By: Richard F. Kessler

Richard F. Kessler — Tue, 28 Dec 2010 19:59:04 +0000

Within and among the state courts, there is occurring a three way collision between Chapter 3 of the UCC, Negotiable Instruments, Chapter 9, Secured Transactions, and reality in the secondary mortgage market in the 21st Century. The procrustean antics of trying to impose archaic legal strictures upon digitized transactions are leading to the frustration of legitimate commercial objectives, inequitable decisions and inappropriate case law.
The first problem arises from the confusion that a mortgage note may function as a negotiable instrument under Chapter 3. However, a mortgage note need not be negotiable to permit foreclosure in the event of a default. If a note is sold to a holder in due course by endorsement as prescribed in Chapter 3, the debtor may not raise underlying defenses or counterclaims against the originating creditor named in the note when successor holder in due course demands payment. The holder of a mortgage note can enforce foreclosure even if the holder is not a holder in due course.
Some courts have ruled that only a holder in due course can foreclose or, alternatively, obtain summary judgment. Such a rule is a clog upon the orderly operation of the secondary mortgage market. It is sound public policy to protect and promote the sale of debt instruments to facilitate commercial credit, and, in the case of residential mortgages, to facilitate the resale and new construction of homes. Courts confuse the rule that a note can only be negotiated to a successor by endorsement with the notion that a mortgage note can only be transferred by endorsement.
A mortgage note can be transferred to a successor in interest by:
1. Endorsement of the note.
2. Assignment.
3. Allonge.
4. Delivery.
5. Testamentary inheritance.
6. Intestacy.
7. Escheat.
8. Order of court.
Accordingly, a party can be the holder of the mortgage note without its endorsement.
There is a second problem relating to a judge’s inability to differentiate a mortgage note from a negotiable instrument. A mortgage is monogamous; a negotiable note is promiscuous. A negotiable note may be transferred by endorsement to an identified endorsee or to the bearer. A bearer note is enforceable by any holder in due course by simply having possession of a bearer note. The right to receive payment of a bearer note is not limited to payment of a specific, indentified party. Notes provide freely transferable payment obligations in a complex economy where the debtor and creditor never conducted a commercial transaction or have any relation to or knowledge of each other.
A mortgage is a a very different species. What is called a “mortgage” in everyday language is a transaction where onme party loans money to another party secured by real estate as collateral. To create such a transaction, two different documents are required. First the payment obligation is recited and contained in a promissory note. Then the repayment obligation is collateralized by real property in a security agreement. When debtor and creditor agree to a loan secured by real property, the agreement is expressed in two documents. Each is necessary to create a mortgage; neither is sufficnet without the other. It is the function of the mortgage to create a secured creditor and distinguished from a general creditor. If the secured creditor does not get paid, a default occurs which triggers the right of the secured creditor to foreclose. The right to foreclose is specific to the secured creditor and may not rightfully be exercised by any person who is not the secured creditor.
In commercial practice, when a mortgage is sold, the buyer expects and the seller intends to make the purchaser a successor in interest who becomes the secured creditor. No investor purchases under normal circumstances contracts to purchase a mortgage note with that expectation the mortgage will be unenforceable and the purchaser become unsecured. In short, the mortgage only secures the secured creditor. In the past, the mortgage was r3corded in the landrecords to provide public notice of the encumbrance. The mortgage note could then be freely sold or conveyed from one purchaser to the next, each in turn becoming a secured creditor.
Over time, courts generally agreed that the mortgage remedy of foreclosure could only be exercised by the holder of the mortgage note. The holder of the note held legal title to the note and equitable title or, as in the case of a trustee, held legal title to the note in a fiduciary relationship to beneficiaries who held equitable title. Furthermore the courts also ruled that the mortgage followed the note. Whoever owns the note and becomes its holder is exclusively entitled to exercise the remedy of foreclosure.
Just when all this appeared well understood along came new technology and securitization to upset the apple cart. The use of securitization exponentially increased the volume and velocity of secondary mortgage transactions. The increased volume and velocity were only made possible because of the use of new technology to digitize transactions and substitute electronic documents in papoerless transactions.
Securitization introduced a whole new set of characters. These include the originator, sponsor, depositor, trustee, mortgage backed securities trust, custodian, master servicer and subservicer. The beneficiaries of the mortgage backed securities trust are the investors who purchase certificates and are referred to as “certificate holders”. Furthermore, the certificates also function as publicly trade securities so that the membership of the certificate holders of a mortgagege backed securities trust are continuously changing.
1. Who is the note holder?
2. What is the legal rule to identify who holds the note?
3. What evidence or how does one prove that a plaintiff seek to foreclose is the note holder?
4. If and under what circumstances can another party act as legal representative and foreclose on behalf of a note holder?
5. How does one transfer a mortgage note from on holder to the next so that the successor is able to enforce foreclosure?
6. How are the repayment rights and foreclosure rights of the note holder affected if the mortgage note was conveyed electronically through the use of electronic documents instead of paper documents?
7. How does one document or otherwise prove the existence of a transfer of the mortgage note from a holder to a successor in interest in a foreclosure proceeding?
To put it charitably, the answers to these questions are very much a part of me4rging new commercial law leaving any questions up in the air. What has happened instead is that many foreclosures have been conducted by practitioners who have skirted legal requirements, filed spurious documentation and contaminated dockets and land records throughout the country with fraudulent documents,
To date, very few courts have taken issue with this state of affairs. For the most part, defendants do not contest foreclosure. As in a grand jury indictment, a good case can be made that even a ham sandwich could obtain summary judgment of foreclosure. Similarly the counsel bringing the lawsuits and their counsel are not likely to complain. The Federal Government has gone out of its way to turn a blind eye to the problem lest they adversely affect the parlous financial condition of the banking system. With more than 13% of mortgages in arrears or default, judges see their dockets overwhelmed by foreclosure cases and are prepared to cut all kinds of legal corners in favor of quick adjudication especially since no one will contest the case.
Overlooked is the fact that the major financial institutions conducting lawless foreclosures are risking extraordinary civil and criminal liability to certificate holders and to wrongfully foreclosed homeowners and state and federal regulatory and law enforcement authorities. In addition, it is unlikely that the country can look toward orderly, efficient operation of a secondary mortgage market if these legal issues remain unsettled.

By: Kathy W.https://4closurefraud.org/message-board/#comments

Kathy W.https://4closurefraud.org/message-board/#comments — Mon, 27 Dec 2010 21:59:43 +0000

Come on Missouri…. are you getting it yet!!!

Comments on: NY Court Rejects Mortgage Foreclosure In MERS Case – LNV Corp. v. Madison Real Estate, LLC

By: Richard F. Kessler

By: Kathy W.https://4closurefraud.org/message-board/#comments