Apr. 20, 2006) (MERS is proper party in foreclosure); King v. American Mortgage Network, et. al., Case No. 1:09-CV-125 TS (D. Utah, Aug. 16, 2010) (court, interpreting the language of the deed of trust, held that MERS had the authority to initiate foreclosure proceedings, appoint a trustee and foreclosure and sell the mortgaged property); Mortgage Elec. Registration Sys., Inc. v. Coakley, 41 A.D.3d 674 (NY App. 2007) (court held that MERS had right to foreclose pursuant to the clear and unequivocal terms of the mortgage instrument).

34. 357 B.R. 180, 183 (Bank. D.Mass. 2006).

35. See Niday v. GMAC Mortgage, LLC, Case No. A147430 (Or. Ct. App., Jul. 18, 2012) (appellate court held that, in connection with a non-judicial foreclosure, Oregon law requires a beneficiary of a trust deed to be a party to whom the underlying loan repayment obligations is owed) (Editor’s Note: as of the date of this article, the Niday case is on appeal to the Oregon Supreme Court); Mortgage Elec. Registration Sys., Inc. v. Graham, 44 Kan. App. 2d 547, 229 P.3d 420 (Kan. App. 2010) (having suffered no injury, MERS lacked standing to bring a foreclosure action); Mortgage Elec. Registration Sys., Inc. v. Saunders, 2 A.3d 289, 297 (Me. 2010) (finding that MERS could not enforce the note and that the substitution of Deutsche Bank for MERS was proper); In re Box, No. 10-20086, 2010 WL 2228289, at *5 (Bankr W.D. Mo. June 3, 2010) (finding that MERS, as beneficiary and nominee under the deed of trust lacked authority to assign the mortgage note because it never “held” the note itself); In re Hawkins, No. BK-S-07-13593-LBR, 2009 WL 901766, at *3 (Bankr. D. Nev. Mar. 31, 2009) (finding that MERS was not a true “beneficiary” under a deed of trust, that, under the UCC, MERS was not entitled to enforce the note, and that “[i]n order to foreclose, MERS must establish there has been a sufficient transfer of both the note and deed of trust, or that it has authority under state law to act for the note’s holder”); Bain v. Metropolitan Mortgage Group, Inc. et. al. and Selkowitz v. Litton Loan Servicing, LP et. al. (No. 86206-1) (Wash. August 16, 2012). The Washington Supreme Court held that MERS Inc. is not a lawful beneficiary under the Washington Deed of Trust Act because it is not “the holder of the instrument or document evidencing the obligations secured by the deed of trust” as required thereunder; that is, if MERS Inc. never held the note, then it is not a lawful beneficiary. However, in response to MERS Inc.’s argument that lenders and their assigns may name it as their agent, the court stated, “That is likely true and nothing in this opinion should be construed to suggest that an agent cannot represent the holder of a note. Washington law, and the deed of trust act itself, approves of the use of agents.” No doubt that point will be made forcefully when the lower court proceeding resumes.

36. See, e.g., Residential Funding Corporation v. Saurman, 292 Mich. App. 321, 807 N.W.2d 412 (Mich. Ct. App. Apr. 21, 2011) (court held that MERS did not meet the requirements to non-judicially foreclose by advertisement because MERS did not own an “interest in the indebtedness” as required by the foreclosure statute), rev’d, 490 Mich. 909, 805 N.W.2d 183 (Mich., 2011); Mortgage Electronic Registration Systems Inc. v. George Azize, et. al., NO. 2D05-4544 (Fla. App. 2 Dist. Sept. 19, 2005) (trial court held that MERS was not a proper party to bring a foreclosure action), rev’d, 965 So.2d 151 (Fla. App. 2 Dist. Feb. 21, 2007); Mortgage Electronic Registration Systems Inc. v. Oscar Revoredo, et. al., NO. 3D05-2572 (Fla. App. 3 Dist. Nov. 4, 2005) (trial court held that MERS must establish ownership of the note in order to have standing to foreclose), rev’d, 955 So.2d 33 (Fla. App. 3 Dist. Mar 14, 2007); U.S. Bank National Association v. Salazar, 448 B.R. 814 (S.D. Ca. Apr. 12, 2011) (bankruptcy court concluded a foreclosure sale was void because MERS, as record deed of trust beneficiary, failed to record a deed of trust assignment to U.S. Bank prior to the foreclosure sale and U.S. Bank was identified on the trustee’s deed as the “foreclosing beneficiary”), rev’d, 470 B.R. 557 (Bankr. S.D. Cal. Mar. 15, 2012); In re Agard, 444 B.R. 231 (Bankr. E.D.N.Y. Feb 10, 2011) (bankruptcy court found that the language of the mortgage document itself and MERS role as mortgagee did not provide MERS with the authority to “effectuate a valid assignment of mortgage”), vacated in part by Agard v. Select Portfolio Servicing, Inc., 2012 WL 1043690 (E.D.N.Y. Mar. 28, 2012); see also, U.S. Bank v. Howie, infra note 43 (interpreting the Kansas Supreme Court’s decision in Landmark Nat’l Bank v. Kesler).

37. See MERSCORP, Inc. Rules of Membership, Rule 8 – Required Assignments for Foreclosure and Bankruptcy, Section 1(e).

38. See RESTATEMENT (THIRD) PROPERTY (MORTGAGES), §5.4, comment e (1997). See also Residential Funding Co. v. Saurman, 490 Mich. 909; 805 N.W.2d 183 (2011) (Michigan Supreme Court held that a mortgage and note are to be construed together and that “the trust and the beneficial interest need not be in the same hands . . . The choice of mortgagee is a matter of convenience.”); Horvath v. Bank of New York, N.A., et al., No. 1:09-cv-1129, Dkt No. 38 (E.D. Va. Jan. 29, 2010) (aff’d., 4th Cir., No. 10-1528, May 19, 2011) (court held that “the ‘split’ of [Plaintiff’s] promissory notes from the deeds of trust does not render the deeds of trust unenforceable. The deeds of trust continue to grant a promissory note holder security . . .”).

39. See Joyce Palomar, 3 Patton & Palomar on Land Titles §5.67.50 (3d ed. 2009) (“[C]ourts have accepted MERS as reconciling modern lending practices with traditional real property law” and “recognize the entity serving as nominee or agent as the record holder of the encumbrance.”).

40. 656 F.3d 1034 (9th Cir. 2011).

41. Id. at 1042.

42. Id.

43. Id. at 1044, citing Landmark Nat’l Bank v. Kesler, 216 P.3d 158, 167 (Kan. 2009). See also, U.S. Bank v. Howie, No. 106,415 (Kans. App. June 8, 2012) in which an appellate court interpreted the Kansas Supreme Court’s decision in Landmark as supporting MERS Inc.’s role as agent of the lender under the plain language of the mortgage. The Howie court further held that because MERS Inc. was acting as agent of the lender, the mortgage and the note were never severed and the lender, as present holder of both the note and mortgage, was entitled to foreclose on the mortgage. Some people misunderstand the term “unenforceable” as confirming fraudulent or illegal behavior on the part of the lender. But this is not necessarily the case. A mortgage may be declared unenforceable due to a mistake or unanticipated occurrence without fault by the lender, with the inequitable result that the lender/creditor who lent money to the borrower secured by a mortgaged property would be unable to foreclose and realize on its collateral.

44. In re MERS Litigation, 744 F. Supp. 2d 1018 (D. Ariz. 2010); see also Martinez v. Mortgage Elec. Registration Sys., Inc. (In re Martinez), 444 B.R. 192 (Bankr. D. Kan. 2011) (the court found that the language in the mortgage, the MERS membership agreement, and the affidavit of MERS’ treasurer, were sufficient to establish that MERS was clearly acting as an agent for Countrywide at all relevant times while holding the mortgage; the mortgage and the note were never split and remained enforceable); Drake v. Citizens Bank of Effingham (In re Corley), 447 B.R. 375 (Bankr. S.D. Ga. 2011) (the note and the mortgage were not split; they were executed together at inception and remain linked via the language in the documents that contemplate the agency relationship formed by the designation of MERS as nominee).

45. See, e.g., Consol. Mortg. & Fin. Corp. v. Landrieu, 493 F. Supp. 1284, 1286-87 (D. D.C. 1980) (discussing the Mortgage Backed Securities Program and Ginnie Mae’s role).

46. Supra note 38.

47. See U.S. Bankruptcy Code, 11 U.S.C. §541(d).

48. See UCC §§9.109(b); 3.102 and 3.201-204.

49. See UCC §9.203. For a thorough review of the issues under the UCC discussing rights of the “owner” of a note, the party entitled to enforce the note, transfer of the note, and the impact of transfer on the underlying mortgage, see Report of the Permanent Editorial Board for the Uniform Commercial Code ― Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes (Nov. 14, 2011), Amer. Law Institute and National Conf. on Uniform State Laws.

50. UCC §9.203(g) (emphasis added); See also UCC §9.308(e), providing the same rule for perfection.

51. See Official Comment 6 to UCC §9.308.

52. For an excellent discussion and survey of relevant state case law on this issue, see Transfer and Assignment of Residential Mortgage Loans in the Secondary Market, ASF White Paper Series (November 16, 2011) at http://www.americansecuritization.com/uploadedFiles/ASF_White_Paper_11_16_10.pdf.

53. Although the disclosure of the identity of the note owner is optional, 97% of the over 3,000 MERS® System members make such disclosure.

54. See 24 C.F.R. §3500.21(d).

55. See 12 C.F.R. §226.39.

56. Pub.L. 111-203, H.R. 4173.

57. See 12 U.S.C. §2605(k) (1) (D).

58. See Haft v. Dart Group Corp., 841 F. Supp. 549, 572 (D.Del. 1993).

59. Del. Code. Ann. Title 8, Sections 122 and 142.

60. Exercise of authority granted under clauses (3) and (4) is subject to rule changes effective July 22, 2011, limiting the member’s ability to initiate foreclosures and make filings in bankruptcy proceedings in the name of MERS Inc.

61. See Bain v. Metro Mortg. Grp., 2010 WL 891585, at *6 (W.D. Wash. Mar. 11, 2010) (holding that MERS’s designation of Members’ employees as “vice president” and “assistant vice president” was not deceptive within the meaning of the Washington State Consumer Protection Act). See also Jackman v. Hasty, 2011 WL 5599075, at *3 (N.D. Ga., Nov. 15, 2011) (Defendants “were appointed as agents of MERS by a corporate resolution . . . According to the resolution, [Defendants] have authority to, among other things, “[a]ssign the lien of any mortgage loan registered on the MERS® System’ . . . and “[e]xecute any and all documents necessary to foreclose upon the property securing any mortgage loan registered on the MERS® System’ . . . The evidence thus shows that Defendants . . . although not employees of MERS, were duly appointed agents of MERS who had authority to assign the Security Deed to LaSalle on behalf of MERS. LaSalle thus had legal authority to foreclose on the Property.”); Ocwen Loan Servicing LLC v. Kroening, 2011 WL 5130357, at *5 (D. Ill. Oct. 28, 2011) (“The assignment was executed for MERS by Scott Anderson. Anderson is an employee of Ocwen, but was designated by Corporate Resolution as an assistant secretary and vice president of MERS, and as such had the authority to assign any mortgage naming MERS as the mortgagee.”).

62. New York State Bar Association, Committee on Professional Ethics, Formal Opinion #847 (12/21/2010).

63. See, e.g., Davis v. U.S. Bank Nat’l Ass’n, 2012 WL 642544 (Nev. Feb. 24, 2012); Bertrand v. SunTrust Mortgage, Inc., 2011 WL 1113421, at *4 (D. Or. Mar. 23, 2011) (stating that the language in the Deed of Trust “grants MERS the power to initiate foreclosure and to assign its beneficial interest . . .”); Wade v. Meridias Cap., Inc., 2011 WL 997161, at *2 (D. Utah Mar. 17, 2011) (“Under the plan terms of the Trust Deed, . . . MERS was appointed as the beneficiary and nominee for the Lender and its successors and assigns and granted power to act in their stead, including making assignments and instituting foreclosure.”) (emphasis in original); Germon v. BAC Home Loans Servicing, L.P., 2011 WL 719591, at *2 (S.D. Cal. Feb. 22, 2011) (stating that under the Deed of Trust “MERS had the legal right to initiate nonjudicial foreclosures and could assign such right.”); Saxon Mortg Servs., Inc. v. Coakley, 921 N.Y.S.2d. 552, 553 (App. Div. 2011) (rejecting foreclosure defendant’s contention that MERS’s assignment of mortgage was improper); Perry v. Nat’l Default Serv’g Corp., 2010 WL 3325623, at *4 (N.D. Cal. Aug. 20, 2010) (observing that numerous courts have held that “MERS had the right to assign its beneficial interest to a third party.”); Rogan v. CitiMortgage, Inc. (In re Jessup), 2010 WL 2926050, at *3 (Bankr. E.D. Ky. July 22, 2010) (MERS had authority to execute an assignment as nominee of lender because “the language in the Lender’s own instrument is sufficient to identify MERS as such.”); GMAC Mortg., LLC v. Reynolds, 2010 WL 7746836, at *2 (Mass. Land Ct. Nov. 30, 2010) (“MERS, as mortgagee of record, has the authority to assign the mortgage.”); In re Relka, 2009 WL 5149262, at *4-5 (Bankr. D. Wyo. Dec. 22, 2009) (The Deed of Trust granted MERS “the right to assign the mortgage.”); Taylor v. Deutsche Bank Nat. Trust Co., 44 So. 3d 618, 623 (Fla. 5th DCCA 2010) (The mortgage granted MERS the “explicit and agreed upon authority to make . . . an assignment.”).

64. See, e.g., Williams v. U.S. Bank Nat’l Ass’n, 2011 WL 2293260 at *1 (E.D. Mich. June 9, 2011) (“To the extent Plaintiffs challenge any assignment from MERS to U.S. Bank, Plaintiffs lack standing to do so because they were not a party to those assignments.”); Bridge v. Aames Capital Corp., 2010 WL 3834059, at *3 (N.D. Ohio Sept. 29, 2010) (“Courts have routinely found that a debtor may not challenge an assignment between an assignor and assignee”); Livonia Prop. Holdings, LLC, 717 F. Supp. 2d 724, 735 (E.D. Mich. 2010) (“Borrower disputes the validity of the assignment [of mortgage] documents. But, as a non-party to those documents, it lacks standing to attack them.”).

65. Jones, supra note 3, at 36.

66. Jones, supra note 3, at 36, 38.

67. Id.

68. See Amoskeag Bank v. Chagnon, 572 A2d 1153, 1155 (N.H. 1990) (“The purpose then of the recording statutes…is to provide notice to the public of a conveyance of or encumbrance on real estate.”); Corpus v. Arriaga, 294 S.W.3d 629, 635 (Tex. App. 2009) (“The purpose of recording statutes in Texas is to give notice to persons of the existence of the instrument.”); Burnett v. County of Bergen, 968 A.2d 1151 (N.J. 2009) (“The very purpose of recording and filing [assignments of mortgages, deeds, discharges of mortgages, and other public records] is to place the world on notice of their contents.”).

69. See Fuller v. Mortgage Electronic Registration Systems, Inc., (U.S. Dist. Ct., Middle District of Fla.,Jacksonville Div.) (Case No. 3:11–CV–1153–J–20MCR) (June 27, 2012) at p. 3, fn. 1.

70. MERSCORP Holdings, Inc. Rules of Membership, Rule 2 – Registration on the MERS System, Section 5(a).

71. See Fuller, supra note 69, at pp. 18-19.

72. Joe Murin, MERS: Myths, Misconceptions and Realities, July 22, 2010 (available at http://mortgagenewsdaily.com/channels/voiceofhousing/164078.aspx); see also Fuller, supra note 69 and accompanying text.

73. Peterson, Foreclosures and MERS, supra note 9 at 1365-66.

74. Plymouth County, supra note 23 at p. 17.

75. Remarks of Treasury Secretary Timothy Geithner Introducing the Financial Stability Plan, February 10, 2009 (available at http://www.treasury.gov/press-center/press-releases/Pages/tg18.aspx).

76. See Christopher L. Peterson articles, supra note 9.

77. MERS’ principal owners are the Mortgage Bankers Association, Fannie Mae, Freddie Mac, Bank of America, JPMorgan Chase Bank, HSBC, CitiMortgage, GMAC, American Land Title Association and Wells Fargo Bank.

78.See, http://www.aei.org/article/economics/financial-services/housing-finance/housing-affordability-us-is-the-envy-of-the-developed-world; see also http://absalonproject.com/wp-content/uploads/2010/12/Harvard-Lea-110v5.pdf.

79. Jones, supra note 3, at 40.

80. For an excellent discussion of the background, issues and certain case law developments regarding the MERS® System, see Beau Phillips, MERS: The Mortgage Electronic Registration System, 63 Consumer Fin. L.Q. Rep. 262 (Fall Winter 2009).

81. Murin, supra note 72.

82. Id.

83. Over 600 government institutions (cities, municipalities and states) utilize the MERS System free of charge to locate property preservation contacts for loans registered on the MERS System.

The Nuts and Bolts of Mortgage Securitization Process

22 Saturday Jun 2013

Posted by BNG in Foreclosure Defense, Litigation Strategies, Non-Judicial States, Pleadings, Pro Se Litigation, Securitization

≈ Leave a comment

Tags

Fannie Mae, Freddie Mac, MERS, Mortgage Electronic Registration System, Mortgage note, Mortgage-backed security, Promissory note, Uniform Commercial Code

The beginnings of the now multi-trillion dollar secondary market for residential mortgage loans date back to the federal government’s creation of Fannie Mae in 1938. Since then, the complexity of the secondary mortgage market has increased, especially as a result of the rapid growth and market acceptance of mortgage backed securities (“MBS”) that began in the 1980s. In contrast, the legal principles and processes by which mortgage-related promissory notes and security instruments (mortgages and deeds of trust) are assigned and transferred have centuries-old origins. Now, in the midst of the worst economic and housing crisis since the 1930s, some are questioning whether the traditional state law principles and processes of assignment and transfer can be fully reconciled with today’s complex holding, assignment and transfer systems for mortgage related promissory notes and security instruments, and what methods are legally effective for participants in the secondary mortgage market to establish, maintain and transfer mortgage notes and security instruments.

This post provides an overview of the legal principles and processes by which promissory notes and related mortgage security instruments are typically held, assigned, transferred and enforced in the secondary mortgage market in connection with loan securitizations and the creation of MBS.

1. Basic Principles
The two core legal documents in most residential mortgage loan transactions are the promissory note and the mortgage or deed of trust that secures the borrower’s payment of the promissory note. The promissory note contains a promise by the borrower to pay the lender a stated amount of money at a specified interest rate (which can be fixed or variable) by a certain date. The typical mortgage or deed of trust contains a grant of a mortgage lien or other security interest in the borrower’s real property to the lender or, in a deed of trust, to a trustee for the benefit of the lender, to secure the borrower’s obligations under the promissory note.
In a typical “private-label” mortgage loan securitization, each mortgage loan, which is evidenced by a mortgage note and secured by a mortgage, is sold, assigned and transferred to a trust through a series of steps:

• The loan originator or a subsequent purchaser sells, assigns and transfers the mortgage loans to a “sponsor,” which is typically a financial services company or a mortgage loan conduit or aggregator.

• The sponsor sells, assigns and transfers the mortgage loans to a “depositor,” which in turn sells, assigns and transfers the mortgage loans to the trustee, which will hold the mortgage loans in trust for the benefit of the certificate holders.

• The trustee issues the MBS pursuant to a pooling and servicing agreement or trust agreement entered into by the depositor, the trustee and a master servicer or servicers.

• The trustee administers the pool assets, typically relying on the loan servicer to perform most of the administrative functions regarding the pool of mortgage loans. In addition, a document custodian is often designated to conduct a review of the mortgage loan documents pursuant to the requirements of the pooling and servicing agreement and to hold
the mortgage loan documents for the loans included in the trust pool.

• In general, the loan documents are assigned and transferred from the depositor to the trustee through the indorsement of the mortgage note and the transfer of possession of the mortgage note to the trustee or a custodian on behalf of the trustee. An assignment of the related mortgage is also typically delivered to the transferee or its custodian, except
in cases where the related mortgage identifies Mortgage Electronic Registration Systems (“MERS”) as the mortgagee. Such assignments generally are in recordable form, but unrecorded, and are executed by the transferor without identifying a specific transferee – a so called assignment in blank.

• In some mortgage loan transactions, MERS becomes the mortgagee of record as the nominee of the loan originator and its assignee in the local land records where the mortgage is recorded, either when the mortgage is first recorded or as a result of the recording of an assignment of mortgage to MERS. This means that MERS is listed as the record title holder of the mortgage. MERS’ name does not appear on the mortgage note, and the beneficial interest in the mortgage remains with the loan originator or its assignee. The documents pursuant to which MERS acts as nominee make clear that MERS is acting in such capacity for the benefit of the loan originator or its assignee. When a mortgage loan is originated with MERS as the nominal mortgagee (or is assigned to MERS post-origination), MERS
tracks all future mortgage loan and loan servicing transfers and other assignments of the mortgage loan unless and until ownership or servicing is transferred (or the loan is otherwise assigned) to an entity that is not a MERS member. In this way, MERS serves as a central system to track changes in ownership and servicing of the loan. Fannie Mae, Freddie Mac and Ginnie Mae, among other governmental entities, permit loans that they
purchase or securitize to be registered with MERS.

As part of the loan securitization process detailed above, a mortgage note and a mortgage may be sold, assigned and transferred several times from one entity to another. The legal principles that govern the assignment and transfer of mortgage notes and mortgages are generally determined by state law. See, e.g., In re Cook, 457 F.3d 561, 566 (6th Cir. 2006) (state law governed whether transferee had superior interest in promissory note secured by mortgage). As such, these principles can vary depending upon the state in which the assignor of the mortgage notes, the underlying property, or the relevant mortgage-related documents are located. The assignment and transfer of a mortgage note, on the one hand, and of a mortgage, on the other hand, are addressed separately below.

2. Transfer of Promissory Notes Secured by Mortgages
The residential mortgage notes in common use in the secondary mortgage market typically are negotiable instruments. The law of negotiable instruments developed over the centuries as a way to encourage commerce and lending by making such instruments, including negotiable mortgage notes, as liquid and transferable as possible. See, e.g., Overton v. Tyler, 3 Pa. 346, 347 (1846) (“[A] negotiable bill or note is a courier without luggage”); 2 Frederick M. Hart & William F. Willier, Negotiable Instruments Under the Uniform Commercial Code § 1.01 (“Negotiable instruments play such an important role in the modern commercial world that it is difficult to realize that the struggle for their existence could be as long and complex as it has been, yet the evolution of the concept took centuries.”). Similarly, the standardization of the forms of mortgage notes and mortgages over the past thirty years or more has contributed to the liquidity and transferability of mortgage notes and the underlying mortgages. See Peter M. Carrozzo, Marketing the American Mortgage: The Emergency Home Finance Act of 1970, Standardization and the Secondary Market Revolution, 39 Real Prop. Prob. & Tr. J. 765, 799-800 (2004-2005) (“standardization of mortgage documents created marketable commodities. Once mechanisms were in place for the secondary market to operate, events rapidly moved toward the ultimate goal: the creation of a security which has as its base land [and] yet which will be as freely transferable as stocks and bonds” (internal quotation omitted)).

The Uniform Commercial Code (“UCC”), which, with state-specific variations, has been adopted as law by all 50 states and the District of Columbia, governs, in significant part, the transfer of mortgage notes. Article 3 applies to the negotiation and transfer of a mortgage note that is a “negotiable instrument,” as that term is defined in Article 3. See UCC §§ 3-102, 3-201, 3-203 and 3-204; see, e.g., Swindler v. Swindler, 355 S.C. 245, 250 (S.C. Ct. App. 2003) (Article 3 governs negotiable mortgage note). In addition, Article 9 applies to the sale of “promissory notes,” a term that generally includes all mortgage notes (both negotiable and nonnegotiable). See UCC §§ 1-201(b)(35) and 9-109(a)(3)

The residential mortgage notes in common use today are typically negotiable instruments for UCC purposes. In addition, as a general matter, the securitization of a loan under a typical pooling and servicing agreement provides both for the negotiation of negotiable mortgage notes (by indorsement and transfer of possession to the securitization trustee or the custodian for the trustee) and for an outright sale and assignment of all of the mortgage notes and related mortgages. Thus, whether the mortgage notes in a given securitization pool are deemed “negotiable” (as we believe most typically are) or “non-negotiable” will have little or no
substantive effect under the UCC on the validity of the transfer of the mortgage notes. The typical securitization process effects valid transfers of the mortgage notes and related mortgages in accordance with the provisions of Articles 3 and 9 of the UCC.

What Constitutes a “Negotiable Instrument?
A “negotiable instrument” is defined as:
an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:
(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;

(2) is payable on demand or at a definite time; and

(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.
UCC § 3-104(a).

Reference in a mortgage note to a mortgage does not affect the mortgage note’s status as a negotiable instrument. See UCC § 3-106(b) (“A promise or order is not made conditional [] by a reference to another writing for a statement of rights with respect to collateral, prepayment, or acceleration….”); see also Int’l Minerals & Chem. Corp. v. Matthews, 321 S.E.2d 545, 547 (N.C. Ct. App. 1984) (“referring to a mortgage or other collateral [in a mortgage note] does not impair negotiability” of the note); In re AppOnline.com, 285 B.R. 805, 815-16 (Bankr. E.D.N.Y. 2002) (reference in mortgage notes to underlying mortgages does not affect the negotiability of the notes).

The fact that a mortgage note contains a variable or adjustable interest rate also does not affect the mortgage note’s status as a negotiable instrument. That is because UCC § 3-112(b) provides that “[i]nterest may be stated in an instrument[7] as a fixed or variable amount of money or it may be expressed as a fixed or variable rate or rates. The amount or rate of interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument.” UCC § 3-112(b).

How is a Negotiable Mortgage Note Transferred?
A negotiable mortgage note is transferred when it is “delivered” by a person other than the mortgagor for the purpose of giving the transferee the right to enforce the note. See UCC § 3-203(a). “Delivery” of a mortgage note occurs when there has been a voluntary transfer of possession of the mortgage note. See UCC § 1-201(b)(15). As a general matter, the “[t]ransfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument . . . .” UCC § 3-203(b). Accordingly, a person in possession of the note becomes a “person entitled to enforce” if it can prove that it is the transferee. See UCC § 3-301.

The easiest and most common way to transfer a negotiable mortgage note is through “negotiation.” Article 3 defines “negotiation” as “a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.” UCC § 3-201(a). The “negotiation” of a negotiable mortgage note that is payable to an identified person or entity (such as the entity that originated a mortgage loan and whose name appears as the payee in the mortgage note) – “requires transfer of possession of the instrument and its indorsement by the holder.” UCC § 3-201(b) (emphasis added). As explained below, “indorsement” and “holder” are both defined terms in the UCC.

The “holder” of a negotiable mortgage note is “the person in possession of [the mortgage note] that is payable either to bearer or to an identified person that is the person in possession.” UCC § 1-201(b)(21)(A). In other words, upon the closing of a mortgage loan, the “holder” of the mortgage note is the entity that is the payee on the mortgage note and that possesses the note (either actually or constructively). After a negotiable mortgage note has been negotiated, such as in connection with a loan securitization, the “holder” of the mortgage note is the entity that possesses the mortgage note if the mortgage note was indorsed to that entity or if the mortgage note was indorsed in blank or to bearer.

The term “indorsement” is defined to include “a signature . . . that alone or accompanied by other words is made on an instrument [in our case, a negotiable mortgage note] for the purpose of . . . negotiating the instrument.” UCC § 3-204(a). Such an indorsement may be either a “special indorsement” or a “blank indorsement.” See UCC § 3-205. A “special indorsement” is a written indorsement that specifically “identifies a person to whom it makes the instrument payable.” UCC § 3-205(a). A “blank indorsement” is an indorsement that does not identify a person to whom the instrument is payable. See UCC § 3-205(b). Mortgage notes that are transferred in connection with loan securitizations are typically indorsed in blank with language such as “Pay to the order of _____________,” where no name is filled in the blank. The effect of an indorsement in blank is significant: “When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.” UCC § 3-205(b) (emphasis added).10 See also UCC § 3-201(b) (The negotiation of a negotiable mortgage note that is payable to bearer (such as a negotiable mortgage note that has been indorsed in blank) is effected by “transfer of possession alone.”).
The term “possession” is not defined in the UCC. Thus, courts rely on common law definitions of possession to interpret that concept in the context of the negotiation of an instrument such as a mortgage note. See, e.g., In re Kelton Motors, Inc., 97 F.3d 22, 26 (2d Cir. 1996) (because Article 3 does not define “possession,” a court must look to the general law of the jurisdiction in determining whether a party is in possession of a negotiable instrument).
Possession can be, and very often is, effected by an agent, nominee or designee, such as the designated custodian for the securitization trust. See, e.g., Midfirst Bank, SB v. C.W. Haynes and Co., Inc., 893 F. Supp. 1304, 1314-15 (D.S.C. 1994) (constructive possession exists when an authorized agent of the owner holds the note on behalf of the owner); Jenkins v. Evans, 31 A.D.2d 597, 598 (N.Y. App. Div. 3d Dept. 1968) (agent had authority to possess instruments for principal). In such cases, while the designated custodian has “physical” possession of the mortgage note, the trustee for which the custodian holds the mortgage note has “constructive” or “legal” possession. See Midfirst Bank, 893 F.Supp. at 1314-15; see also UCC § 9-313 cmt. (“if the collateral is in [the] possession of an agent of the secured party for the purposes of possessing on behalf of the secured party, and if the agent is not also an agent of the debtor, the secured party has taken actual possession” (emphasis added)).

Who May Enforce A Negotiable Mortgage Note?
The maker of a mortgage note is obligated to pay the note to the “person entitled to enforce the instrument.” UCC § 3-412. The “person entitled to enforce” a negotiable mortgage note includes “(i) the holder of the instrument, [and] (ii) a nonholder in possession of the instrument who has the rights of a holder.” UCC § 3-301. Accordingly, to enforce a mortgage note against the borrower, a person must generally prove either that it is a “holder” or that it is a transferee with the rights of a holder. See UCC § 3-301. The first category of persons that may enforce a mortgage note is a “holder.” A “holder” of a negotiable mortgage note is “the person in possession of [the mortgage note] that is payable either to bearer or to an identified person that is the person in possession.” UCC § 1-201(b)(21)(A). The manner in which one becomes a “holder” is described in the section above.

The second category contemplated by UCC § 3-301– a “nonholder in possession who has the rights of a holder” – is more difficult to define. Under this clause, a person would qualify as a “nonholder in possession” if possession of the mortgage note was transferred to him from the transferor, but the transferor did not indorse the mortgage note. See UCC § 3-203 cmt. In this circumstance, the transferee is entitled to enforce the instrument, but to do so, the transferee must first prove both possession of the unindorsed mortgage note and prove the transfer of the mortgage note by the holder to the transferee. See id. Under both clauses, the person seeking to enforce the mortgage note must have possession of the note.

UCC § 3-301 also permits a person without possession to enforce a mortgage note where the mortgage note has been lost, stolen, or destroyed within the meaning of UCC § 3-309. See UCC § 3-301.12 Courts have consistently affirmed the use of UCC § 3-309 to enforce lost, stolen or destroyed negotiable mortgage notes that a party, such as a securitization trustee, seeks to enforce when the party has proven the terms of the mortgage notes and its right to enforce the mortgage notes (i.e., it has proven the transfer of the mortgage note from the transferee). See, e.g., In re Montagne, 421 B.R. 65, 79 (D. Vt. 2009) (finding that plaintiff who satisfied requirements of UCC § 3-309 could enforce lost mortgage note); Waggoner v. Mortgage Elect. Registration Sys., Inc., No. 2003-CA-002666-MR, 2005 WL 2175439, at *1 n.1 (Ky. App. Ct. Sept. 9, 2005) (“The promissory note was proven … by an affidavit concerning a lost or destroyed promissory note.”).

What Rights Against Borrower Defenses are Available to the Holder of a Negotiable Mortgage Note?
A key concept relating to the negotiation of negotiable mortgage notes is the “holder in due course” doctrine. That is because where the “holder” of a negotiable mortgage note is deemed a “holder in due course,” the holder takes the mortgage note subject only to specific limited defenses of the borrower. The following is a brief summary of an expansive area of law. Under UCC § 3-302(a):
[A] “holder in due course” means the holder of an instrument if:
(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and

(2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 3-306 [regarding claims of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds], and (vi) without notice that any party has a defense or claim in recoupment described in Section 3-305(a).

UCC § 3-302(a).

Under Article 3, a holder in due course of a negotiable mortgage note takes the mortgage note free of (a) all prior claims to or regarding the mortgage note by any person and (b) most defenses to enforceability of the mortgage note that may be raised by parties with whom the holder in due course has not dealt. See UCC §§ 3-305 and 3-306; see also Provident Bank v. Community Home Mortgage Corp., 498 F. Supp. 2d 558, 565 (E.D.N.Y. 2007). The defenses to which a holder in due course may be subject are found in UCC § 3-305, and
include:

a defense of the obligor based on (i) infancy of the obligor to the extent it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (iii) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (iv) discharge of the obligor in insolvency proceedings.

UCC § 3-305(a)(1).

How Is a Mortgage Note Transferred Under Article 9 of the UCC?
The sale of mortgage notes is also governed, in significant part, by Article 9. Article 9 establishes
(1) whether the interests of a transferee of a mortgage note have both “attached” and become “perfected” so that those interests will prevail over conflicting claims of third parties and (2) the rights of the transferee in and to the underlying mortgage that secures the mortgage note.

Article 9 addresses the sale of mortgage notes, regardless of whether they are negotiable or nonnegotiable. More specifically, Article 9 applies to “a sale of . . . promissory notes.” UCC § 9-109(a)(3). A “promissory note” is defined as “an instrument that evidences a promise to pay a monetary obligation, does not evidence an order to pay, and does not contain an acknowledgment by a bank that the bank has received for deposit a sum of money or funds.” UCC § 9-102(a)(65). Given this broad definition, residential mortgage notes in common use today are typically “promissory notes” for purposes of Article 9.

Under Article 9, the sale of a mortgage note (whether or not the mortgage note is negotiable) is deemed a secured transaction and the transferee’s “security interest” is automatically perfected when it attaches (more on “attachment” and “perfection” below). See UCC § 9-309(4). While security interests are most commonly thought of as the liens obtained by lenders, the UCC defines the term “security interest” to also include “any interest of a . . . buyer of . . . a promissory note in a transaction that is subject to Article 9.” UCC § 1-201(b)(35) (emphasis added). In addition, the definition of “secured party” includes “a person to which . . . promissory notes have been sold.” UCC § 9-102(a)(72)(D).

Before a buyer’s “security interest” in a mortgage note can be perfected under Article 9, the security interest must “attach.” A security interest attaches when (1) value has been given for the sale, (2) the seller has rights in the mortgage note or the power to transfer rights in the mortgage note to the buyer and (3) either (a) the mortgage note is in the possession of the buyer pursuant to a security agreement of the seller or (b) the seller has signed a written or electronic security agreement that describes the mortgage note. See UCC § 9-203(b). Article 9 defines “security agreement” as “an agreement that creates or provides for a security interest,” UCC § 9-102(a)(73), which, in the context of a mortgage loan securitization, would include an agreement pursuant to which mortgages and mortgage notes are sold and transferred from one entity to another. Such an agreement, normally a pooling and servicing agreement or trust agreement, typically will provide that the transfer of the mortgage note pursuant thereto effects a sale of the mortgage note, which would thus, under Article 9, constitute a “security agreement.”

Significantly, the attachment of a security interest in a mortgage note that is itself “secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage or other lien.” UCC § 9-203(g) (emphasis added). Similarly, under UCC § 9-308(e), perfection of a security interest in a promissory note “also perfects a security interest in a security interest, mortgage, or other lien on personal or real property securing the right.” UCC § 9-308(e) (emphasis added). In other words, perfection of a security interest (which includes a sale to a buyer) in a mortgage note pursuant to Article 9 also perfects a security interest in the mortgage that secures the note.

Perfection of the interest in the mortgage note is important because it provides the transferee of the mortgage note with a right in the mortgage note and mortgage superior to that of a subsequent lien creditor of the seller. And, perfection provides the transferee of the mortgage note with a right in the mortgage superior to that of a subsequent lien creditor of the mortgagee, which includes a bankruptcy trustee (see UCC § 9-102(a)(52)). See UCC § 9-308 cmt.

Transfer of Mortgage Notes: Conclusion
In summary, under the UCC, the transfer of a mortgage note that is a negotiable instrument is most commonly effected by indorsing the note, which may be a blank or special indorsement, and delivering the mortgage note to the transferee (or the agent acting on behalf of the transferee). As the residential mortgage notes in common usage typically are “negotiable instruments,” this is the most common method of transfer.

In addition, even without indorsement, the assignment can be effected by transferring possession under UCC § 3-203(a). Moreover, the sale of any mortgage note also effects the assignment and transfer of the mortgage under Article 9. The attachment and perfection of the buyer’s interest in the mortgage note attaches and perfects the buyer’s interest in the underlying mortgage that secures the mortgage note. Securitization agreements often
provide both for (a) the indorsement and transfer of possession to the trustee or the custodian for the trustee, which would constitute a negotiation of the mortgage note under Article 3 of the UCC and (b) an outright sale and assignment of the mortgage note. Thus, regardless of whether the mortgage notes in a securitization trust are deemed “negotiable” or “non-negotiable,” the securitization process generally includes a valid transfer of the mortgage notes to the trustee in accordance with the explicit requirements of the UCC.

3. Assignment and Transfer of Ownership of Mortgages
As described above, when a mortgage loan is assigned and transferred as part of the securitization of the loan in the secondary market, both the mortgage note and the mortgage itself are typically sold, assigned, and physically transferred to the trustee that is acting on behalf of the MBS investors or to a trustee-designated document custodian pursuant to a custody agreement. The assignment and transfer are usually documented and performed in accordance with a pooling and servicing agreement.

What is the Relationship Between the Transfer of a Mortgage Note and the Transfer of Ownership of the Mortgage?
When a mortgage note is transferred in accordance with common mortgage loan securitization processes, the mortgage is also automatically transferred to the mortgage note transferee under the UCC and the general common law rule that “the mortgage follows the note.” See, e.g., Carpenter v. Longan, 83 U.S. 271, 275 (1873) (“The transfer of the note carries with it the security, without any formal assignment or delivery, or even mention of the latter.”); Mortgage Elect. Registration Sys., Inc. v. Coakley, 41 A.D.3d 674, 674 (N.Y. App. Div. 2d Dept. 2007) (“the mortgage . . . passed as an incident to the promissory note”); Restatement (Third) of Property, Mortgages § 5.4(a) (1997) (“A transfer of an obligation secured by a mortgage also transfers the mortgage . . . . ”).

The rule that “the mortgage follows the note” has been codified in the UCC, but the rule’s common law origins date back hundreds of years, long before the creation of the UCC. As stated in the official comments to UCC § 9-203(g), that section “codifies the common-law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien.” UCC §9-203 cmt.

All states follow this rule.16 In addition to the codification of the rule under UCC § 9-203(g), reported court cases in nearly every state and non-UCC statutory provisions in some states make clear that “the mortgage follows the note”:

Alabama: Armour Fertilizer Works v. Zills, 177 So. 136, 138 (Ala. 1937) (“when the note is secured by a mortgage, such mortgage follows the note”).
Arizona: Ariz. Rev. Stat § 33-817 (“The transfer of any contract or contracts secured by a trust deed shall operate as a transfer of the security for such contract or contracts.”).
Arkansas: Leach v. First Cmty. Bank, No. CA 07-05, 2007 WL 2852599, at *1 (Ark. App. Ct. Oct. 3, 2007) (“Arkansas has long followed the rule that, in the absence of an agreement or a plain manifestation of a contrary intention, the security of the original mortgage follows the note or renewal thereof.”).

California: Cal. Civ. Code § 2936 (“The assignment of a debt secured by mortgage carries with it the security”); In re Staff Mortgage & Invest. Corp., 625 F.2d 281, 284 (9th Cir. 1980) (in California, “[A] deed of trust is a mere incident of the debt it secures and . . . an assignment of the debt ‘carries with it the security.” (internal quotation omitted)).

Colorado: Carpenter v. Longan, 83 U.S. 271, 275 (1873) (in an appeal from the Supreme Court of Colorado Territory, the United States Supreme Court stated: “The transfer of the note carries with it the security, without any formal assignment or delivery, or even mention of the latter.”).

Connecticut: Conn. Gen. Stat. § 49-17 (“When any mortgage is foreclosed by the person entitled to receive the money secured thereby but to whom the legal title to the mortgaged premises has never been conveyed, the title to such premises shall, upon the expiration of the time limited for redemption and on failure of redemption, vest in him in the same manner and to the same extent as such title would have vested in the mortgagee if he had foreclosed, provided the person so foreclosing shall forthwith cause the decree of foreclosure to be recorded in the land records in the town in which the land lies.”); In re AMSCO, Inc., 26 B.R. 358, 361 (Bankr. D. Conn. 1982) (“An assignment of the note carries the mortgage with it . . . .”).

District of Columbia: Hill v. Hawes, 144 F.2d 511, 513 (D.C. Cir. 1944) (after mortgage note has been cancelled, cancellation of “any mortgage follows as a matter of course and does not require a separate action”).

Florida: Capital Investors Co. v. Ex’rs of Estate of Morrison, 484 F.2d 1157, 1163 n.12 (4th Cir. 1973) (“That the mortgage follows the note it secures and derives negotiability, if any, from the note is the rule in Florida where the land under mortgage in this case was located.” (citing Daniels v. Katz, 237 So.2d 58, 60 (Fla. App. 1970); Meyerson v. Boyce, 97 So.2d 488, 489 (Fla. App. 1957))); Margiewicz v. Terco Properties, 441 So.2d 1124, 1125 (Fla. Dist. Ct. App. 1983) (when a note secured by a mortgage is assigned, the mortgage follows the note into the hands of the mortgagee).

Illinois: Federal Nat’l Mort. Ass’n v. Kuipers, 314 Ill. App.3d 631, 635, 732 N.E.2d 723, 727 (Ill. Ct. App. 2000) (“The assignment of a mortgage note carries with it an equitable assignment of the mortgage by which it was secured. The assignee stands in the shoes of the assignor-mortgagee with regard to the rights and interests under the note and mortgage. . . . [I]n Illinois, the assignment of the mortgage note is sufficient to transfer the underlying mortgage.”) (citations omitted).

Indiana: Lagow v. Badollet, 1 Blackf. 416, 1826 WL 1087, at *3 (Ind. 1826) (“a mortgage . . . follows the debt into whose hands soever it may pass”).

Iowa: Bremer County Bank v. Eastman, 34 Iowa 392, 1872 WL 254, at *1 (Iowa 1872) (“The transfer of the note, secured by the mortgage, carried the mortgage with it as an incident to the debt, and the indorsee of the note could maintain an action in his own name, to foreclose the mortgage without any assignment thereon whatever.”).

Kansas: Kan. Stat. Ann § 58-2323 (“The assignment of any mortgage as herein provided shall carry with it the debt thereby secured.”); Bank Western v. Henderson, 255 Kan. 343, 354, 874 P.2d 632, 640 (1994) (“[T]he mortgage follows the note. A perfected claim to the note is equally perfected as to the mortgage.”).

Maryland: In re Bird, No. 03-52010-JS, 2007 WL 2684265, at *2-4 (Bankr. D.Md. Sept. 7, 2007) (“The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it . . . .”).

Massachusetts: The transfer of a mortgage note, without the express transfer of the mortgage, vests in the note holder an equitable interest in the mortgage (an interest that can be enforced by the note holder) and the mortgage holder is deemed to hold the mortgage in constructive trust for the benefit of the note holder. See Weinberg v. Brother, 263 Mass. 61, 62 (1928); Barnes v. Boardman, 149 Mass. 106, 114 (1889); Morris v. Bacon, 123 Mass. 58, 59 (1877); First Nat’l Bank of Cape Cod v. North Adams Hoosac Savs. Bank, 7 Mass. App. Ct. 790, 796 (1979); see also In re Ivy Properties, Inc., 109 B.R. 10, 14 (Bankr. D. Mass. 1989) (“[U]nder Massachusetts common law the assignment of a debt carries with it the underlying mortgage, without necessity for the granting or recording of a separate mortgage assignment.”).

Despite the above cited authorities, the Massachusetts Land Court in a recent opinion cast doubt on the “mortgage follows the note” rule:

[E]ven a valid transfer of the note does not automatically transfer the mortgage. . . . The holder of the note may have an equitable right to obtain an assignment of the mortgage by filing an action in equity, but that is all it has. . . . The mortgage itself remains with the mortgagee (or, if properly assigned, its assignee) who is deemed to hold the legal title in trust for
the purchaser of the debt until the formal assignment of the mortgage to the note holder or, absent such assignment, by order of the court in an action for conveyance of the mortgage.
. . . But . . . the right to get something and actually having it are two different things.

U.S. Bank Nat’l Ass’n v. Ibanez, Nos. 08 MISC 384283 (KCL), 08 MISC 386755 (KCL), 2009 WL 3297551, at *11 (Mass. Land Ct. Oct. 14, 2009) (citations omitted).

The Ibanez case appears to stand in stark contrast to the principles embodied in the UCC.
The Ibanez case was affirmed and Judges concurred on appeal before the Massachusetts Supreme Judicial Court, that state’s highest court.

Michigan: Prime Fin. Serv. v. Vinton, 279 Mich. App. 245, 257, 761 N.W.2d 694, 704 (Mich. Ct. App. 2008) (“the transfer of a note necessarily includes a transfer of the mortgage with it”) (citing Ginsberg v. Capitol City Wrecking Co., 300 Mich. 712, 717, 2 N.W.2d 892 (1942)); Jones v. Titus, 208 Mich. 392, 397, 175 N.W. 257, 259 (Mich. 1919) (when a note given with a mortgage was indorsed over to a third party it carried with it the equitable title to the mortgage).

Minnesota: Jackson v. Mortgage Elect. Registration Sys., Inc., 770 N.W.2d 487, 497 (Minn. 2009) (“Absent an agreement to the contrary, an assignment of the promissory note operates as an equitable assignment of the underlying security interest.”) (emphasis in original).

Mississippi: Holmes v. McGinty, 44 Miss. 94, 1870 WL 4406, at *4 (“[T]he mortgage . . . follows the debt as an incident, and is a security for whomsoever may be the beneficial owner of it.”).

Missouri: George v. Surkamp, 76 S.W.2d 368, 371 (Mo. 1934) (when the holder of the promissory note assigns or transfers the note, the deed of trust is also transferred).

Montana: First Nat’l Bank v. Vagg, 65 Mont. 34, 212 P. 509, 511 (Mont. 1922) (“The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while the assignment of the latter alone is a nullity. The mortgage can have no separate existence.”) (citations omitted).

Nebraska: In re Union Packing Co., 62 B.R. 96, 100 (Bankr. D. Neb. 1986) (with or without the
assignment of the mortgage, the assignee of the promissory note has the right to enforce the mortgage securing the note).

New Hampshire: Southerin v. Mendum, 5 N.H. 420, 1831 WL 1104, at *7 (N.H. 1831) (“When a
mortgagee transfers to another person , the debt which is secured by the mortgage, he ceases to have any control over the mortgage. . . . And we are of the opinion, that the interest of the mortgagee passes in all cases with the debt, and that it is not within the statute of frauds, because it is a mere incident to the debt, has no value independent of the debt, and cannot be separated from the debt.”).

New Jersey: In re Kennedy Mort. Co., 17 B.R. 957, 966 (Bankr. D. N.J. 1982) (“Anyone interested in acquiring an interest in the mortgage would be obliged to obtain an interest in the debt.”).

New York: Mortgage Elec. Registration Sys., Inc. v. Coakley, 41 A.D.3d 674, 838 N.Y.S.2d 622 (App. Div. 2007) (“at the time of the commencement of this action, MERS was the lawful holder of the promissory note (see UCC 3-204[1]; Franzese v. Fidelity N.Y. FSB, 214 A.D.2d 646, 625 N.Y.S.2d 275), and of the mortgage, which passed as an incident to the promissory note (see Payne v. Wilson, 74 N.Y. 348, 354-355; see also Weaver Hardware Co. v. Solomovitz, 235 N.Y. 321, 139 N.E. 353; Matter of Falls, 31 Misc. 658, 660, 66 N.Y.S. 47, aff’d. 66 A. D. 616, 73 N.Y.S. 1134”) (emphasis added); Provident Bank v. Community Home Mortgage Corp., 498 F. Supp. 2d 558, 564-65 (E.D.N.Y. 2007) (applying principle that the mortgage follows the note).

North Carolina: Dixie Grocery Co. v. Hoyle, 204 N.C. 109, 167 S.E. 469 (1933) (“The mortgage follows the debt.”).

Ohio: U.S. Nat’l Bank Ass’n v. Marcino, 181 Ohio App.3d 328, 337 (2009) (“[T]he negotiation of a note operates as an equitable assignment of the mortgage, even when the mortgage is not assigned or delivered. Kuck v. Sommers (1950), 100 N.E.2d 68, 75, 59 Ohio Abs. 400. Various sections of the Uniform Commercial Code, as adopted in Ohio, support the conclusion that the owner of a promissory note should be recognized as the owner of the related mortgage. . . . Thus, although the recorded assignment is not before us, there is sufficient evidence on the record to establish that appellee is the current owner of the note and mortgage at issue in this case, and, therefore, the real party in interest.”) (citations to Ohio’s versions of UCC §§ 9-109(a)(3), 9-102(a)(72)(D) and 9-203(g) omitted).

Oklahoma: Zorn v. Van Buskirk, 111 Okla. 211, 239 P. 151 (1925) (“the mortgage follows the note”).

Pennsylvania: In re Miller, No. 99-25616JAD, 2007 WL 81052, at *6 & n.7 (Bankr. W.D. Pa. Jan.
9, 2007) (citing and quoting with approval Gray, Mortgages in Pennsylvania at § 1-3 (1985) (“the
mortgage follows the note”)).

South Carolina: MidFirst Bank, SSB v. C.W. Haynes & Co., Inc., 893 F. Supp. 1304, 1318 (D. S.C. 1994) (“South Carolina recognizes the ‘familiar and uncontroverted proposition’ that ‘the assignment of a note secured by a mortgage carries with it an assignment of the mortgage.’ Hahn v. Smith, 157 S.C. 157, 154 S.E. 112 (1930); Ballou v. Young, 42 S.C. 170, 20 S.E. 84 (1894).”).

Texas: Kirby Lumber Corp. v. Williams, 230 F.2d 330, 333 (5th Cir. 1956) (applying Texas law) (“The rule is fully recognized . . . that a mortgage to secure a negotiable promissory note is merely an incident to the debt, and passes by assignment or transfer of the note.”).

Utah: Smith v. Jarman, 211 P. 962, 966 (Utah 1922) (“The modern doctrine that the mortgage follows the note as an incident was thus long ago recognized by this court . . . .”).

Virginia: Yerby v. Lynch, 3 Gratt. 460, 1847 WL 2384, at *8-10 (Va. 1847) (“the mortgage follows the debt”).

Virgin Islands: UMLI C VP LLC v. Matthias, 234 F. Supp. 2d 520, 523 (D. V.I. 2002) (citing and quoting with approval the “RESTATEMENT (THIRD) OF PR OPER TY, MORTGAGES § 5.4(a) (1997). The comment to this section further explains that ‘[t]he principle of this subsection, that the mortgage follows the note, … applies even if the transferee does not know that the obligation is secured by a mortgage…. Recordation of a mortgage assignment is not necessary to the effective transfer of the obligation or the mortgage securing it.’ Id. § 5.4 cmt. b (1997). Accordingly, in the Virgin Islands, no separate document specifically assigning and transferring the mortgage which secures a note is required to accompany the assignment of the obligation, because the mortgage automatically follows the note.”).

Washington: Nance v. Woods, 79 Wash. 188, 189, 140 P. 323, 323 (Wash. 1914) (“the mortgage follows the note”).

As mentioned above, the general common law rule that “the mortgage follows the note” is codified in Article 9 of the UCC. Section 9-203(g) of the UCC states: “The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien.”17 UCC § 9-203(g) (emphasis added). The phrase “security interest” in this provision includes a buyer’s ownership interest because UCC § 1-201(b)(35) defines “security interest” to include “any interest of a . . . buyer of . . . a promissory note in a transaction that is subject to Article 9.” Thus, under Article 9, a sale of a mortgage note means that the buyer’s rights attach not only to the mortgage note itself but also to the mortgage that secures the mortgage note. Moreover, under UCC § 9-308(e), those rights are perfected and can be enforced against third parties. Regarding the impact of these UCC provisions, one treatise states: “Article 9 makes it as plain as possible that the secured party need not record an assignment of mortgage, or anything else, in the real property records in order to perfect its rights in the mortgage.” J. McDonnell and J. Smith, Secured Transactions Under the Uniform Commercial Code, § 16.09[3][b].

Courts in several states have affirmed and applied the “mortgage follows the note” rule in cases where the mortgage assignment was not recorded by the transferee.19 See, e.g., Nat’l Livestock Bank v. First Nat. Bank, 203 U.S. 296, 307-08 (1906) (citing with approval a decision of the Supreme Court of Kansas for the proposition that “where a mortgage upon real estate is given to secure payment of a negotiable note, and before its maturity the note and mortgage are transferred by indorsement of the note to a bona fide holder, the assignment, if there be a written one, need not be recorded”); Jackson v. Mortgage Elec. Registration Sys., Inc., 770 N.W.2d 487, 497-98, 500 (Minn. 2009) (applying the “mortgage follows the note” rule where there was no assignment of the mortgage); UMLI C VP LLC v. Matthias, 234 F. Supp. 2d 520, 523 (D. V.I. 2002) (“Recordation of a mortgage assignment is not necessary to the effective transfer of the obligation or the mortgage securing it.”); Federal Nat’l Mort. Ass’n v. Kuipers, 314 Ill. App. 3d 631, 635, 732 N.E.2d 723, 727 (Ill. Ct. App. 2000) (“Because the assignment of the debt, with nothing more, is sufficient to preserve the mortgage lien, it cannot follow that the lien is somehow extinguished for the failure to record the assignment. Therefore, we are persuaded that the mortgage lien and priority position inure to the benefit of the assignee and that recording the assignment is unnecessary to preserve the security for the debt.”); In re Kennedy Mortgage Co., 17 B.R. 957, 964 (Bankr. D.N.J. 1982) (“The fact that assignments of mortgages may be recorded does not affect the validity of an assignment of a mortgage which has not been recorded.”).

Courts have also affirmed and applied the “mortgage follows the note” rule even when there was no actual separate written assignment of the mortgage. See, e.g., Carpenter v. Longan, 83 U.S. 271, 275 (1873) (“The transfer of the note carries with it the security, without any formal assignment or delivery, or even mention of the latter.”); Chase Home Fin., LLC v. Fequiere, 119 Conn. App. 570, 989 A.2d 606, 610-11 (Conn. Ct. App. 2010) (“General Statutes § 49-17 [which codifies the “mortgage follows the note” rule] permits the holder of a negotiable instrument that is secured by a mortgage to foreclose on the mortgage even when the mortgage has not yet been assigned to him.” (emphasis added)); U.S. Nat’l Bank Ass’n v. Marcino, 181 Ohio App.3d 328, 337 (2009) (holding that bank was the “current owner” of a mortgage note and the related mortgage despite the fact that “there is no evidence on the record that appellee is the current assignee of the note and mortgage,” and finding that “the negotiation of a note operates as an equitable assignment of the mortgage, even when the mortgage is not assigned or delivered” (citing Kuck v. Sommers, 100 N.E.2d 68, 75, 59 Ohio Abs. 400 (1950)); UMLI C VP LLC v. Matthias, 234 F. Supp. 2d 520, 523 (D. V.I. 2002) (the principle “that the mortgage follows the note, . . . applies even if the transferee does not know that the obligation is secured by a mortgage”); In re Union Packing Co., 62 B.R. 96, 100 (Bankr. D. Neb. 1986) (with or without the assignment of the mortgage, the assignee of the promissory note has the right to enforce the mortgage securing the note); Morris v. Bacon, 123 Mass. 58, 59 (1877) (note holder that endorsed and delivered mortgage note to bank as security for a loan, but without an assignment of the mortgage, was required by the court to transfer the mortgage to the bank); Bremer County Bank v. Eastman, 34 Iowa 392, 1872 WL 254, at *1 (Iowa 1872) (“The transfer of the note, secured by the mortgage, carried the mortgage with it as an incident to the debt, and the indorsee of the note could maintain an action in his own name, to foreclose the mortgage without any assignment thereon whatever.”); Southerin v. Mendum, 5 N.H. 420, 1831 WL 1104, at *8 (N.H. 1831) (“the right of the mortgagee before foreclosure is . . . assignable by a mere assignment of the debt, without deed or writing”).

Common MBS practices, as described above, are consistent with the general rule that “the mortgage follows the note”: pursuant to the pooling and servicing agreement that governs a mortgage-loan securitization, and the language of assignment typically contained in such an agreement, the mortgage note and the mortgage itself are sold, assigned, transferred and delivered to the trustee, and the transferor also typically delivers a written assignment of the mortgage that is in blank in recordable form. Courts have held that the language of assignment contained in a pooling and servicing agreement, along with the corresponding transfer, sale and delivery of the mortgage note and mortgage, are sufficient to transfer the mortgage to the transferee/trustee or its designee or nominee. See, e.g., Wells Fargo Bank, N.A. v. Konover, No. 3:05 CV 1924 (CFD), 2009 WL 2710229, at *3 (D. Conn. Aug. 21, 2009) (MBS pooling agreement vested authority in pool trustee to bring legal action in the event of default); U.S. Bank N.A. v. Cook, No. 07 C 1544, 2009 WL 35286, at *2-3 (N.D. Ill. Jan. 6, 2009) (MBS pooling trust agreement effected an assignment of the mortgage at issue to the pool trustee); In re Samuels, 415 B.R. 8, 18 (Bankr. D. Mass. 2009) (“The [Pooling and Servicing Agreement] itself [by which the MBS loan trust was created], in conjunction with the schedule of mortgages deposited through it into the pool trust, served as a written assignment of the designated mortgage loans, including the mortgages themselves.”); EMC Mortgage Corp. v. Chaudhri FSB, 400 N.J. Super. 126, 141, 946 A.2d 578, 588 (N.J. Super. Ct. 2008) (“any [mortgage] assignment shall pass and convey the estate of the assignor in the mortgaged premises, and the assignee may sue thereon in his own name.’” (citing New Jersey Stat. Ann. § 46:9-9 and Byram Holding Co. v. Bogren, 2 N.J. Super. 331, 336, 63 A.2d 822 (N.J. Ch. Div. 1949)); LaSalle Bank N.A. v. Lehman Bros. Holdings, Inc., 237 F. Supp. 2d 618, 632-33 (D. Md. 2002) (MBS pooling agreement granted trustee authority to bring suit on behalf of trust); LaSalle Bank N.A. v. Nomura Asset Capital Corp., 180 F. Supp. 2d 465, 470-71 (S.D.N.Y. 2001) (language in the pooling and servicing agreement for MBS trust effectually assigned mortgage to the pool trustee).

What is the Relationship Between the UCC and State Real Property Laws?
Article 9 does not apply to “the creation or transfer of an interest in or lien on real property, . . . except to the extent that provision is made for . . . liens on real property in Sections 9-203 and 9-308.” UCC §9-109(d)(11) (emphasis added). As discussed above, UCC § 9-203(g) provides that, when a security interest in a mortgage note attaches, a security interest in the underlying mortgage also attaches, and UCC § 9-308(e) provides the same regarding the perfection of the security interest. See UCC § 9-203 cmt. 9 (the “mortgage follows the note” rule codified into UCC §§ 9-203(g) and 9-308(e)). In addition, UCC § 9-109(b) makes clear that Article 9 does apply to mortgage notes even though Article 9 does not govern the creation of the mortgage itself:

The application of this article [9] to a security interest [remember that this term is defined to include any interest of a buyer of a promissory note in a transaction subject to Article 9] in a secured obligation [e.g., mortgage note] is not affected by the fact that the obligation [e.g., mortgage note] is itself secured by a transaction or interest [e.g., creation of the
mortgage or deed of trust itself] to which this article does not apply.

UCC § 9-109(b)

The creation of an interest in or lien on real property, including a mortgage, is governed by the non-UCC law of the state in which the property is located. See, e.g., Oregon v. Corvallis Sand and Gravel Co., 429 U.S. 363, 378-79 (1977). Likewise, the enforceability of mortgages (including the right and method to foreclose) is subject to all of the conditions precedent and requirements that are set forth in the particular mortgage itself and in all applicable state and local laws. Those conditions precedent and procedural requirements vary from mortgage to mortgage and from state to state. Thus, ownership of a mortgage (i.e., without notice to the mortgagor or the public, without judicial proceedings (where required), without satisfaction of other conditions precedent or procedural requirements in the mortgage itself or in applicable state law), does not always give the holder of the mortgage the legal ability to foreclose on the mortgage. Though a discussion of the other necessary prerequisites to foreclosure is beyond the scope of this paper, the fact that other steps may need to be taken by the owner of a mortgage note, or the owner of a mortgage, is neither unique nor surprising in our legal and regulatory system and does not diminish an otherwise legally effective transfer of the mortgage note and mortgage.

How Does the Use of MERS Affect These Issues?
The use of MERS as the nominee for the benefit of the trustee and other transferees in the mortgage loan securitization process has been a subject of litigation in recent years. See, e.g., Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. Ct. App. 2009). Some cases address the authority or ability of MERS or transferees of MERS to foreclose on a mortgage for which MERS is or was the mortgagee of record. See, e.g., Saxon Mort. Serv., Inc. v. Hillery, No. C-08-4357 EMC, 2008 WL 5170180, at *4-5 (N.D. Cal. Dec. 9, 2008). As a general matter, the assignment and transfer of a mortgage to MERS as nominee of and for the benefit of the beneficial owner of the mortgage does not adversely impact the right to foreclose on the mortgage.

Decisions in many jurisdictions support this conclusion. See, e.g., In re Mortgage Elect. Registration Sys., Inc. (MERS) Litig., No. 2:09-md-2119, 2010 WL 4038788, at *8 (D. Ariz. Sept. 30, 2010) (“Plaintiffs have not cited any legal authority where the naming of MERS . . . was cause to enjoin a non-judicial foreclosure as wrongful.”); Commonwealth Property Advocates, LLC v. Mortgage Elect. Registration Sys., Inc., No. 2:10-CV-340 TS, 2010 WL 3743643, at *3 (D. Utah Sept. 20, 2010) (MERS as nominee has authority to foreclose); Taylor v. Deutsche Bank Nat’l Trust Co., No. 5D09-4035, 2010 WL 3056612, at *3 (Fla. App. Aug. 6, 2010) (“[T]he written assignment of the note and mortgage from MERS to Deutsche Bank properly transferred the note and mortgage. . . . The transfer, moreover, was not defective by reason of the fact that MERS lacked a beneficial ownership interest in the note at the time of the assignment, because MERS was lawfully acting in the place of the holder and was given explicit and agreed upon authority to make just such an assignment.”); Mortgage Elect. Registration Sys., Inc. v. Bellistri, No. 4:09-CV-731 CAS, 2010 WL 2720802, at *15 (E.D. Mo. July 1, 2010) (“[a]s the nominee of the original lender … or the lender’s assigns, MERS has bare legal title to the note and deed of trust securing it, and this is sufficient to create standing” to initiate foreclosure proceedings); Silvas v. GMAC Mortgage, LLC, No. CV-09-265-PHX-GMS, 2009 WL 4573234, at *8 (D. Ariz. Jan. 5, 2010) (MERS empowered to foreclose where MERS is designated on deed of trust as beneficiary); Diessner v. Mortgage Elec. Registration Sys., 618 F. Supp. 2d 1184, 1187-91 (D. Ariz. 2009) (MERS and trustee under deed of trust are authorized to institute non-judicial foreclosure proceeding); Jackson v. Mortgage Elec. Registration Sys., Inc., 770 N.W.2d 487, 501 (Minn. 2009) (rejecting argument that transfer of mortgage note to MERS is a transfer that must be recorded before foreclosure); Reynoso v. Paul Financial, LLC, No. 09-3225 SC, 2009 WL 3833298, at *2 (N.D. Cal. Nov. 16, 2009) (naming of MERS as initial beneficiary under deed of trust, as nominee for the lender, and the subsequent transfer of the deed of trust from MERS to a transferee was effective and did not hinder transferee’s right to foreclose); Blau v. America’s Servicing Co., No. CV-08-773, 2009 WL 3174823, at *8 (D. Ariz. Sept. 29, 2009) (MERS authorized under deed of trust to act on behalf of lender and transfer its interests); Farahani v. Cal-Western Recon. Corp., No. 09-194, 2009 WL 1309732, at *2-3 (N.D. Cal. May 8, 2009) (MERS authorized to pursue non-judicial foreclosure action); Vazquez v. Aurora Loan Servs., No 2:08-cv-01800-RCJRJJ, 2009 WL 1076807, at *1 (D. Nev. Apr. 20, 2009) (loan documents sufficiently demonstrate MERS’ standing “with respect to the loan and the foreclosure”); Pfannenstiel v. Mortgage Elect. Registration Sys., Inc., No. CIV S-08-2609, 2009 WL 347716, at *4 (E.D. Cal. Feb. 11, 2009) (dismissing plaintiff ’s claim that MERS lacked authority to foreclose); Trent v. Mortgage Elect. Registration Sys., Inc., 288 Fed. App’x 571, 572 (11th Cir. 2008) (MERS “has the legal right to foreclose on the debtors’ property” and “is the mortgagee”); Peyton v. Recontrust Co., No. TC021868, Notice of Ruling, at 2 (Cal. Super. Ct. County of Los Angeles S. Cent. Dist. Oct. 15, 2008) (MERS may foreclose under California law); Johnson v. Mortgage Elect. Registration Sys., Inc., 252 Fed. App’x 293, 294 (11th Cir. 2007) (summary judgment for MERS on its action for foreclosure of plaintiff ’s property); In re Smith, 366 B.R. 149, 151 (Bankr. D. Colo. 2007) (MERS has standing to conduct foreclosure on behalf of the beneficiary); Mortgage Elect. Registration Sys., Inc. v. Revoredo, 955 So.2d 33, 34 (Fla. Dist. Ct. App. 2007) (“Because, however, it is apparent – and we so hold – that no substantive rights, obligations or defenses are affected by use of the MERS device, there is no reason why mere form should overcome the salutary substance of permitting the use of this commercially effective means of business.”); Mortgage Elect. Registration Sys., Inc. v. Ventura, CV054003168S, 2006 WL 1230265, at *1 (Conn. Super. Apr. 20, 2006) (MERS is proper party in foreclosure).

There are several minority decisions that, in some form, have taken issue with MERS. But none of these decisions, to our knowledge, has invalidated a mortgage for which MERS is the nominee, and none of these decisions has challenged MERS’ ability to act as a central system to track changes in the ownership and servicing of loans:22 See Rinegard-Guirma v. Bank of Am., Nat’l Ass’n, No. 10-1065-PK , 2010 WL 3945476, at *4 (D. Or. Oct. 6, 2010) (suggesting that MERS may not qualify as a legitimate beneficiary of a deed of trust under Oregon law, and preliminarily enjoining foreclosure action by MERS); In re Allman, No. 08-31282-elp7, 2010 WL 3366405, at *10 (Bankr. D. Or. Aug. 24, 2010) (same); Mortgage Elec. Registration Sys., Inc. v. Saunders, 2 A.3d 289, 297 (Me. 2010); In re Box, No. 10-20086, 2010 WL 2228289, at *5 (Bankr W.D. Mo. June 3, 2010) (finding that MERS, as beneficiary and nominee under the deed of trust lacked authority to assign the mortgage note because it never “held” the note itself);23 In re Hawkins, No. BK -s-07-13593-LBR , 2009 WL901766, at *3 (Bankr. D. Nev. Mar. 31, 2009) (finding that MERS was not a true “beneficiary” under a deed of trust, that, under the UCC, MERS was not entitled to enforce the note, and that “[i]n order to foreclose, MERS must establish there has been a sufficient transfer of both the note and deed of trust, or that it has authority under state law to act for the note’s holder”).

Finally, it is important to recognize that the UCC does not displace traditional rules of agency law.
See UCC § 1-103(b) (“Unless displaced by the particular provisions of [the Uniform Commercial Code], the principles of law and equity, including the law [of] . . . principal and agent . . . supplement its provisions.”); see
also UCC § 9-313 cmt. 3 (principles of agency apply for purposes of determining “possession” under Article 9).
Under general agency law, an agent has authority to act on behalf of its principal where the principal “manifests assent” to the agent “that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” Restatement (Third) of Agency § 1.01 (2006).

Accordingly, the UCC does not prevent MERS or others, including loan servicers, from acting as the agent for the note holder in connection with transfers of ownership in mortgage notes and mortgages. See, e.g., In re Tucker, No. 10-61004, 2010 WL 3733916, at *6 (Bankr. W.D. Mo. Sept. 20, 2010) (finding MERS was the “agent for [the lender] under the Deed of Trust from the inception, and MERS became the agent for each subsequent note-holder under the Deed of Trust when each such note holder negotiated the Note to its successor and assign”); King v. Am. Mortgage Network, Inc., No. 1:09CV162 DAK, 2010 WL 3516475, at *3 (D. Utah Sept. 2, 2010) (rejecting argument that note and deed of trust were split because Fannie Mae held the note and MERS was listed as the nominal beneficiary under the deed of trust and finding that both MERS and the authorized loan servicer had authority as agents of the note holder to act on behalf of the note holder, including the initiation of foreclosure proceedings on the underlying property); Mich. Comp. Laws § 600.3204(1)(d) (“The party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.”); Hilmon v. Mortgage Elect. Registration Sys., Inc., No. 06-13055, 2007 WL 1218718, at *3 (E.D. Mich. Apr. 23, 2007); Caravantes v. California Reconveyance Co., No. 10-cv-1407-IEG (AJB), 2010 WL 4055560, at *9 (S.D. Cal. Oct. 14, 2010) (“as servicer of the subject loan in this case, JP Morgan had the authority to record the Notice of Default and to enforce the power of sale under the Deed of Trust”); Birkland v. Silver State Fin. Servs., Inc., No. 2:10-CV-00035-KJD-LRL, 2010 WL3419372, at *3 (D. Nev. Aug. 25, 2010) (“MERS, as nominee on a deed of trust, is granted authority as an agent on behalf of the nominator (holder of the promissory note) as to the administration of the deed of trust, which would include substitution of trustees”). In short, principles of agency law provide MERS and loan servicers another legal basis for their respective roles in the transfer of mortgage notes and mortgages.

4. Conclusion

In summary, the longstanding and consistently applied rule in the United States is that, when a mortgage note is transferred, “the mortgage follows the note.” When a mortgage note is transferred and delivered to a transferee in connection with the securitization of the mortgage loan pursuant to an MBS pooling and servicing agreement or similar agreement, the mortgage automatically follows and is transferred to the mortgage note transferee, notwithstanding that a third party, including an agent/nominee entity such as MERS, may remain as the mortgagee of record. Both common law and the UCC confirm and apply this rule, including in the context of mortgage loan securitizations. The legal principles and processes discussed above provide for – and, if followed, result in – a valid and enforceable transfer of mortgage notes and the underlying mortgages. The transfer and legal effectiveness of mortgage notes and mortgages are not diminished by the fact that the enforceability of mortgages, including the right to foreclose, is subject to the conditions precedent and requirements that are set forth in the particular mortgage itself and in the laws of the state in which the mortgaged property is located.

Footnotes:

1. References to the UCC are to the Official Text of the Model UCC, as revised, issued by the National Conference of Commissioners on Uniform State Laws.
2. Note that the UCC replaces the more common U.S. spelling of “endorsement” for the less common “indorsement.” The UCC spelling is used throughout this Executive Summary.3. However, in some states, such as Massachusetts and Minnesota, courts have held that the transfer of a mortgage note without an
express transfer of the mortgage vests in the note holder only an equitable interest in the mortgage. This arrangement has been
described as follows: the holder of the mortgage holds the legal title to the mortgage in constructive trust for the benefit of the
mortgage note holder. In both states, however, case law suggests that foreclosure proceedings must be initiated by, or at least in the
name of, the holder of the legal title in the mortgage.
4. In most states, recording of an assignment of mortgage is generally not required to ensure the enforceability of the assignment of mortgage as between the assignor and assignee, and anyone with knowledge thereof. It is beyond the scope of this post to discuss in detail the potential risks to the mortgage transferee of not recording a mortgage assignment.
Those risks might include, among others, delaying the transferee’s ability to foreclose on the mortgage, failing to receive notices that may go to the mortgagee of record, and otherwise leaving the assignee open to negligent or fraudulent actions or inactions by the mortgagee of record that could bind the mortgage transferee and impair the value or enforceability of the mortgage. Similarly, when an assignment of mortgage is not recorded, the assignor may be liable for certain obligations imposed upon a mortgagee of record, such as the obligation to provide a pay-off statement or mortgage release within a designated time period.

5. Issues related to a party’s right to foreclose or to engage in foreclosure-related activities are generally outside the scope of this paper.
6. For ease of reference, “mortgage” will be used throughout much of this post to refer to both mortgages and deeds of trust, and “mortgage note” will be used to refer to a promissory note that is secured by a mortgage.

7. References to the UCC are to the Official Text of the Model UCC, as revised, issued by the National Conference of Commissioners
on Uniform State Laws.
8. While Article 9 does not directly govern a mortgage on real property, the fact that a mortgage note is itself secured by a mortgage on real property does not render Article 9 inapplicable to transfers of the mortgage note. See UCC § 9-109(b) (“The application of this article [9] to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this article does not apply.”).
9. Note that the UCC eschews the more common U.S. spelling of “endorsement” for the less common “indorsement.” The UCC spelling is used throughout this paper.

10. Article 3 and Article 9 are not mutually exclusive. Article 9 applies to the transfer of all “promissory notes,” which includes negotiable
and non-negotiable instruments. Both Article 3 and Article 9 apply to “negotiable instruments.” With respect to non-negotiable instruments, only Article 9 applies to the transfer.
11. UCC § 3-104(b) defines “instrument” simply as a “negotiable instrument” for purposes of Article 3. As discussed in more detail below, the definition of “instrument” in Article 9 (governing secured transactions) is somewhat more expansive.

12. It is important to note that Article 3 does not concern “ownership” of a mortgage note, but instead provides for the transfer of a mortgage note and the right to enforce such notes. See UCC § 3-301; UCC § 3-203 cmt. 1. A party need not be the “owner” of the mortgage note to enforce it. See UCC § 3-301 (“A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.”). Thus, a party may have the right to enforce the instrument, but not have “ownership” of that instrument. UCC § 3-203 cmt 1. For an example of situations where a party with the right to enforce an instrument is not also the “owner” of the instrument, see UCC 3-203 cmt. 1 and Note 16 infra.
13. Note also that UCC § 3-203(c) provides for the scenario in which an instrument is transferred for value without the indorsement that, as described in the text below, would be needed for the mortgage note to have been “negotiated.” Under that section, if a negotiable mortgage note is transferred for value as part of a loan securitization, but the transferor fails to indorse the note, the transferee of the note has the “specifically enforceable right to the unqualified indorsement of the transferor.” UCC § 3-203(c); see Note 16, infra (discussing distinction between the right to enforce a mortgage note and ownership of the mortgage note).

14. An indorsement is considered to be made “on an instrument” for purposes of negotiation when it is made either on the mortgage note itself or on a separate paper, often referred to as an “allonge,” that is affixed to the note. See UCC § 3-204(a). Once affixed, the allonge becomes “part of the instrument.” Id.
15. As noted above, the right to enforce an instrument and the ownership of that instrument are not necessarily the same. See UCC §3-203 cmt. 1. Thus, a party may have the right to enforce the instrument, but not have “ownership” of that instrument. Id. A party need not be the “owner” of the note to enforce it. See UCC § 3-301 (“A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.”). For example, if X (holder of an instrument payable to X) sells the instrument to Y pursuant to a document conveying all of X’s right, title and interest
in the instrument to Y, but does not deliver immediate possession to Y, Y would have ownership of the instrument under the agreement, but Y generally would not be entitled to enforce the instrument until it obtained possession of the instrument. Id.
16. UCC § 3-301 also permits a person without possession to enforce a mortgage note where, in certain circumstances, there has been mistaken payment as defined in UCC § 3-418(d).

17. Article 9 also applies to the creation of a lien on, or a “less-than-ownership security interest” in, a mortgage note. Because most assignments and transfers of mortgage notes in loan securitizations are of the ownership of the mortgage notes, not a mere lien on or security interest in the notes, this paper addresses only outright sales of mortgage notes under Article 9. The principles discussed below regarding attachment of a buyer’s interest in a sale of mortgage notes are identical to those that apply in the context of the creation of a lien on mortgage notes, and the principles regarding perfection of the interest in the mortgage notes are likewise very similar. “Although . . . Article [9] occasionally distinguishes between outright sales of receivables and sales that secure an obligation, neither . . . Article [9] nor the definition of “security interest” (Section 1-201(37)) delineates how a particular transaction is to be classified. That issue is left to the courts.” UCC § 9-109 cmt 4.
18. Under Article 9, the term “instrument” is defined broadly as “a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment.” UCC § 9-102(a)(47).

19. The comments to UCC § 9-203 expressly provide that “Subsection (g) codifies the common-law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien.” UCC § 9-203 cmt. 9; see also Restatement (Third) of Property (Mortgages) § 5.4(a) (1997). The same holds true for UCC § 9-308(e), under which perfection of a security interest in a mortgage note also accomplishes perfection of a security interest in the mortgage. See UCC §9-308 cmt. 6.

20. However, in some states, such as Massachusetts and Minnesota, courts have held that the transfer of a mortgage note without an express transfer of the mortgage vests in the note holder only an equitable interest in the mortgage. See, e.g., First Nat’l Bank of Cape Cod v. North Adams Hoosac Savs. Bank, 7 Mass. App. Ct. 790, 796 (1979); Jackson v. Mortgage Elect. Registration Sys., Inc., 770 N.W.2d 487, 497, 500-01 (Minn. 2009). This arrangement has been described as follows: the holder of the mortgage holds the legal title to the mortgage in constructive trust for the benefit of the mortgage note holder. See First Nat’l Bank of Cape Cod, 7 Mass. App. Ct. at 796. In both states, however, case law suggests that foreclosure proceedings must be initiated by, or at least in the name of, the holder of the legal title in the mortgage. See Jackson, 770 N.W.2d at 500; U.S. Bank Nat’l Ass’n v. Ibanez, Nos. 08 MISC 384283 (KCL), 08 MISC 386755 (KCL), 2009 WL 3297551, at *11 (Mass. Land Ct. Oct. 14, 2009) (rejecting argument that note holders had authority to foreclose on mortgages for which their status as full mortgagees was in dispute) (currently on appeal to the Massachusetts Supreme Judicial Court).

21. Courts have observed that UCC § 9-203(g) codifies the “mortgage follows the note” rule. See, e.g., U.S. Nat’l Bank Ass’n v. Marcino, 181 Ohio App.3d 328, 337 (2009) (quoting with approval Official Comment 9 to UCC § 9-203: “subsection (g) [of UCC § 9-203] codifies the common-law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien”).
22. As discussed above, UCC § 9-308(e) provides that “perfection of a security interest in a right to payment or performance also perfects a security interest in a security interest, mortgage, or other lien on personal or real property securing the right.” UCC §9-308(e) (emphasis added).
23. In most states, recording of an assignment of mortgage is generally not required to ensure the enforceability of the assignment of mortgage as between the assignor and assignee, and anyone with knowledge thereof. It is beyond the scope of this paper to discuss in detail the potential risks to the mortgage transferee of not recording a mortgage assignment. Those risks might include, among others, delaying the transferee’s ability to foreclose on the mortgage, failing to receive notices that may go to the mortgagee of record, and otherwise leaving the assignee open to negligent or fraudulent actions or inactions by the mortgagee of record that could bind the mortgage transferee and impair the value or enforceability of the mortgage. Similarly, when an assignment of mortgage is not recorded, the assignor may be liable for certain obligations imposed upon a mortgagee of record, such as the obligation to provide a pay-off statement or mortgage release within a designated time period.

24. Although the rule is “the mortgage follows the note” when a mortgage note is assigned, some case law indicates that the converse is not true and that the mortgage note does not necessarily follow the mortgage if there is an attempted assignment of the mortgage alone or separate from the mortgage note. See, e.g., Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. Ct. App. 2009) (“An assignment of the deed of trust separate from the note has no ‘force.’”); Saxon Mort. Serv., Inc. v. Hillery, No. C-08-4357 EMC, 2008 WL 5170180, at *4-5 (N.D. Cal. Dec. 9, 2008) (“For there to be a valid assignment, there must be more than just assignment of the deed [of trust] alone; the note must also be assigned.”); In re Wilhelm, 407 B.R. 392, 400-05 (Bankr. D. Idaho 2009); Kelley v. Upshaw, 39 Cal.2d 179, 192 (1952) (“In any event, Kelley’s purported assignment of the mortgage without an assignment of the debt which is secured was a legal nullity.”). This is consistent with the longstanding aspect of the “mortgage follows the note” rule that “the note and mortgage are inseparable; the former as essential, the latter as an incident.” In re Bird, No. 03-52010-JS, 2007 WL 2684265, at *2-4 (Bankr. D.Md. Sept. 7, 2007).
25. UCC Article 3, which applies to negotiable mortgage notes, does not apply to mortgages themselves because mortgages do not fit the definition of “negotiable instrument” in UCC § 3-104(a).

26. Some investors and loan servicers have sought to lessen the risk of challenges to foreclosure pertaining to MERS by assigning loans out of MERS and to the note holder prior to the initiation of foreclosure.
27. The Court in In re Box expressly noted, but did not decide, the question of whether MERS had authority to assign the note as an agent of the lender or even as “a nominee beneficiary.” In re Box, 2010 WL 2228289 at *4. The same court, in a later case, answered the question directly and found that MERS, as the designated “nominee for the lender and its assigns,” “was the agent for [the lender] under the Deed of Trust from the inception, and MERS became agent for each subsequent note-holder under the Deed of Trust when each such note holder negotiated the Note to its successors and assigns.” In re Tucker, No. 10-61004, 2010 WL 3733916, at *6 (Bankr. W.D. Mo. Sept. 20, 2010) (“[w]hen [note-holder] acquired the right to enforce the Note as the note-holder, MERS held the beneficial interest in the Deed of Trust on behalf of [note-holder] and [note-holder] had the right to enforce all the rights granted to [the original lender] and its successors and assigns in the Deed of Trust”). Thus, the Court found that the Note and the Deed of Trust were not split because of MERS’ status as agent for the note holders. Id.

28. Some parties to litigation, and commentators, have relied upon the Kansas Supreme Court’s decision in Landmark National Bank v. Kesler, 216 P.3d 158 (Kan. 2009), to support the proposition that the identification of MERS as a nominee on a mortgage is improper. However, reliance on the decision in Kesler for that proposition is misplaced and stretches the decision well-beyond its actual holding. In Kesler, the Court merely held that MERS, in its capacity as the nominee for the lender under a second-position mortgage, was not entitled to notice of a foreclosure sale by the holder of the senior mortgage. See id. at 169-70. As the Kansas Appeals Court that considered the case noted, “[w]hether MERS may act as a nominee for the lender, either to bring a foreclosure suit or for some other purpose, is not at issue….” Landmark Nat’l Bank v. Kesler, 192 P.3d 177, 180 (Kan. Ct. App. 2008).

For More Info on How To Effectively Challenge Your Wrongful Foreclosure Using Valid Mortgage Securitization Arguments, UCC and Relevant Case Laws: Visit http://www.fightforeclosure.net

Application of UCC to Mortgage Securitization Process

22 Saturday Jun 2013

Posted by BNG in Foreclosure Defense, Litigation Strategies, MERS, Mortgage Laws, Pro Se Litigation, Securitization

≈ Leave a comment

Tags

Fannie Mae, Freddie Mac, MERS, Mortgage Electronic Registration System, Mortgage note, Promissory note, UCC, Uniform Commercial Code

In recently times, a lot of issues have been raised on a number of legal theories questioning whether securitization trusts, either those created by private financial institutions or those created by government sponsored enterprises, such as Ginnie Mae, Fannie Mae or Freddie Mac, have valid legal title to the seven trillion dollars of mortgage notes in those trusts. In an effort to contribute thorough and well-researched legal analysis to the discussion of these theories. The writing provides a detailed overview of the legal principles and processes by which mortgage loans are typically held, assigned, transferred and enforced in the secondary mortgage market and in the creation of mortgage-backed securities (“MBS”). These principles and processes have centuries-old origins, and they have continued to be sound and validated since the advent of MBS over forty years ago.

While the real property laws of each of the 50 U.S. states and the District of Columbia affect the method of foreclosing on a mortgage loan in default, the legal principles and processes discussed in this post result, if followed, in a valid and enforceable transfer of mortgage notes and the underlying mortgages in each of these jurisdictions. To be thorough, this post undertakes a review of both common law and the Uniform Commercial Code (the “UCC”) in each of the 50 U.S. states and the District of Columbia. One of the most critical principles is that when ownership of a mortgage note is transferred in accordance with common securitization processes, ownership of the mortgage is also automatically transferred pursuant to the common law rule that “the mortgage follows the note.” The rule that “the mortgage follows the note” dates back centuries

and has been codified in the UCC. In essence, this means that the assignment of a mortgage to a trustee does not need to be recorded in real property records in order for it to be a valid and binding transfer. In summary, these traditional legal principles and processes are fully consistent with today’s complex holding, assignment and transfer methods for mortgage loans and those methods are legally effective for participants in the secondary mortgage market to transfer mortgage loans.

1. Basic Principles
The two core legal documents in most residential mortgage loan transactions are the promissory note and the mortgage or deed of trust that secures the borrower’s payment of the promissory note. In a typical “private-label” mortgage loan securitization, each mortgage loan is sold to a trust through a series of steps.

A mortgage note and a mortgage may be sold, assigned and transferred several times between the time the mortgage loan is originated and the time the mortgage loan ends up with the trust. The legal principles that govern the assignment and transfer of mortgage notes and related mortgages are determined, in significant part, by the Uniform Commercial Code (“UCC”), which has been adopted by all 50 states and the District of
Columbia.

The residential mortgage notes in common usage typically are negotiable instruments. As a general matter, under the UCC, a negotiable mortgage note can be transferred from the transferor to the transferee through the indorsement2 of the mortgage note and the transfer of possession of the note to the transferee or a custodian on behalf of the transferee. An assignment of the related mortgage is also typically delivered to the transferee or its custodian, except in cases where the related mortgage identifies the Mortgage Electronic Registration System (“MERS”) as the mortgagee. Such assignments generally are in recordable form, but unrecorded, and are executed by the transferor without identifying a specific transferee – a so-called assignment “in blank.” Intervening assignments, in some cases, may be recorded in the local real estate records.

In some mortgage loan transactions, MERS becomes the mortgagee of record as the nominee of the loan originator and its assignees in the local land records where the mortgage is recorded, either when the mortgage is first recorded or as a result of the recording of an assignment of mortgage to MERS. This means that MERS is listed as the record title holder of the mortgage. MERS’ name does not appear on the mortgage note, and the beneficial interest in the mortgage remains with the loan originator or its assignee. The documents pursuant to which MERS acts as nominee make clear that MERS is acting in such capacity for the benefit of the loan originator or its assignee. When a mortgage loan is originated with MERS as the nominal mortgagee (or is assigned to MERS post-origination), MERS tracks all future mortgage loan and mortgage loan servicing transfers and other assignments of the mortgage loan unless and until ownership or servicing is transferred (or the mortgage loan is otherwise assigned) to an entity that is not a MERS member. In this way, MERS serves as a central system to track changes in ownership and servicing of the mortgage loan. Fannie Mae, Freddie Mac and Ginnie Mae, among other governmental entities, permit mortgage loans that they purchase or securitize to be registered with MERS.

2. Transfer of Promissory Notes Secured by Mortgages
The law of negotiable instruments developed over the centuries as a way to encourage commerce and lending by making such instruments, including negotiable mortgage notes, as liquid and transferable as possible. The UCC, with state-specific variations, in significant part governs the assignment and transfer of mortgage notes. Article 3 of the UCC applies to the negotiation and transfer of a mortgage note that is a “negotiable instrument,” as that term is defined in Article 3. In addition, Article 9 of the UCC applies to the sale of “promissory notes,” a term that generally includes mortgage notes.

In addition, as a general matter, the securitization of a loan under a typical pooling and servicing agreement provides both for the negotiation of negotiable mortgage notes (by indorsement and transfer of possession to the securitization trustee or the custodian for the trustee) and for an outright sale and assignment of all of the mortgage notes and mortgages. Thus, whether the mortgage notes in a given securitization pool are deemed “negotiable” (as we believe most typically are) or “non-negotiable” will have little or no substantive effect under the UCC on the validity of the transfer of the notes. The typical securitization process effects valid transfers of the mortgage notes and related mortgages in accordance with the provisions of Articles 3 and 9 of the UCC.

Under the UCC, the transfer of a mortgage note that is a negotiable instrument is most commonly effected by (a) indorsing the note, which may be a blank indorsement that does not identify a person to whom the mortgage note is payable or a special indorsement that specifically identifies a person to whom the mortgage note is payable, and (b) delivering the note to the transferee (or an agent acting on behalf of the transferee). As residential mortgage notes in common usage typically are “negotiable instruments,” this is the most common method to transfer the mortgage note. In addition, even without indorsement, the transfer can be effected by transferring possession under the UCC. Moreover, the sale of any mortgage note also effects the transfer of the mortgage under Article 9. Securitization agreements often provide both for (a) the indorsement and transfer of possession to the trustee or the custodian for the trustee, which would constitute a negotiation of the mortgage note under Article 3 of the UCC and (b) an outright sale and assignment of the mortgage note. Thus, regardless of whether the mortgage notes in a securitization trust are deemed “negotiable” or “non-negotiable,” the securitization process generally includes a valid transfer of the mortgage notes to the trustee in accordance with the explicit requirements of the UCC.

In addition, Article 3 of the UCC permits a person without possession to enforce a negotiable mortgage note where the note has been lost, stolen, or destroyed. Courts have consistently affirmed the use of the salient provisions of the UCC to enforce lost, stolen or destroyed negotiable mortgage notes that are owned by a securitization trust when the trust or its agent has proved the terms of the mortgage notes and their right to enforce the mortgage notes.

3. Assignment and Transfer of Ownership of Mortgages
As stated above, when a mortgage loan is assigned and transferred as part of the securitization of the mortgage loan in the secondary market, both the mortgage note and the mortgage itself are typically sold, assigned, and physically transferred to the trustee that is acting on behalf of the MBS investors or a trustee designated document custodian pursuant to a custody agreement. The assignment and transfer are usually
documented in accordance with a pooling and servicing agreement.
When a mortgage note is transferred in accordance with common mortgage loan securitization processes, the mortgage is also automatically transferred to the mortgage note transferee pursuant to the general common law rule that “the mortgage follows the note.” The rule that “the mortgage follows the note” has been codified in the UCC, but the rule’s common law origins date back hundreds of years, long before the creation of the UCC. As stated in the official comments to UCC § 9-203(g), the section “codifies the commonlaw rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien.” UCC § 9-203 cmt. 9. All states follow this rule.

In addition to the codification under UCC § 9-203(g), reported court cases in nearly every state and non-UCC statutory provisions in some states make clear that “the mortgage follows the note.” Regarding the impact of these UCC provisions, one treatise states: “Article 9 makes it as plain as possible that the secured party need not record an assignment of mortgage, or anything else, in the real property records in order to perfect its rights in the mortgage.” J. McDonnell and J. Smith, Secured Transactions Under the Uniform Commercial Code, § 16.09[3][b]. Indeed, courts in several states have affirmed and applied the “mortgage follows the note” rule in cases where the mortgage assignment was not recorded by the transferee and even when there was no actual separate written assignment of the mortgage.

Common securitization practices are consistent with the general rule that “the mortgage follows the note”: pursuant to the pooling and servicing agreement that governs an MBS, and the language of assignment typically contained in such an agreement, the mortgage note and the mortgage itself are sold, assigned, transferred and delivered to the trustee, and the transferor also typically delivers a written assignment of the mortgage that is in blank in recordable form. Courts have held that the language of sale and assignment contained in a pooling and servicing agreement, along with the corresponding transfer, sale, and delivery of the mortgage note and mortgage, are sufficient to transfer the mortgage to the transferee/trustee or its designee or nominee.

The creation of an interest in or lien on real property, including a mortgage, is governed by the non-UCC law of the state in which the property is located. Likewise, the enforceability of mortgages (including the right and method to foreclose) is subject to all of the conditions precedent and requirements that are set forth in the particular mortgage itself and in all applicable state and local laws. Those conditions precedent and procedural requirements vary from mortgage to mortgage and from state to state. Thus, ownership of a mortgage (i.e., without notice to the mortgagor or the public, without judicial proceedings (where required), without satisfaction of other conditions precedent or procedural requirements in the mortgage itself or in applicable state law), does not always give the holder of the mortgage the legal ability to foreclose on the mortgage. Though a discussion of the other necessary prerequisites to foreclosure is beyond the scope of this Executive Summary and the White Paper, the fact that other steps may need to be taken by the owner of a mortgage note, or the owner of a mortgage, is neither unique nor surprising in our legal and regulatory system and does not diminish an otherwise legally effective transfer of the mortgage note and mortgage.

The use of MERS as the nominee for the benefit of the trustee and other transferees in the mortgage loan securitization process has been a subject of litigation in recent years regarding a mortgage note holder’s right to enforce a mortgage loan registered in MERS. Some cases address the authority or ability of MERS or transferees of MERS to foreclose on a mortgage for which MERS is or was the mortgagee of record. As a general matter, the assignment and transfer of a mortgage to MERS as nominee of and for the benefit of the beneficial owner of the mortgage does not adversely impact the right to foreclose on the mortgage. Decisions in many jurisdictions support this conclusion.

Finally, it is important to recognize that the UCC does not displace traditional rules of agency law. Under general agency law, an agent has authority to act on behalf of its principal where the principal “manifests assent” to the agent “that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” Accordingly, the UCC does not prevent MERS or others, including loan servicers, from acting as the agent for the note holder in connection with transfers of ownership in mortgage notes and mortgages. In short, principles of agency law provide MERS and loan servicers another legal basis for their respective roles in the transfer of mortgage notes and mortgages.

4. Conclusion
In summary, the longstanding and consistently applied rule in the United States is that, when a mortgage note is transferred, “the mortgage follows the note.” When a mortgage note is transferred and delivered to a transferee in connection with the securitization of the mortgage loan pursuant to an MBS pooling and servicing agreement or similar agreement, the mortgage automatically follows and is transferred to the mortgage note transferee, notwithstanding that a third party, including an agent/nominee entity such as MERS, may remain as the mortgagee of record. Both common law and the UCC confirm and apply this rule, including in the context of mortgage loan securitizations.

For a more info on how you can use the application of UCC to effectively and successfully challenge and win your Foreclosure Defense, please visit http://www.fightforeclosure.net

FightForeclosure.net

~ Your "Pro Se" Foreclosure Fight Solution!

Tag Archives: Promissory note

What Florida Homeowners Need to Know About Mortgage Assignments

What Homeowners Needs to know About Mortgage Assignments and Endorsements

What Homeowners Needs To Know About MERS

The Nuts and Bolts of Mortgage Securitization Process

Application of UCC to Mortgage Securitization Process

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this: