Tag Archives: Renuart

Assignments Not Standing up

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The District Court of Appeal of the State of Florida (4th Dist.) ruled in Murray v. HSBC Bank USA et al., (No. 4D13-4316, Jan. 21, 2015) that HSBC did not have standing to foreclose. This case highlights the difficulties that so many judges have in applying the UCC appropriately in foreclosures. The Court quotes the trial court as stating,

     To me, that’s the only issue in the case; can this Court enter a judgment on what you say is that possession is enough without the [i]ndorsement.

      In every other respect they have it. They got the mortgage. They got the records. They got the servicing. They got the whole thing. They just don’t have the [i]ndorsement, and is that fatal?

       In other words do you have to go and get, and then start over again? That’s the question. I don’t know the answer. (2, n.1)

It is well documented that many, many courts have trouble applying the relevant provisions of the UCC in harmony with the relevant provisions of the state foreclosure procedure statute.

The District Court of Appeal goes to great efforts to get it right here, given that the trial court apparently punted on the analysis. I found the the Appendix to the opinion to be of particular of interest. It carefully walks through the chain of transfers to identify the “missing piece” that results in the HSBC’s lack of standing. It also distinguishes these transfers from those between servicers, which some courts conflate with transfers between those with the right to enforce a mortgage.

From a law reform perspective, I wonder what should be done to get courts to apply the law as it is written, instead of just trying to get the gist of it right. Given that the Permanent Editorial  Board of the UCC has issued guidance in this area, I don’t think the issue is lack of clarity. Rather, I think it is just straightforward complexity — judges have a hard time going through all of the steps of the analysis. Can this area of law be simplified so that courts can achieve more just and equitable results? I wonder if Dale Whitman has any ideas . . ..

Should The Mortgage Follow The Note?

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The financial crisis and the foreclosure crisis have pushed many scholars to take a fresh look at all sorts of aspects of the housing finance system. John Patrick Hunt has added to this growing body of literature with a posting to SSRN, Should The Mortgage Follow The Note?. It is an interesting and important article, taking a a fresh look at the legal platitude, “the mortgage follows the note” and asking — should it?!? The abstract reads,

The law of mortgage assignment has taken center stage amidst foreclosure crisis, robosigning scandal, and controversy over the Mortgage Electronic Registration System. Yet a concept crucially important to mortgage assignment law, the idea that “the mortgage follows the note,” apparently has never been subjected to a critical analysis in a law review.

This Article makes two claims about that proposition, one positive and one normative. The positive claim is that it has been much less clear than typically assumed that the mortgage follows the note, in the sense that note transfer formalities trump mortgage transfer formalities. “The mortgage follows the note” is often described as a well-established principle of law, when in fact considerable doubt has attended the proposition at least since the middle of the last century.

The normative claim is that it is not clear that the mortgage should follow the note. The Article draws on the theoretical literature of filing and recording to show that there is a case that mortgage assignments should be subject to a filing rule and that “the mortgage follows the note,” to the extent it implies that transferee interests should be protected without filing, should be abandoned.

Whether mortgage recording should in fact be abandoned in favor of the principle “the mortgage follows the note” turns on the resolution of a number of empirical questions. This Article identifies key empirical questions that emerge from its application of principles from the theoretical literature on filing and recording to the specific case of mortgages.

The article does not answer the core question that it asks, but it certainly demonstrates that it is worth answering.

Imposing Order on Recording Chaos

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Dale Whitman has posted A Proposal for a National Mortgage Registry: MERS Done Right. This is great timing because he will be touching on some of the issues raised in this article in tomorrow’s webinar. His proposal for a national mortgage registry also shares things in common with elements of Adam Levitin‘s recent proposal.

Whitman’s abstract reads:

In this Article, Professor Whitman analyzes the existing legal regime for transfers of notes and mortgages on the secondary market, and concludes that it is highly inconvenient and dysfunctional, with the result that large numbers of market participants simply did not observe its rules during the huge market run-up of the early and mid-2000s. He also considers Mortgage Electronic Registration System (MERS), which was designed to alleviate the inconveniences of repeatedly recording mortgage assignments, but concludes that it was conceptually flawed and has proven to be an inadequate response to the problem. For these reasons the legal system was ill-prepared for the avalanche of foreclosures that followed the collapse of the mortgage market in 2007, and continues to be beset by litigation and uncertainty. This Article then provides a conceptual outline for an alternative National Mortgage Registry, which would supplant the present legal system and would provide convenience, transparency, and efficiency for all market participants. He concludes with a draft of a statute that could be enacted by Congress to create such a registry.

The article concludes:

A national mortgage loan Registry structured along the lines outlined here would resolve all of the major legal problems that beset the secondary mortgage market today. To be specific, the following problems would be put to rest.

1. The lack of clarity in the distinction between negotiable and nonnegotiable notes that exists today would become irrelevant for purposes of loan transfer. Negotiable and nonnegotiable notes would be treated exactly alike and would be transferred in the same manner.

2. The need to physically deliver original notes in order to transfer the right of enforcement – an extremely burdensome and inconvenient requirement for negotiable notes in today’s market – would be eliminated. Transfers would take place electronically with assurance that they would be recognized by local law in all jurisdictions.

3. The necessity of recording mortgage assignments in local recording offices would be eliminated. MERS was designed to remove the need for such assignments (except at the point when foreclosure was necessary), but the national Registry would accomplish this without the artificiality and con-fusion engendered by MERS’ “nominee” status.

4. Borrowers would be protected against competing claims by purported mortgage holders because the Registry’s records of loan holdings would be conclusive. Whether in cases of loan modification, payoff and discharge, approval of a short sale, or foreclosure, a borrower would know with certainty whether a purported holder’s claim to the loan was authentic, and whether its purported servicer was authorized to act.

5. All foreclosures, both judicial and non-judicial, could be conducted with assurance that the correct party was foreclosing. The Registry’s certificate could be recorded under state law and become a part of the chain of title of property passing through foreclosure, thus permitting future title examiners to verify that the foreclosure was conducted by the person authorized to do so. Concerns of title insurers about the validity of titles coming through foreclosure, currently a major worry, would be largely eliminated.

6. The current confusion and litigation about separation of notes from their mortgages, and about what proof is needed to foreclose a mortgage, would be brought to an end. The Registry’s certificate would provide all of the documentary evidence necessary to foreclose.

7. The holder in due course doctrine, with its potential for unfair harm to borrowers, would probably disappear in the context of mortgage loans as secondary market participants abandoned the practice of physical delivery of mortgage notes.

The system for transferring mortgage loans with which we are saddled today is a shambles. The result has been enormous uncertainty and likely huge financial loss for investors, servicers, and title insurers. It is time for Congress to act to create a sensible, simple, and efficient alternative. (68-69)

Many (including Brad Borden and I) have argued that the current recording system is horribly flawed. It is unclear whether there is sufficient political will to engage in a structural reform at this time. If there is not, expect to see another foreclosure mess once the current one has played itself out.

(Non-)Enforcement of Securitized Mortgage Loans

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Professors Neil Cohen and Dale Whitman, two important scholars who know their way around the UCC and mortgage law, will take on a highly contested topic in an upcoming ABA Professors’ Corner webinar: “Ownership, Transfer, and Enforcement of Securitized Mortgage Loans.” I blogged a bit about this topic a couple of days ago, in relation to Adam Levitin’s new article. There is a lot of misinformation floating around the blogosphere relating to this topic, so I encourage readers to register.

The full information on this program is as follows:

Professors’ Corner is a FREE monthly webinar, sponsored by the ABA Real Property, Trust and Estate Law Section’s Legal Education and Uniform Law Group.  On the second Wednesday of each month, a panel of law professors discusses recent cases or issues of interest to real estate practitioners and scholars.

December 2013 Professors’ Corner
“Ownership, Transfer, and Enforcement of Securitized Mortgage Loans”
Profs. Neil Cohen and Dale Whitman
Wednesday, December 11, 2013
12:30pm Eastern/11:30am Cental/9:30am Pacific
Register for this FREE program at https://ambar.org/ProfessorsCorner

Our nation’s courts have been swamped with litigation involving the foreclosure of securitized mortgage loans.  Much of this litigation involves the appropriate interaction of the Uniform Commercial Code and state foreclosure law. Because few foreclosure lawyers and judges are UCC experts, the outcomes of the reported cases have reflected a significant degree of uncertainty or confusion.

In addition, much litigation has been triggered by poor practices in the securitization of mortgage loans, such as robo-signing and the failure to transfer loans into a securitized trust within the time period required by the IRS REMIC rules.  This litigation has likewise produced conflicting case outcomes.  In particular, recent decisions have reflected some disagreement regarding whether a mortgagor — who is not a party to the Pooling and Servicing Agreement that governs the securitized trust that holds the mortgage — can successfully defend a foreclosure by challenging the validity of the assignment of the mortgage to a securitized trust.

Our speakers for the December program will bring some much-needed clarity to these issues.  Our speakers are Prof. Neil B. Cohen, the Jeffrey D. Forchelli Professor of Law at Brooklyn Law School, and Prof. Dale A. Whitman, the James E Campbell Missouri Endowed Professor Emeritus of Law at the University of Missouri School of Law.  Prof. Cohen is the Research Director of the Permanent Editorial Board for the Uniform Commercial Code, and a principal contributor to the November 2011 PEB Report, “Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes.” Prof. Whitman is the co-Reporter for the Restatement (Third) of Property — Mortgages, and the co-author of the pre-eminent treatise on Real Estate Finance Law.

Please join us for this program.  You may register at https://ambar.org/ProfessorsCorner.

Levitin on the Uncertainty of Mortgage Title

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Adam Levitin has posted The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title to SSRN.  This paper adds to a small (here and here, for instance), but important body of literature that seeks to harmonize the application of foreclosure laws with the Uniform Commercial Code. Levitin’s abstract reads

The mortgage foreclosure crisis raises legal questions as important as its economic impact. Questions that were straightforward and uncontroversial a generation ago today threaten the stability of a $13 trillion mortgage market: Who has standing to foreclose? If a foreclosure was done improperly, what is the effect? And what is the proper legal method for transferring mortgages? These questions implicate the clarity of title for property nationwide and pose a too- big-to-fail problem for the courts.

The legal confusion stems from the existence of competing systems for establishing title to mortgages and transferring those rights. Historically, mortgage title was established and transferred through the “public demonstration” regimes of UCC Article 3 and land recordation systems. This arrangement worked satisfactorily when mortgages were rarely transferred. Mortgage finance, however, shifted to securitization, which involves repeated bulk transfers of mortgages.

To facilitate securitization, deal architects developed alternative “contracting” regimes for mortgage title: UCC Article 9 and MERS, a private mortgage registry. These new regimes reduced the cost of securitization by dispensing with demonstrative formalities, but at the expense of reduced clarity of title, which raised the costs of mortgage enforcement. This trade-off benefitted the securitization industry at the expense of securitization investors because it became apparent only subsequently with the rise in mortgage foreclosures. The harm, however, has not been limited to securitization investors. Clouded mortgage title has significant negative externalities on the economy as a whole.

This Article proposes reconciling the competing title systems through an integrated system of note registration and mortgage recordation, with compliance as a prerequisite to foreclosure. Such a system would resolve questions about standing, remove the potential cloud to real-estate title, and facilitate mortgage financing by clarifying property rights.

I had to agree with one of his conclusions:  “Reduction of transaction costs is ultimately a second-order move for commercial law. The first-order move, so elemental it is easy to forget, is clarification of the property being transferred.” (723-24) The others are pretty compelling too.

Enforcing The Mortgage Note

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Elizabeth Renuart has posted Uneasy Intersections: The Right to Foreclose and the UCC to SSRN. This is a subject that Brad and I have touched on a bit in the context of the Show Me The Note! defense, but Renuart has done a magisterial fifty state review of how state foreclosure laws interact with the Uniform Commercial Code which has been adopted in all 50 states (NY has an older version it on the books for now). The case law in this area is incredibly confused and confusing.  The article helps to chart a path to navigate the intersection between these two areas of law.

Renuart provides a taxonomy of the caselaw, dividing it into three categories:

1.  The UCC States: “courts in these states explicitly join the right to foreclose on a mortgage that secures the negotiable note with the” UCC. (44)

2.  The Foreclosure-Statute-Definition States: “the courts focus on relevant words in the state’s foreclosure statute, such as ‘mortgagee’ where mortgages are used, ‘beneficiary’ where deeds of trust are used, ‘holder’, or ‘owner.’ Next, they determine if that state’s legislature intended that these designations refer to the note holder or the one with the right to act on behalf of the note holder. These courts may or may not reference the UCC in their decisions but the result generally is consistent with” the UCC. (45)

3.  The UCC- Does-Not-Apply States: “courts in these states reason that the state’s foreclosure scheme is comprehensive, inclusive of the prerequisites to foreclose, or does not define the secured party as the one entitled to repayment on the secured monetary obligation. As a result, the UCC does not apply in any way to identify the party who possesses the right to foreclose. To date, these decisions have arisen exclusively in nonjudicial foreclosure states.” (47)

She concludes that the “methodology utilized in Category 1 and 2 states properly harmonizes the relevant UCC rules with state foreclosure law. Category 3 states dismiss the UCC’s role outright. It is these decisions that muddy the law and create inconsistent outcomes from state to state.” (47-48)

It is no exaggeration to say that the discussions about this topic in the blogosphere are virtually incoherent, so this article may provide guidance for those who are looking for it.