Home Foreclosures: 2.4.5 The Sale of Promissory Notes Through Securitization and Practical Issues
Securitization is described in § 1.3.3.4, supra.
Securitization is described in § 1.3.3.4, supra.
Conducting mortgage loan closings electronically has become more common given certain developments over the last two decades.
If the record constitutes a transferable record, the next issue is whether the lender or a transferee maintains “control” of the electronic note. “Control” in this electronic world substitutes for “possession” in the paper world.379 Even if a party establishes “possession” of a paper copy of an electronic note, the relevant consideration is control of the note in its electronic form.380
First, the system must produce a single authoritative copy of the electronic record that is unique, identifiable, and unalterable.384 In Good v. Wells Fargo Bank, the only reported appellate case applying section 7021 of E-Sign, the court ruled that the plaintiff did not show that it controlled the single authoritative copy at the summary judgment stage.385
If a person attempts to enforce the note either through foreclosure, suit on the note, or otherwise, the obligor has the right to request “reasonable proof” that it is in control of the transferable record.394 Typically, the proof should include information about security and integrity systems which must be available before trial for scrutiny by the borrower’s attorney and expert.
There are several examples of paper notes secured by real property that are not negotiable: home equity lines of credit (HELOCs), payment option ARMs, reverse mortgages, FHA-insured notes in certain circumstances, and land installment contracts.405 In the paper world, Article 9 of the UCC governs the sale of promissory notes.406 As a result, Article 9 and the sale contract provide the exclusive method for determining ownership of nonnegotiable promissory notes, in the absence of other statutes t
The Fannie Mae and Freddie Mac uniform eNote contains the borrower’s consent to allow either the note holder or a subsequent transferee to “convert” the electronic note into a paper-based note.423 Paragraph 11 also provides that:
Multiple assignments of a mortgage or deed of trust are commonplace in today’s lending market.433 In addition to scrutinizing the note and its indorsements for compliance with negotiable instruments law and other contract law, practitioners should check for the existence of and the validity of assignments of the security instrument, whether this be a mortgage or a deed of trust.
The absence of a separate written assignment of a mortgage or deed of trust will not necessarily defeat a foreclosure.
The previous chapter discussed the general concepts behind the authority to foreclose, focusing on the role of the key documents in a mortgage transaction: the promissory note and the security instrument (a mortgage or deed of trust). The prevailing view among the states is that authority to foreclose is determined by the right to enforce the promissory note. This chapter focuses on how to raise challenges to authority to foreclose in the context of a foreclosure. Foreclosures can occur through either judicial or non-judicial procedures.
The two federal statutes that require disclosure of information about ownership of mortgage loans to consumers are the Real Estate Settlement Procedures Act (RESPA)2 and the Truth in Lending Act (TILA).3 These statutes are discussed extensively in other NCLC manuals.4 What follows is a summary of the statutes’ provisions related to the disclosure of ownership of mortgage loans.
State laws can require disclosure of ownership of mortgage loans in several contexts. These laws are in effect in both non-judicial and judicial foreclosure jurisdictions. In the case of non-judicial foreclosures the laws may require the foreclosing party to disclose the identity of the loan’s owner in pre-foreclosure notices to borrowers or in documents that must be recorded in order to conduct a foreclosure sale.
Standing is a basic element of any civil action. A foreclosing plaintiff may be barred from all relief if it fails this basic test. For federal courts, which include the bankruptcy courts, standing has a constitutional foundation. Article III of the U.S.
In addition to the constitutional “case or controversy” requirement, federal standing jurisprudence recognizes a “prudential” limit on the exercise of a court’s jurisdiction. The “prudential” standing doctrine requires that the party bringing the lawsuit assert its own rights and interests and not those of some other party.64 Federal Rule of Civil Procedure 17 embodies this prudential standing principle.
A homeowner in foreclosure typically faces a complaint containing averments to the effect that the named plaintiff meets all state law requirements for authority to foreclose. Complaints often state in conclusory fashion that the plaintiff has authority to enforce the promissory note and is the current assignee of the mortgage.
One option for challenging the plaintiff’s authority to foreclose could be a motion to dismiss the complaint for failure to state a claim or for lack of jurisdiction.88 The motion to dismiss is appropriate where a statute or court rule mandates that the complaint contain specific averments and certain required allegations are absent.
A plaintiff may be able to defeat a motion to dismiss with conclusory pleading of authority to foreclose. Nevertheless, the same foreclosure plaintiff may be unable to prevail when it seeks to obtain summary judgment in its favor. To succeed in a summary judgment motion when its authority to foreclose has been challenged, the plaintiff must specify the facts that support its authority.
As long as the borrower/defendant disputed standing to foreclose in the answer, the plaintiff lender must establish its standing as part of its case at trial.109 If the note with an undated blank indorsement was attached to the complaint, and the plaintiff produces the original of this note at trial with the same indorsements, and there is no evidence of contradictory indorsements, then this plaintiff should have established standing at trial.110 The trial court has authority to resolve certain
Most judicial foreclosures end in a default judgment against the homeowner. While prompt action to set aside a default judgment may allow the homeowner to proceed with the full range of challenges to authority to foreclose, the entry of judgment presents a barrier to standing challenges. This problem is heightened if the foreclosure sale authorized by the judgment has already occurred.
Regardless of the jurisdiction, there is little dispute that the party seeking to conduct a non-judicial foreclosure sale must have authority to enforce the underlying security instrument, whether this be a deed of trust or mortgage.150 Even courts that minimize the burden on a party claiming authority to foreclose agree that the party must be able to enforce a contractual power of sale contained in a security instrument.151 Beyond this essential point, courts in different states diverge over ho
As a general rule, the party seeking to conduct a non-judicial foreclosure sale upon default in payments due under a promissory note should be the party with authority to enforce the note. This seems like a plain enough rule. Recognition of this general principle, however, has not been uniform around the country. The 2007 foreclosure crisis spawned an enormous amount of litigation over this question. Two events coalesced to produce a confusing body of case law on the subject.
Two decisions of the Massachusetts Supreme Judicial Court addressed the critical issues related to enforcement of notes and mortgages in non-judicial foreclosures. The court’s decisions in U.S. Bank v. Ibanez170 and Eaton v. Federal National Mortgage Association171 focused on one state’s foreclosure statute and common law.
In Ibanez the Massachusetts high court addressed two significant issues: (a) the standing of a trust owning securitized mortgage obligations to conduct a valid non-judicial foreclosure sale and (b) the important role played by preforeclosure notices that must be served and published as a condition to a valid sale under state law.
This chart contains a list of each Federal Register in which either the Federal Reserve Board or the Consumer Financial Protection Bureau published proposed, interim, and final amendments, additions, deletions, and corrections to Regulation Z and the Official Interpretations. The chart contains a link to the cited Federal Register, followed by a description of its contents and the affected provisions. The provisions are marked as “proposed,” “interim,” and “final” to allow the reader to easily match the proposed with the final version of any changes.