Tag Archives: mortgage follows the note

Maine Really Doesn’t Like Lenders

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I recently blogged in No MERS-y for Maine Lenders about a Maine Supreme Judicial Court opinion that seemed to go against the weight of authority as to a fundamental issue:  that the mortgage follows the note.

The lender in that Maine case, Bank of America, filed a Motion to Reconsider which the Court summarily denied. I think that the lender has it right on the law here and I quote from its motion:

The Court’s standing analysis conflicts with Maine’s Uniform Commercial Code (“UCC”) and sets Maine apart from other states (even those construing the same language that the Court finds of particular importance here). These persuasive authorities recognize MERS’s designation in a mortgage as a “nominee” and “mortgagee of record” does not prevent MERS from validly assigning all legal rights in the mortgage to a subsequent foreclosure plaintiff. The UCC “explicitly provides that . . . the assignment of the interest of the seller or other grantor of a security interest in the note automatically transfers a corresponding [beneficial] interest in the mortgage to the assignee.” Report of the Permanent Editorial Board for the Uniform Commercial Code 12 (Nov. 2011), available at https://www.uniformlaws.org/Shared/Committees_Materials/PEBUCC/PEB_Report_111411.pdf. The UCC further provides: “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.” 11 M.R.S. § 9-1203(7). The Editor’s Notes to this statutory provision confirm that it “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 [beneficial interests in the] security interest or lien.” Id. cmt. 9. The UCC thus “adopts the traditional view that the mortgage follows the note; i.e., the transferee of the note acquires, as a matter of law, the beneficial interests in the mortgage, as well.” 11 M.R.S. § 9-1308 cmt. 6.

In these circumstances, “the UCC is unambiguous: the sale of a mortgage note (or other grant of a security interest in the note) not accompanied by a separate conveyance of the mortgage securing the note does not result in the mortgage being severed from the note.” Report of the Permanent Editorial Board for the Uniform Commercial Code 12 (emphasis added). Instead, by the explicit terms of the statute, the attachment of the note “is also attachment of a security interest in the . . . mortgage.” 11 M.R.S. § 9-1203(7). Thus, under the UCC, the beneficial interest in the mortgage travels with the note so holding the note in addition to the assignment from MERS of bare legal title means that party has everything necessary for standing under Section 6321. Thus, the Court was inconsistent with the UCC in stating that BANA’s right to enforce the Note (along with assignment of the legal title of the Mortgage by MERS) was not sufficient to show its requisite interest in the Mortgage. The Court should reconsider its analysis on this basis.

Moreover, this Court’s analysis stands in conflict with many other state and federal courts that have examined the issue. Many courts across the nation (in judicial and non-judicial foreclosures states alike) have determined that MERS can assign all rights under a mortgage in which it is named mortgagee as nominee for the lender and lender’s successors and assigns. (18-20, footnote omitted)

As I have acknowledged before, the Supreme Judicial Court is the final arbiter of Maine law. I think, nonetheless, that the Court got it wrong in this case. I also think that this summary denial of the well-argued motion for reconsideration does not do the issue justice.

 

HT Max Gardner

No MERS-Y for Maine Lenders

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The Maine Supreme Judicial Court seems to be on a roll against the mortgage industry, having recently issued an opinion that effectively wiped out a mortgage because of the lenders bad faith negotiations during a foreclosure proceeding.

And now, the Maine Supreme Judicial Court issued an opinion in Bank of America, N.A. v. Greenleaf et al., 2014 ME 89 (July 3, 2014), that casts into doubt whether MERS has any life left in it in Maine.  The case’s reasoning is, however, somewhat suspect. The Greenleaf court held that the bank did not have standing to seek foreclosure even though it was the holder of the mortgage note. The court stated that

The interest in the note is only part of the standing analysis, however;  to be able to foreclose, a plaintiff must also show the requisite interest in the mortgage. Unlike a note, a mortgage is not a negotiable instrument. See 5 Emily S. Bernheim, Tiffany Real Property § 1455 n.14 (3d ed. Supp. 2000). Thus, whereas a plaintiff who merely holds or possesses—but does not necessarily own—the note satisfies the note portion of the standing analysis, the mortgage portion of the standing analysis requires the plaintiff to establish ownership of the mortgage. (8)

This seems to go against the weight of authority. The influential Report of The Permanent Editorial Board for The Uniform Commercial Code, Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes (November 14, 2011), states that

the UCC is unambiguous: the sale of a mortgage note (or other grant of a security interest in the note) not accompanied by a separate conveyance of the mortgage securing the note does not result in the mortgage being severed from the note. . . . UCC Section 9-308(e) goes on to state that, if the secured party’s security interest in the note is perfected, the secured party’s security interest in the mortgage securing the note is also perfected . . .. (12-13, footnotes omitted)

The Maine Supreme Judicial Court is the ultimate authority on the meaning of Maine’s foreclosure statute, of course, but their reasoning is still open to criticism.

Arizona’s “Unholy” Foreclosure Mess

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Professor Dale Whitman posted a commentary about Steinberger v. McVey ex rel. County of Maricopa, 2014 WL 333575 (Ariz. Court of Appeals, Jan. 30, 2014) on the Dirt listserv:

A defaulting borrower may defend against foreclosure on ground that the chain of assignments of the deed of trust is defective, and also on a variety of other theories.

The residential mortgage loan in this case was originally made in 2005 to Steinberger’s 87-year-old father, who died two years later, leaving her the property. By 2008, she was having difficulty making the payments, and asked IndyMac FSB to consider a loan modification. She was advised that she must first default, and she did so. There followed a period of more than two years during which she was “jerked around” by IndyMac, with successive promises to consider a loan modification, the setting of (and then vacating of) foreclosure dates, and assertions by IndyMac that she had not properly submitted all of the paperwork required for a modification.

In November 2010 she filed an action seeking a declaratory judgment that IndyMac had no authority to foreclose on the house, and upon filing a $7,000 bond, she obtained a TRO against foreclosure. The following summarizes the theories on which she obtained a favorable result.

1. Lack of a proper chain of title to the deed of trust. The Court of Appeals seems to have assumed that no foreclosure would be permissible without the foreclosing party having a chain of assignments from the originator of the loan. If one accepts this assumption, IndyMac was in trouble. The first assignment, made in 2009, was from MERS, acting as nominee of IndyMac Bank, to IndyMac Federal FSB, but it was made before IndyMac Federal FSB even existed!

A second assignment was made in 2010 by IndyMac Federal FSB to DBNTC, the trustee of a securitized trust. But Steinberger alleged that by this date, IndyMac Federal FSB no longer existed, so this assignment was void as well. She also made the familiar allegation that this assignment was too late to comply with the 90-day transfer period required by the trust’s Pooling and Servicing Agreement, but the court did not pursue this theory.

The court’s opinion is significant for its treatment of Hogan v. Wash. Mut. Sav. Bank, the 2012 case in which the Arizona Supreme Court held that “Arizona’s non-judicial foreclosure statutes do not require the beneficiary [of a deed of trust] to prove its authority.² The Court of Appeals, in Steinberger, read this statement to mean that the beneficiary need not prove its authority unless the borrower alleges a lack of authority in her complaint. There was no such allegation in Hogan, but there was in Steinberger. Hence, the Court of Appeals concluded that Steinberger could contest IndyMac’s right to foreclose. And it felt that Steinberger’s allegations about the defects in the chain of title to the deed of trust, if proven, could constitute a successful attack on IndyMac’s authority to foreclose.

It’s important to realize what the Court of Appeals did not do. It did not disagree with Hogan’s holding that the beneficiary need not show possession of the promissory note in order to foreclose. Several commentators (including me) have criticized Hogan for this holding, but the Steinberger opinion leaves it intact. Indeed, in Steinberger, the borrower raised no issue as to whether IndyMac had the note, and seems to have conceded that it did. The discussion focuses on the legitimacy of the chain of title to the deed of trust, not on possession of the note.

Is the court correct that a valid chain of title to the deed of trust is necessary to foreclose under Arizona law? As a general proposition, one would think not. Arizona not only has adopted the common law rule that the mortgage follows the note, but even has a statute saying so: 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.” So if the note is transferred, no separate assignment of the deed of trust would be needed at all. And a recent unreported Court of Appeals case, Varbel v. Bank of America Nat. Ass’n, 2013 WL 817290 (Ariz. App. 2013), quotes the Bankruptcy Court as reaching the same conclusion: In re Weisband, 427 B.R. 13, 22 (Bankr. D. Ariz. 2010) (“Arizona’s deed of trust statute does not require a beneficiary of a deed of trust to produce the underlying note (or its chain of assignment) in order to conduct a Trustee’s Sale.”).

By the way, that’s the rule with respect to mortgages in virtually every state. A chain of assignments, recorded or not, is completely unnecessary to proof of the right to foreclose. The power to foreclose comes from having the right to enforce the note, not from having a chain of assignments of the mortgage or deed of trust.

However, since Hogan has told us that no showing of holding the note is necessary in order to foreclose, what is necessary? It defies common sense to suppose that a party can foreclose a deed of trust in Arizona without at least alleging some connection to the original loan documents. If that allegation is not that one holds the note, perhaps it must be the allegation that one has a chain of assignments of the deed of trust. If this is true, then the opinion in Steinberger, written on the assumption that the assignments must be valid ones, makes sense.

The ultimate problem here is the weakness of the foreclosure statute itself. Ariz. Stat. 33-807 provides, “The beneficiary or trustee shall constitute the proper and complete party plaintiff in any action to foreclose a deed of trust.” Fine, but when the loan has been sold on the secondary market, who is the “beneficiary?” The statute simply doesn’t say. The normal answer would be the party to whom the right to enforce the note has been transferred, but Hogan seems to have deprived us of that answer. An alternative answer (though one that forces us to disregard the theory that the mortgage follows the note) is to say that the “beneficiary” is now the party to whom the deed of trust has been assigned. But the Arizona courts don’t seem to be willing to come out and say that forthrightly, either. Instead, as in the Steinberger opinion, it’s an unstated assumption.

As Wilson Freyermuth put it, after graciously reading an earlier version of this comment, “The Steinberger court couldn’t accept the fact that a lender could literally foreclose with no connection to the loan documents — so if Hogan says the note is irrelevant, well then it has to be the deed of trust (which would presumably then require proof of a chain of assignments).  It’s totally backwards — right through the looking glass.  And totally inconsistent with Ariz. Stat. 33-817.”

To say that this is an unsatisfactory situation is an understatement; it’s an unholy mess. The statute was written with no recognition that any such thing as the secondary mortgage market exists, and the Arizona courts have utterly failed to reinterpret the statute in a way that makes sense. It’s sad, indeed.

There are a number of other theories in the Steinberger opinion on which the borrower prevailed. Some of these are quite striking, and should give a good deal of comfort to foreclosure defense counsel. In quick summary form, they are:

2. The tort of negligent performance of an undertaking (the “Good Samaritan” tort). This applies, apparently, to IndyMac’s incompetent and vacillating administration of its loan modification program.

3. Negligence per se, in IndyMac’s recording of defective assignments of the deed of trust in violation of the Arizona statute criminalizing the recording of a false or forged legal instrument.

4. Breach of contract, in IndyMac’s failure to follow the procedures set out in the deed of trust in pursuing its foreclosure.

5. Procedural unconscionability, in IndyMac’s making the original loan to her elderly father without explaining its unusual and onerous terms, particularly in light of his failing mental health.

6. Substantive unconscionability, based on the terms of the loan itself. It was an ARM with an initial interest rate of 1%, but which could be (and apparently was) adjusted upward in each succeeding month. This resulted in an initial period of negative amortization, and once the amortization cap was reached, a large and rapid increase in monthly payments. At the same time, some of Steinberger’s other theories were rejected, including an argument that, because IndyMac had intentionally destroyed the note, it had cancelled the debt. The court concluded that, in the absence of proof of intent to cancel the debt, it remained collectible.

 

 

U.S. District Court for the Eastern District of New York Rules That a Party Perfects its Security Interests in Disputed Loans by Taking Possession of the Notes as Opposed to Recording the Mortgage Assignments, Pursuant to UCC Article 9

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In Provident Bank v. Community Home Mortgage Corp., 498 F.Supp.2d 558, 558 (E.D.N.Y. 2007) the U.S. District Court for the Eastern District of New York ruled in favor of intervenor-plaintiff NetBank, granting its cross motion for summary judgment against intervenor-plaintiff, Southwest Securities Bank (herein described as Southwest) in a dispute regarding conflicting recorded mortgage assignments for nine loans. The court stated that “where parties assert competing interests in mortgage assignments,” under Article 9, “possession of the note perfects the assignee’s security interest regardless of whether any mortgage securing the note has been properly recorded.” It concluded that NetBank perfected its interest in eight of the nine disputed loans and took possession of them before Southwest, giving it a superior interest in those loans.

Confusion over who possessed the loans started when Defendant Community, a mortgage banker, entered into agreements with two banks, Southwest and RBMG (NetBank’s successor in interest), to fund a portion of its mortgage loans. Community entered Mortgage Purchase Agreements with both banks and engaged in a scheme known as “double booking,” where it “obtained duplicate funding for one loan from two different lenders and retained the entire value of the loan.” Essentially, “Community created two original notes and mortgages for each of the disputed loans.” Because of Community’s fraud “only one of the lenders would be paid in full,” and each bank claimed a priority interest in the nine loans that Community sold to it. Southwest recorded its assignments of the mortgages before RBMG for five of the loans, but RBMG received the original notes and assignments for eight of the loans before Southwest.

In determining which of the loans belonged to Southwest or NetBank and which of the mortgages were valid, the court had to decide “whether Article 9 or state real property law governs the security interests in mortgages.”  Under Article 9, a party perfects it security interest in a note by taking possession of it. Alternatively, under “race-notice statutes in state real property law,” a party perfects its security interest in a mortgage by recording the assignment. Southwest argued that the court should follow New York’s race-notice statute, whereas RBMG argued that Article 9 should govern.

Before reaching its decision, the court examined the New York Real Property Law Section 291, which states that a “bona fide purchaser for value, without notice of a junior mortgage, who records his assignment is entitled to priority over a prior unrecorded mortgage of which his assignor has full knowledge.” It explained that previous decisions applying the statute did not address instances where the “first party to record a mortgage assignment [had] a prior interest over another party who first takes possession of the note securing the mortgage.”  The court stated that in this case, the question depended on the “supremacy of perfecting the security interest in the note [as opposed to previous cases which regarded] perfecting the security interest in the mortgage.”

According to the statute’s language and precedent decisions regarding the same issue, Southwest would have a priority interest in five of the loans that it recorded before RMGA. Instead, the court applied Article 3 and Article 9 of the UCC in reaching its conclusions. It stated that “NetBank perfected its security interest in the loans and Southwest,” did not. The court agreed with previous cases in the Circuit which held that, “perfection of a security interest in the note (by taking possession under Article 9) should carry over to the mortgage incidental to it.” It explained that in New York, assignment of a note creates a security interest in the note, but a party perfects its security interest in the note by possessing it. From this reasoning, the court determined Southwest was not the first party to perfect its security interest in the loans, as it merely recorded its mortgage assignments but never possessed them. Therefore, the court denied Southwest’s motion for summary judgment requesting possession over the disputed loans.

Instead, the court granted NetBank’s motion for summary judgment, pursuant to Article 9, as it possessed eight of the disputed loans before Southwest. It also held that under UCC Article 3, NetBank qualified as a holder in due course (defined as a holder of a negotiable instrument who takes it for value, in good faith, and without notice that it is overdue or has been dishonored) in regards to seven of the loans, entitling it to those loans independent of its possession under Article 9.