Enforcement of Note vs. Enforcement of Mortgage

While the two are often conflated there is a distinct difference between them. In an action to enforce the note it is often presumed that the note is being enforced to pay the debt to a creditor who might not even be identified. But the enforcement of the encumbrance requires actual ownership by an identified creditor. Judges and attorneys commit error when they act as though there is no difference. There are protections built into every statutory scheme for foreclosure and in the Bankruptcy code to prevent the loss of a home where the claim is sketchy or the claimant’s status is sketchy.

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Enforcement of the note requires evidence that the note is being enforced to pay the debt. Where the note is a negotiable instrument, possession of the note alone raises certain presumptions about the right to enforce it, presumably on behalf of either the owner of the debt or on behalf of an authorized representative of the owner of the debt.

So it is generally easier to enforce the note than it is to enforce the encumbrance (mortgage or deed of trust). But one thing is certain and highly relevant  — enforcement of the note can only be accomplished by producing the original note or pleading and proving a “lost note.” Very strong evidence exists of “industry practice” in which the notes are destroyed contemporaneously with the loan closing — and in most (nearly all) cases that is what happened.

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Where the debt arises by a loan from a creditor who remains the owner of the note and keeps the note and mortgage in a vault there are no real issues about ownership or rights to enforce the debt, note or mortgage excepting only situations where the loan did not in fact ever occur.
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Without payment of value (UCC Article 9-203(b)(1) the encumbrance cannot be enforced. This is law, not some opinion.
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But where assignments are involved, the assignment is a nullity unless the following elements are present:
  1. The Assignor owns the debt or is the authorized representative of the owner of the debt, who is identified.
    1. If that condition is true then either the Assignor actually funded the loan or the previous party paid value for the loan.
  2. The Assignor has sold the debt to the Assignee for value either through a transaction that specifies sale of the debt or through a transaction in which the note or encumbrance is purchased for value, which means money paid in hand.
  3. The Assignee paid value for the debt, note and mortgage. This means that the owner of all three — debt, note and mortgage — are the same party.
  4. Both the Assignor and the Assignee must be actual legal persons.
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The absence of one or more of these elements calls for extrinsic (parol) evidence to determine whether an assignment, recorded or not, is a valid assignment of the encumbrance. A facially valid assignment is frequently actually invalid for this reason. In the absence of those elements the burden of proof must shift back to the claimant. The new presumption should be that the assignment is a nullity. The burden of proving those elements should be on the claimant seeking foreclosure but litigants should be prepared for a fight on this issue.
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Delivery of the note is problematic since the original note was most probably destroyed. Discovery and investigation and analysis of this issue must be very precise. But assuming some version of the note is delivered, it might be presumed that ownership of the debt is also being transferred. The trick is to force the claimant to prove they received the original note and not just a copy. They can never do that. Presumptions are easily rebutted by questions regarding the existence of a transaction in which the debt, note or mortgage was purchased. In most cases no such transaction exists.
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The truth is that in most foreclosures neither the note nor the mortgage are being enforced to pay the debt to a creditor who owns the debt. Hence the basic assumption from the judiciary is erroneous — that somewhere in the securitization chain someone owns the debt and will be compensated for their financial loss by forced sale of the subject property. Nothing could be further from the truth. And tracing the proceeds of sale after foreclosure will prove it every time.
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PRACTICE HINT: If you present a credible narrative that your client is denying that the claimant is a real party in interest and that there is a pattern of conduct from prior foreclosures showing that neither the Trustee nor the trust (nor any investor) actually received the proceeds of sale in other foreclosures conducted in the name of “Trustee” on behalf of “Certificate holders” of XYZ Trust series Certificates 200x-X” then you should have a right to inquire about about a list of prior foreclosures conducted for the “trust”, who was involved and where the money went.

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