Foreclosure Defense: UCC on Delivery of Note

From: Whitman, Dale
…. UCC amendments that require a secondary market purchaser of a note to give credit for any payments made to the original payee of the note, if they were made before the maker of the note was notified that the note had been transferred. [Editor’s Note: This is exactly what happened in a majority of the securitization loan transactions]
There are two sources of law that bear on a secondary market purchaser’s (or its servicer’s) right to foreclose. The first is the UCC, if the note is negotiable. Under Art. 3 of the UCC, the right to collect or enforce a negotiable note can be transferred only by physical transfer and delivery of the original note itself. And a person who doesn’t have the right to enforce the note obviously can’t foreclose the mortgage that secures the note. In many cases these days involving residential loans, the note has been lost or mislaid, or simply was never delivered to the secondary market investor. Maybe someone can find it now, and maybe not. If not, it can’t properly be foreclosed.
Bear in mind that this applies only to negotiable notes. It isn’t easy to determine whether a note is negotiable, and that is often an issue that could be litigated. If the note was nonnegotiable, UCC Art. 3 is completely inapplicable; the right to enforce it can be transferred merely by a document of assignment — including a document that lists and purports to assign hundreds or thousands of notes. No delivery of the original note is necessary or even relevant, although delivery is one way to accomplish a transfer of the right of enforcement. Of course, a foreclosing court is still entitled to insist on evidence that the note was in fact assigned, even if the assignment was part of a bulk transaction.
Bottom line: whether the UCC’s delivery requirement applies is often difficult to determine, and would require a factual and legal inquiry into the wording of the note and circumstances of the purported transfer.
The second relevant body of law is state foreclosure law. In a fairly large number of states (but not all), a mortgage can’t be foreclosed unless and until the foreclosing party has a record chain of title of assignments of the original recorded mortgage. Since in many (non-MERS) cases there is no recorded assignment, the secondary market investor (or its servicer) would have to obtain and record one before foreclosing. Fannie Mae, at least at one time, used to take care of this problem by obtaining an assignment for every loan they purchased, but not recording them. If the loan needed to be foreclosed, they would record the assignment before filing the foreclosure. [Editor’s Note: to record any document, one would need to comply with all statutory requirements which includes personal knowledge of the signatory if an affidavit is filed]
Of course, in the current context some loans have been assigned multiple times, and some of the intervening assignees are probably out of business or dissolved, so that obtaining written assignments from them would be problematic or impossible.
A third issue, though perhaps not as difficult as the first two outlined above, is whether the foreclosing servicer is properly authorized by the secondary market holder (or the custodian or trustee, in the case of securitized loans) to act as an agent in the holder’s behalf. In a judicial foreclosure, the servicer will have to prove its authority.
There is no doubt that in the tremendous flurry of secondary market transactions that occurred incident to the securitization of subprime mortgages in the 2002-2006 period, many transactions were done in complete disregard of the principles outlined above. Those chickens are now coming home to roost.
Dale A. Whitman
Professor of Law Emeritus
University of Missouri-Columbia
Telephone 573-884-0946

One Response

  1. Professor Whitman,

    I wish to thank you for your imput.I gained an insite into the answers to questions I had corcerning the UCC.I look forward to reading more of your posts.

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