Upload
rjigarjian
View
216
Download
0
Embed Size (px)
Citation preview
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
1/31
ASF White PAPer SerieS
Transfer and Assignment
of Residential Mortgage
Loans in the Secondary
Mortgage Market
NOVEMBEr 16, 2010
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
2/31
ASF Headquarters I One World Financial Center, 30th Floor I New York, NY 10281 I 212.412.7100
www.aericansecuritiation.co
THS WHT pAp AN TS xCTv SmmAY A NTN FO
NFOmATONA ppOSS ONY AN O NOT CONTAN O CONvY gA
AvC, A gA OpNON O A pSNTATON AS TO TH FACTS OF ANY
pATCA TANSACTON pOv bY TH AmCAN SCTzATON
FOm O bY ANY OF TH AW FmS FNC bOW. TH NFOmATON
N TH xCTv SmmAY AN WHT pAp SHO NOT b S O
pON N gA TO ANY pATCA FACTS O CCmSTANCS.
TH AW Fm & gATS p Sv AS OTS CONS TO TH AmCAN
SCTzATON FOm N CONNCTON WTH TH ppAATON OF
TH WHT pAp AN xCTv SmmAY. TH OTH AW FmS
ST ON xHbT A HAv vW TH WHT pAp AN bv THAT
TH xCTv SmmAY pSNTS A FA SmmAY OF TH gA
pNCpS pSNT.
Aerican Securitiation Foru, nc. Noeer 2010. All rihts resered.
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
3/31
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1. basic princiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Transfer of proissory Notes Secured y mortaes . . . . . . . . . . . . . . . . . . . 3
3. Assinent and Transfer of Ownershi of mortaes. . . . . . . . . . . . . . . . . . . 3
4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Exhibit A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Transfer and Assignment of Residential Mortgage Loans
in the Secondary Mortgage Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1. basic princiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2. Transfer of proissory Notes Secured y mortaes . . . . . . . . . . . . . . . . . . . 9
What Constitutes a Neotiale nstruent? . . . . . . . . . . . . . . . . . . . . . . .10
How is a Neotiale mortae Note Transferred? . . . . . . . . . . . . . . . . . . . . .11
Who may nforce A Neotiale mortae Note? . . . . . . . . . . . . . . . . . . . . .12
What ihts Aainst borrower efenses are Aailale to the Holder
of a Neotiale mortae Note? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
How s a mortae Note Transferred nder Article 9 of the CC? . . . . . . . . . .14
Transfer of mortae Notes: Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3. Assinent and Transfer of Ownershi of mortaes. . . . . . . . . . . . . . . . . . .16
What is the elationshi between the Transfer of a mortae Noteand the Transfer of Ownershi of the mortae? . . . . . . . . . . . . . . . . . . . . .16
What is the elationshi between the CC and State eal proerty aws? . . . . . .23
How oes the se of mS Aect ese ssues? . . . . . . . . . . . . . . . . . . . . .24
4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Table of Contents
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
4/31
1
Introduction
ecently, a few coentators hae raised a nuer of leal theories questionin whether securitiation
trusts, either those created y riate nancial institutions or those created y oernent sonsored
enterrises, such as ginnie mae, Fannie mae or Freddie mac, hae alid leal title to the seen trillion dollarsof ortae notes in those trusts. n an eort to contriute thorouh and well-researched leal analysis to
the discussion of these theories, the Aerican Securitiation Foru (ASF) issues the enclosed white aer
entitled Transfer and Assinent of esidential mortae oans in the Secondary mortae market (the
White paer). e White paer roides a detailed oeriew of the leal rinciles and rocesses y which
ortae loans are tyically held, assined, transferred and enforced in the secondary ortae arket and in
the creation of ortae-acked securities (mbS). ese rinciles and rocesses hae centuries-old oriins,
and they hae continued to e sound and alidated since the adent of mbS oer forty years ao.
While the real roerty laws of each of the 50 .S. states and the istrict of Coluia aect the ethod
of foreclosin on a ortae loan in default, the leal rinciles and rocesses discussed in this White paerresult, if followed, in a alid and enforceale transfer of ortae notes and the underlyin ortaes in each
of these jurisdictions. To e thorouh, the White paer undertakes a reiew of oth coon law and the
nifor Coercial Code (the CC) in each of the 50 .S. states and the istrict of Coluia. One of the
ost critical rinciles is that when ownershi of a ortae note is transferred in accordance with coon
securitiation rocesses, ownershi of the ortae is also autoatically transferred ursuant to the coon
law rule that the ortae follows the note. e rule that the ortae follows the note dates ack centuries
and has een codied in the CC. n essence, this eans that the assinent of a ortae to a trustee does
not need to e recorded in real roerty records in order for it to e a alid and indin transfer.
n suary, these traditional leal rinciles and rocesses are fully consistent with todays co-le holdin, assinent and transfer ethods for ortae loans and those ethods are leally eectie
for articiants in the secondary ortae arket to transfer ortae loans. irteen ajor .S. law rs
noted in hiit A hae reiewed the White paer and eliee that the ecutie Suary contained therein
reresents a fair suary of the leal rinciles resented. ASF wishes to thank each of these rs and the
doens of reeinent mbS attorneys who hae contriuted to the deeloent of this White paer.
Tom Deutsch
Executive Director
American Securitization Forum
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
5/31
2
Executive Summary
1. Basic Principles
e two core leal docuents in ost residential ortae loan transactions are the roissory note
and the ortae or deed of trust that secures the orrowers ayent of the roissory note. n a tyical
riate-lael ortae loan securitiation, each ortae loan is sold to a trust throuh a series of stes.
A ortae note and a ortae ay e sold, assined and transferred seeral ties etween the tie the
ortae loan is oriinated and the tie the ortae loan ends u with the trust. e leal rinciles that
oern the assinent and transfer of ortae notes and related ortaes are deterined, in sinicant
art, y the nifor Coercial Code (CC), which has een adoted y all 50 states and the istrict of
Coluia.1
e residential ortae notes in coon usae tyically are neotiale instruents. As a eneral
atter, under the CC, a neotiale ortae note can e transferred fro the transferor to the transferee
throuh the indorseent2 of the ortae note and the transfer of ossession of the note to the transferee or
a custodian on ehalf of the transferee. An assinent of the related ortae is also tyically deliered to
the transferee or its custodian, ecet in cases where the related ortae identies the mortae lectronic
eistration Syste (mS) as the ortaee. Such assinents enerally are in recordale for, ut
unrecorded, and are eecuted y the transferor without identifyin a secic transferee a so-called assinent
in lank. nterenin assinents, in soe cases, ay e recorded in the local real estate records.
n soe ortae loan transactions, mS ecoes the ortaee of record as the noinee of the
loan oriinator and its assinees in the local land records where the ortae is recorded, either when the
ortae is rst recorded or as a result of the recordin of an assinent of ortae to mS. is eans
that mS is listed as the record title holder of the ortae. mS nae does not aear on the ortae
note, and the enecial interest in the ortae reains with the loan oriinator or its assinee. e docuents
ursuant to which mS acts as noinee ake clear that mS is actin in such caacity for the enet of
the loan oriinator or its assinee. When a ortae loan is oriinated with mS as the noinal ortaee
(or is assined to mS ost-oriination), mS tracks all future ortae loan and ortae loan sericin
transfers and other assinents of the ortae loan unless and until ownershi or sericin is transferred (or
the ortae loan is otherwise assined) to an entity that is not a mS eer. n this way, mS seres as
a central syste to track chanes in ownershi and sericin of the ortae loan. Fannie mae, Freddie mac
and ginnie mae, aon other oernental entities, erit ortae loans that they urchase or securitie
to e reistered with mS.
1 eferences to the CC are to the Ocial Tet of the model CC, as reised, issued y the National Conference of Coissionerson nifor State aws.
2 Note that the CC relaces the ore coon .S. sellin of endorseent for the less coon indorseent. e CC sell-in is used throuhout this ecutie Suary.
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
6/31
3
2. Transfer of Promissory Notes Secured by Mortgages
e law of neotiale instruents deeloed oer the centuries as a way to encourae coerce
and lendin y akin such instruents, includin neotiale ortae notes, as liquid and transferale as
ossile. e CC, with state-secic ariations, in sinicant art oerns the assinent and transfer of
ortae notes. Article 3 of the CC alies to the neotiation and transfer of a ortae note that is aneotiale instruent, as that ter is dened in Article 3. n addition, Article 9 of the CC alies to the sale
of roissory notes, a ter that enerally includes ortae notes.
n addition, as a eneral atter, the securitiation of a loan under a tyical oolin and sericin
areeent roides oth for the neotiation of neotiale ortae notes (y indorseent and transfer of
ossession to the securitiation trustee or the custodian for the trustee) and for an outriht sale and assinent
of all of the ortae notes and ortaes. us, whether the ortae notes in a ien securitiation ool
are deeed neotiale (as we eliee ost tyically are) or non-neotiale will hae little or no sustantie
eect under the CC on the alidity of the transfer of the notes. e tyical securitiation rocess eects alid
transfers of the ortae notes and related ortaes in accordance with the roisions of Articles 3 and 9 ofthe CC.
nder the CC, the transfer of a ortae note that is a neotiale instruent is ost coonly
eected y (a) indorsin the note, which ay e a lank indorseent that does not identify a erson to who
the ortae note is ayale or a secial indorseent that secically identies a erson to who the ortae
note is ayale, and () delierin the note to the transferee (or an aent actin on ehalf of the transferee). As
residential ortae notes in coon usae tyically are neotiale instruents, this is the ost coon
ethod to transfer the ortae note. n addition, een without indorseent, the transfer can e eected
y transferrin ossession under the CC. moreoer, the sale of any ortae note also eects the transfer
of the ortae under Article 9. Securitiation areeents oen roide oth for (a) the indorseent andtransfer of ossession to the trustee or the custodian for the trustee, which would constitute a neotiation of the
ortae note under Article 3 of the CC and () an outriht sale and assinent of the ortae note. us,
reardless of whether the ortae notes in a securitiation trust are deeed neotiale or non-neotiale,
the securitiation rocess enerally includes a alid transfer of the ortae notes to the trustee in accordance
with the elicit requireents of the CC.
n addition, Article 3 of the CC erits a erson without ossession to enforce a neotiale ortae
note where the note has een lost, stolen, or destroyed. Courts hae consistently ared the use of the salient
roisions of the CC to enforce lost, stolen or destroyed neotiale ortae notes that are owned y a
securitiation trust when the trust or its aent has roed the ters of the ortae notes and their riht toenforce the ortae notes.
3. Assignment and Transfer of Ownership of Mortgages
As stated aoe, when a ortae loan is assined and transferred as art of the securitiation of the
ortae loan in the secondary arket, oth the ortae note and the ortae itself are tyically sold,
assined, and hysically transferred to the trustee that is actin on ehalf of the mbS inestors or a trustee-
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
7/31
4
desinated docuent custodian ursuant to a custody areeent. e assinent and transfer are usually
docuented in accordance with a oolin and sericin areeent.
When a ortae note is transferred in accordance with coon ortae loan securitiation
rocesses, the ortae is also autoatically transferred to the ortae note transferee ursuant to the
eneral coon law rule that the ortae follows the note. e rule that the ortae follows the note
has een codied in the CC, ut the rules coon law oriins date ack hundreds of years, lon efore the
creation of the CC. As stated in the ocial coents to CC 9-203(), the section codies the coon-
law rule that a transfer of an oliation secured y a security interest or other lien on ersonal or real roerty
also transfers the security interest or lien. CC 9-203 ct. 9. All states follow this rule.3
n addition to the codication under CC 9-203(), reorted court cases in nearly eery state and
non-CC statutory roisions in soe states ake clear that the ortae follows the note. eardin the
iact of these CC roisions, one treatise states: Article 9 akes it as lain as ossile that the secured arty
need not record an assinent of ortae, or anythin else, in the real roerty records in order to erfect
its rihts in the ortae. J. mconnell and J. Sith, Secured Transactions nder the nifor Coercial
Code, 16.09[3][]. ndeed, courts in seeral states hae ared and alied the ortae follows the note
rule in cases where the ortae assinent was not recorded y the transferee and een when there was no
actual searate written assinent of the ortae.4
Coon securitiation ractices are consistent with the eneral rule that the ortae follows the
note: ursuant to the oolin and sericin areeent that oerns an mbS, and the lanuae of assinent
tyically contained in such an areeent, the ortae note and the ortae itself are sold, assined,
transferred and deliered to the trustee, and the transferor also tyically deliers a written assinent of
the ortae that is in lank in recordale for. Courts hae held that the lanuae of sale and assinent
contained in a oolin and sericin areeent, alon with the corresondin transfer, sale, and deliery of the
ortae note and ortae, are sucient to transfer the ortae to the transferee/trustee or its desinee or
noinee.
e creation of an interest in or lien on real roerty, includin a ortae, is oerned y the non-
CC law of the state in which the roerty is located. ikewise, the enforceaility of ortaes (includin
the riht and ethod to foreclose) is suject to all of the conditions recedent and requireents that are set
forth in the articular ortae itself and in all alicale state and local laws. ose conditions recedent
3 Howeer, in soe states, such as massachusetts and minnesota, courts hae held that the transfer of a ortae note without aneress transfer of the ortae ests in the note holder only an equitale interest in the ortae. is arraneent has eendescried as follows: the holder of the ortae holds the leal title to the ortae in constructie trust for the enet of theortae note holder. n oth states, howeer, case law suests that foreclosure roceedins ust e initiated y, or at least in thenae of, the holder of the leal title in the ortae.
4 n ost states, recordin of an assinent of ortae is enerally not required to ensure the enforceaility of the assinentof ortae as etween the assinor and assinee, and anyone with knowlede thereof. t is eyond the scoe of this ecutieSuary and the White paer to discuss in detail the otential risks to the ortae transferee of not recordin a ortae as-sinent. ose risks iht include, aon others, delayin the transferees aility to foreclose on the ortae, failin to receienotices that ay o to the ortaee of record, and otherwise leain the assinee oen to nelient or fraudulent actions orinactions y the ortaee of record that could ind the ortae transferee and iair the alue or enforceaility of the ort-ae. Siilarly, when an assinent of ortae is not recorded, the assinor ay e liale for certain oliations iosed uon aortaee of record, such as the oliation to roide a ay-o stateent or ortae release within a desinated tie eriod.
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
8/31
5
and rocedural requireents ary fro ortae to ortae and fro state to state. us, ownershi of a
ortae (i.e., without notice to the ortaor or the ulic, without judicial roceedins (where required),
without satisfaction of other conditions recedent or rocedural requireents in the ortae itself or in
alicale state law), does not always ie the holder of the ortae the leal aility to foreclose on the
ortae. ouh a discussion of the other necessary rerequisites to foreclosure is eyond the scoe of this
ecutie Suary and the White paer, the fact that other stes ay need to e taken y the owner of a
ortae note, or the owner of a ortae, is neither unique nor surrisin in our leal and reulatory syste
and does not diinish an otherwise leally eectie transfer of the ortae note and ortae.
e use of mS as the noinee for the enet of the trustee and other transferees in the ortae
loan securitiation rocess has een a suject of litiation in recent years reardin a ortae note holders
riht to enforce a ortae loan reistered in mS. Soe cases address the authority or aility of mS or
transferees of mS to foreclose on a ortae for which mS is or was the ortaee of record. As a eneral
atter, the assinent and transfer of a ortae to mS as noinee of and for the enet of the enecial
owner of the ortae does not adersely iact the riht to foreclose on the ortae. ecisions in any
jurisdictions suort this conclusion.
ere are seeral inority decisions that, in soe for, hae taken issue with mS. but none of
these decisions, to our knowlede, has inalidated a ortae for which mS is the noinee, and none of
these decisions has challened mS aility to act as a central syste to track chanes in the ownershi and
sericin of ortae loans.
Finally, it is iortant to reconie that the CC does not dislace traditional rules of aency law.
nder eneral aency law, an aent has authority to act on ehalf of its rincial where the rincial anifests
assent to the aent that the aent shall act on the rincials ehalf and suject to the rincials control, and
the aent anifests assent or otherwise consents so to act. Accordinly, the CC does not reent mS
or others, includin loan sericers, fro actin as the aent for the note holder in connection with transfers
of ownershi in ortae notes and ortaes. n short, rinciles of aency law roide mS and loan
sericers another leal asis for their resectie roles in the transfer of ortae notes and ortaes.
4. Conclusion
n suary, the lonstandin and consistently alied rule in the nited States is that, when a ortae
note is transferred, the ortae follows the note. When a ortae note is transferred and deliered to a
transferee in connection with the securitiation of the ortae loan ursuant to an mbS oolin and sericin
areeent or siilar areeent, the ortae autoatically follows and is transferred to the ortae note
transferee, notwithstandin that a third arty, includin an aent/noinee entity such as mS, ay reain as
the ortaee of record. both coon law and the CC conr and aly this rule, includin in the contet
of ortae loan securitiations.
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
9/31
6
Exhibit A
Alston & bird p
binha mcCutchen p
Cadwalader, Wickersha & Ta p
echert p
Hunton & Willias p
atten muchin osenan p
& gates p
owenstein Sandler pC
mayer brown p
Omeleny & myers p
Orrick, Herrinton & Sutclie p
Sidley Austin p
SN enton S p
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
10/31
7
Transfer and Assignment of Residential Mortgage
Loans in the Secondary Mortgage Market
e einnins of the now ulti-trillion dollar secondary arket for residential ortae loans date
ack to the federal oernents creation of Fannie mae in 1938. Since then, the coleity of the secondary
ortae arket has increased, esecially as a result of the raid rowth and arket accetance of ortae-
acked securities (mbS) that ean in the 1980s. n contrast, the leal rinciles and rocesses y which
ortae-related roissory notes and security instruents (ortaes and deeds of trust) are assined and
transferred hae centuries-old oriins. Now, in the idst of the worst econoic and housin crisis since the
1930s, soe are questionin whether the traditional state law rinciles and rocesses of assinent and
transfer can e fully reconciled with todays cole holdin, assinent and transfer systes for ortae-
related roissory notes and security instruents, and what ethods are leally eectie for articiants in
the secondary ortae arket to estalish, aintain and transfer ortae notes and security instruents.
is aer roides an oeriew of the leal rinciles and rocesses y which roissory notes and
related ortae security instruents are tyically held, assined, transferred and enforced in the secondary
ortae arket in connection with loan securitiations and the creation of mbS.1
1. Basic Principles
e two core leal docuents in ost residential ortae loan transactions are the roissory note
and the ortae or deed of trust that secures the orrowers ayent of the roissory note. e roissory
note contains a roise y the orrower to ay the lender a stated aount of oney at a secied interest rate
(which can e ed or ariale) y a certain date. e tyical ortae or deed of trust contains a rant of a
ortae lien or other security interest in the orrowers real roerty to the lender or, in a deed of trust, to a
trustee for the enet of the lender, to secure the orrowers oliations under the roissory note.2
n a tyical riate-lael ortae loan securitiation, each ortae loan, which is eidenced y a
ortae note and secured y a ortae, is sold, assined and transferred to a trust throuh a series of stes:
e loan oriinator or a susequent urchaser sells, assins and transfers the ortae loans
to a sonsor, which is tyically a nancial serices coany or a ortae loan conduit or
areator.
e sonsor sells, assins and transfers the ortae loans to a deositor, which in turn
sells, assins and transfers the ortae loans to the trustee, which will hold the ortae
loans in trust for the enet of the certicateholders.
1 ssues related to a artys riht to foreclose or to enae in foreclosure-related actiities are enerally outside the scoe of this aer.
2 For ease of reference, ortae will e used throuhout uch of this aer to refer to oth ortaes and deeds of trust, andortae note will e used to refer to a roissory note that is secured y a ortae.
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
11/31
8
e trustee issues the mbS ursuant to a oolin and sericin areeent or trust aree-
ent entered into y the deositor, the trustee and a aster sericer or sericers.
e trustee adinisters the ool assets, tyically relyin on the loan sericer to erfor
ost of the adinistratie functions reardin the ool of ortae loans. n addition, a
docuent custodian is oen desinated to conduct a reiew of the ortae loan docu-ents ursuant to the requireents of the oolin and sericin areeent and to hold
the ortae loan docuents for the loans included in the trust ool.
n eneral, the loan docuents are assined and transferred fro the deositor to the
trustee throuh the indorseent of the ortae note and the transfer of ossession of
the ortae note to the trustee or a custodian on ehalf of the trustee. An assinent
of the related ortae is also tyically deliered to the transferee or its custodian, ecet
in cases where the related ortae identies mortae lectronic eistration Systes
(mS) as the ortaee. Such assinents enerally are in recordale for, ut un-
recorded, and are eecuted y the transferor without identifyin a secic transferee a
so called assinent in lank.
n soe ortae loan transactions, mS ecoes the ortaee of record as the no-
inee of the loan oriinator and its assinee in the local land records where the ortae
is recorded, either when the ortae is rst recorded or as a result of the recordin of an
assinent of ortae to mS. is eans that mS is listed as the record title hold-
er of the ortae. mS nae does not aear on the ortae note, and the enecial
interest in the ortae reains with the loan oriinator or its assinee. e docuents
ursuant to which mS acts as noinee ake clear that mS is actin in such caacity
for the enet of the loan oriinator or its assinee. When a ortae loan is oriinated
with mS as the noinal ortaee (or is assined to mS ost-oriination), mS
tracks all future ortae loan and loan sericin transfers and other assinents of
the ortae loan unless and until ownershi or sericin is transferred (or the loan is
otherwise assined) to an entity that is not a mS eer. n this way, mS seres
as a central syste to track chanes in ownershi and sericin of the loan. Fannie mae,
Freddie mac and ginnie mae, aon other oernental entities, erit loans that they
urchase or securitie to e reistered with mS.
As art of the loan securitiation rocess detailed aoe, a ortae note and a ortae ay e
sold, assined and transferred seeral ties fro one entity to another. e leal rinciles that oern the
assinent and transfer of ortae notes and ortaes are enerally deterined y state law. See, e..,
n re Cook, 457 F.3d 561, 566 (6th Cir. 2006) (state law oerned whether transferee had suerior interest in
roissory note secured y ortae). As such, these rinciles can ary deendin uon the state in which
the assinor of the ortae notes, the underlyin roerty, or the releant ortae-related docuents are
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
12/31
9
located. e assinent and transfer of a ortae note, on the one hand, and of a ortae, on the other
hand, are addressed searately elow.
2. Transfer of Promissory Notes Secured by Mortgages
e residential ortae notes in coon use in the secondary ortae arket tyically are
neotiale instruents. e law of neotiale instruents deeloed oer the centuries as a way to encourae
coerce and lendin y akin such instruents, includin neotiale ortae notes, as liquid and
transferale as ossile. See, e.., Oerton . Tyler, 3 pa. 346, 347 (1846) ([A] neotiale ill or note is a courier
without luae); 2 Frederick m. Hart & Willia F. Willier, Neotiale nstruents nder the nifor
Coercial Code 1.01 (Neotiale instruents lay such an iortant role in the odern coercial
world that it is dicult to realie that the strule for their eistence could e as lon and cole as it has
een, yet the eolution of the concet took centuries.). Siilarly, the standardiation of the fors of ortae
notes and ortaes oer the ast thirty years or ore has contriuted to the liquidity and transferaility of
ortae notes and the underlyin ortaes. See peter m. Carroo, marketin the Aerican mortae:
e erency Hoe Finance Act of 1970, Standardiation and the Secondary market eolution, 39 eal
pro. pro. & Tr. J. 765, 799-800 (2004-2005) (standardiation of ortae docuents created arketale
coodities. Once echaniss were in lace for the secondary arket to oerate, eents raidly oed
toward the ultiate oal: the creation of a security which has as its ase land [and] yet which will e as freely
transferale as stocks and onds (internal quotation oitted)).
e nifor Coercial Code (CC), which, with state-secic ariations, has een adoted as
law y all 50 states and the istrict of Coluia, oerns, in sinicant art, the transfer of ortae notes.3
Article 3 alies to the neotiation and transfer of a ortae note that is a neotiale instruent, as that
ter is dened in Article 3. See CC 3-102, 3-201, 3-203 and 3-204; see, e.., Swindler . Swindler, 355
S.C. 245, 250 (S.C. Ct. A. 2003) (Article 3 oerns neotiale ortae note). n addition, Article 9 alies
to the sale of roissory notes, a ter that enerally includes all ortae notes (oth neotiale and non-
neotiale). See CC 1-201()(35) and 9-109(a)(3).4
e residential ortae notes in coon use today are tyically neotiale instruents for CC
uroses. n addition, as a eneral atter, the securitiation of a loan under a tyical oolin and sericin
areeent roides oth for the neotiation of neotiale ortae notes (y indorseent 5 and transfer of
ossession to the securitiation trustee or the custodian for the trustee) and for an outriht sale and assinent
of all of the ortae notes and related ortaes. us, whether the ortae notes in a ien securitiation
3 eferences to the CC are to the Ocial Tet of the model CC, as reised, issued y the National Conference of Coissionerson nifor State aws.
4 While Article 9 does not directly oern a ortae on real roerty, the fact that a ortae note is itself secured y a ortae
on real roerty does not render Article 9 inalicale to transfers of the ortae note. See CC 9-109() (e alication ofthis article [9] to a security interest in a secured oliation is not aected y the fact that the oliation is itself secured y a transac-tion or interest to which this article does not aly.).
5 Note that the CC eschews the ore coon .S. sellin of endorseent for the less coon indorseent. e CC sell-in is used throuhout this aer.
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
13/31
10
ool are deeed neotiale (as we eliee ost tyically are) or non-neotiale will hae little or no
sustantie eect under the CC on the alidity of the transfer of the ortae notes. e tyical securitiation
rocess eects alid transfers of the ortae notes and related ortaes in accordance with the roisions
of Articles 3 and 9 of the CC.6
What Constitutes a Negotiable Instrument?
A neotiale instruent is dened as:
an unconditional roise or order to ay a ed aount of oney, with or without inter-
est or other chares descried in the roise or order, if it:
(1) is ayale to earer or to order at the tie it is issued or rst coes into ossession of
a holder;
(2) is ayale on deand or at a denite tie; and
(3) does not state any other undertakin or instruction y the erson roisin or order-
in ayent to do any act in addition to the ayent of oney, ut the roise or
order ay contain (i) an undertakin or ower to ie, aintain, or rotect collateral
to secure ayent, (ii) an authoriation or ower to the holder to confess judent
or realie on or disose of collateral, or (iii) a waier of the enet of any law intended
for the adantae or rotection of an olior.
CC 3-104(a).
eference in a ortae note to a ortae does not aect the ortae notes status as a neotialeinstruent. See CC 3-106() (A roise or order is not ade conditional [] y a reference to another
writin for a stateent of rihts with resect to collateral, reayent, or acceleration.); see also ntl
minerals & Che. Cor. . matthews, 321 S..2d 545, 547 (N.C. Ct. A. 1984) (referrin to a ortae or
other collateral [in a ortae note] does not iair neotiaility of the note); n re AOnline.co, 285 b..
805, 815-16 (bankr. ..N.Y. 2002) (reference in ortae notes to underlyin ortaes does not aect the
neotiaility of the notes).
e fact that a ortae note contains a ariale or adjustale interest rate also does not aect the
ortae notes status as a neotiale instruent. at is ecause CC 3-112() roides that [i]nterest ay
e stated in an instruent[7
] as a ed or ariale aount of oney or it ay e eressed as a ed or arialerate or rates. e aount or rate of interest ay e stated or descried in the instruent in any anner and
ay require reference to inforation not contained in the instruent. CC 3-112().
6 Article 3 and Article 9 are not utually eclusie. Article 9 alies to the transfer of all roissory notes, which includes neotia-le and non-neotiale instruents. both Article 3 and Article 9 aly to neotiale instruents. With resect to non-neotialeinstruents, only Article 9 alies to the transfer.
7 CC 3-104() denes instruent sily as a neotiale instruent for uroses of Article 3. As discussed in ore detailelow, the denition of instruent in Article 9 (oernin secured transactions) is soewhat ore eansie.
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
14/31
11
How is a Negotiable Mortgage Note Transferred?8
A neotiale ortae note is transferred when it is deliered y a erson other than the ortaor
for the urose of iin the transferee the riht to enforce the note. See CC 3-203(a). eliery of a
ortae note occurs when there has een a oluntary transfer of ossession of the ortae note. See CC
1-201()(15). As a eneral atter, the [t]ransfer of an instruent, whether or not the transfer is a neotiation,ests in the transferee any riht of the transferor to enforce the instruent . . . . CC 3-203(). Accordinly,
a erson in ossession of the note ecoes a erson entitled to enforce if it can roe that it is the transferee.9
See CC 3-301.
e easiest and ost coon way to transfer a neotiale ortae note is throuh neotiation.
Article 3 denes neotiation as a transfer of ossession, whether oluntary or inoluntary, of an instruent
y a erson other than the issuer to a erson who therey ecoes its holder. CC 3-201(a). e neotiation
of a neotiale ortae note that is ayale to an identied erson or entity (such as the entity that oriinated
a ortae loan and whose nae aears as the ayee in the ortae note) requires transfer ofpossession
of the instruent and its indorsement y the holder. CC 3-201() (ehasis added). As elained elow,indorseent and holder are oth dened ters in the CC.
e holder of a neotiale ortae note is the erson in ossession of [the ortae note] that
is ayale either to earer or to an identied erson that is the erson in ossession. CC 1-201()(21)
(A). n other words, uon the closin of a ortae loan, the holder of the ortae note is the entity
that is the ayee on the ortae note and that ossesses the note (either actually or constructiely). Aer a
neotiale ortae note has een neotiated, such as in connection with a loan securitiation, the holder
of the ortae note is the entity that ossesses the ortae note if the ortae note was indorsed to that
entity or if the ortae note was indorsed in lank or to earer.
e ter indorseent is dened to include a sinature . . . that alone or accoanied y otherwords is ade on an instruent [in our case, a neotiale ortae note] for the urose of . . . neotiatin
the instruent. CC 3-204(a). Such an indorseent ay e either a secial indorseent or a lank
indorseent. See CC 3-205. A secial indorseent is a written indorseent that secically identies a
erson to who it akes the instruent ayale. CC 3-205(a). A lank indorseent is an indorseent
that does not identify a erson to who the instruent is ayale. See CC 3-205(). mortae notes that
are transferred in connection with loan securitiations are tyically indorsed in lank with lanuae such as
pay to the order of _____________, where no nae is lled in the lank. e eect of an indorseent in
8 t is iortant to note that Article 3 does not concern ownershi of a ortae note, ut instead roides for the transfer of aortae note and the riht to enforce such notes. See CC 3-301; CC 3-203 ct. 1. A arty need not e the owner of theortae note to enforce it. See CC 3-301 (A erson ay e a erson entitled to enforce the instruent een thouh the er-son is not the owner of the instruent or is in wronful ossession of the instruent.). us, a arty ay hae the riht to enforcethe instruent, ut not hae ownershi of that instruent. CC 3-203 ct 1. For an eale of situations where a arty withthe riht to enforce an instruent is not also the owner of the instruent, see CC 3-203 ct. 1 and Note 12 infra.
9 Note also that CC 3-203(c) roides for the scenario in which an instruent is transferred for alue without the indorseentthat, as descried in the tet elow, would e needed for the ortae note to hae een neotiated. nder that section, if a neo-tiale ortae note is transferred for alue as art of a loan securitiation, ut the transferor fails to indorse the note, the trans-feree of the note has the secically enforceale riht to the unqualied indorseent of the transferor. CC 3-203(c); see Note12, infra (discussin distinction etween the riht to enforce a ortae note and ownershi of the ortae note).
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
15/31
12
lank is sinicant: When indorsed in lank, an instruent ecoes ayale to earer and ay e neotiated
y transfer ofpossession alone until secially indorsed. CC 3-205() (ehasis added).10 See also CC
3-201() (e neotiation of a neotiale ortae note that is ayale to earer (such as a neotiale ortae
note that has een indorsed in lank) is eected y transfer of ossession alone.).
e ter ossession is not dened in the CC. us, courts rely on coon law denitions of ossession
to interret that concet in the contet of the neotiation of an instruent such as a ortae note. See, e.., n re
elton motors, nc., 97 F.3d 22, 26 (2d Cir. 1996) (ecause Article 3 does not dene ossession, a court ust look
to the eneral law of the jurisdiction in deterinin whether a arty is in ossession of a neotiale instruent).
possession can e, and ery oen is, eected y an aent, noinee or desinee, such as the desinated custodian for
the securitiation trust. See, e.., midrst bank, Sb . C.W. Haynes and Co., nc., 893 F. Su. 1304, 1314-15 (.S.C.
1994) (constructie ossession eists when an authoried aent of the owner holds the note on ehalf of the owner);
Jenkins . ans, 31 A..2d 597, 598 (N.Y. A. i. 3d et. 1968) (aent had authority to ossess instruents for
rincial). n such cases, while the desinated custodian has hysical ossession of the ortae note, the trustee
for which the custodian holds the ortae note has constructie or leal ossession. See midrst bank, 893 F.
Su. at 1314-15; see also CC 9-313 ct. 3 (if the collateral is in [the] ossession of an aent of the secured arty
for the uroses of ossessin on ehalf of the secured arty, and if the aent is not also an aent of the detor, the
secured arty has taken actual ossession (ehasis added)).
Who May Enforce A Negotiable Mortgage Note?
e aker of a ortae note is oliated to ay the note to the erson entitled to enforce the
instruent. CC 3-412. e erson entitled to enforce a neotiale ortae note includes (i) the holder
of the instruent, [and] (ii) a nonholder in ossession of the instruent who has the rihts of a holder. CC
3-301. Accordinly, to enforce a ortae note aainst the orrower, a erson ust enerally roe eitherthat it is a holder or that it is a transferee with the rihts of a holder. See CC 3-301.
e rst cateory of ersons that ay enforce a ortae note is a holder. A holder of a neotiale
ortae note is the erson in ossession of [the ortae note] that is ayale either to earer or to an
identied erson that is the erson in ossession. CC 1-201()(21)(A). e anner in which one ecoes
a holder is descried in the section aoe.
e second cateory contelated y CC 3-301 a nonholder in ossession who has the rihts of
a holder is ore dicult to dene. nder this clause, a erson would qualify as a nonholder in ossession
if ossession of the ortae note was transferred to hi fro the transferor, ut the transferor did not indorse
the ortae note. See CC 3-203 ct. 2. n this circustance, the transferee is entitled to enforce theinstruent, ut to do so, the transferee ust rst roe oth ossession of the unindorsed ortae note and
roe the transfer of the ortae note y the holder to the transferee. See id.11 nder oth clauses, the erson
10 An indorseent is considered to e ade on an instruent for uroses of neotiation when it is ade either on the ortaenote itself or on a searate aer, oen referred to as an allone, that is aed to the note. See CC 3-204(a). Once aed, theallone ecoes art of the instruent. d.
11 As noted aoe, the riht to enforce an instruent and the ownershi of that instruent are not necessarily the sae. See CC 3-203 ct. 1. us, a arty ay hae the riht to enforce the instruent, ut not hae ownershi of that instruent. d. A arty
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
16/31
13
seekin to enforce the ortae note ust hae ossession of the note.
CC 3-301 also erits a erson without ossession to enforce a ortae note where the ortae
note has een lost, stolen, or destroyed within the eanin of CC 3-309. See CC 3-301. 12 Courts hae
consistently ared the use of CC 3-309 to enforce lost, stolen or destroyed neotiale ortae notes that
a arty, such as a securitiation trustee, seeks to enforce when the arty has roen the ters of the ortae
notes and its riht to enforce the ortae notes (i.e., it has roen the transfer of the ortae note fro
the transferee). See, e.., n re montane, 421 b.. 65, 79 (. vt. 2009) (ndin that lainti who satised
requireents of CC 3-309 could enforce lost ortae note); Waoner . mortae lect. eistration
Sys., nc., No. 2003-CA-002666-m, 2005 W 2175439, at *1 n.1 (y. A. Ct. Set. 9, 2005) (e roissory
note was roen y an adait concernin a lost or destroyed roissory note.).
What Rights Against Borrower Defenses are Available to the Holder of a Negotiable Mortgage Note?
A key concet relatin to the neotiation of neotiale ortae notes is the holder in due course
doctrine. at is ecause where the holder of a neotiale ortae note is deeed a holder in due course,the holder takes the ortae note suject only to secic liited defenses of the orrower. e followin is a
rief suary of an eansie area of law. nder CC 3-302(a):
[A] holder in due course eans the holder of an instruent if:
(1) the instruent when issued or neotiated to the holder does not ear such aarent
eidence of forery or alteration or is not otherwise so irreular or incolete as to
call into question its authenticity; and
(2) the holder took the instruent (i) for alue, (ii) in ood faith, (iii) without notice that
the instruent is oerdue or has een dishonored or that there is an uncured default
with resect to ayent of another instruent issued as art of the sae series, (i)
without notice that the instruent contains an unauthoried sinature or has een
altered, () without notice of any clai to the instruent descried in Section 3-306
[reardin clais of a roerty or ossessory riht in the instruent or its roceeds,
includin a clai to rescind a neotiation and to recoer the instruent or its ro-
ceeds], and (i) without notice that any arty has a defense or clai in recouent
descried in Section 3-305(a).
CC 3-302(a).
need not e the owner of the note to enforce it. See CC 3-301 (A erson ay e a erson entitled to enforce the instruenteen thouh the erson is not the owner of the instruent or is in wronful ossession of the instruent.). For eale, if x
(holder of an instruent ayale to x) sells the instruent to Y ursuant to a docuent coneyin all of xs riht, title and interestin the instruent to Y, ut does not delier iediate ossession to Y, Y would hae ownershi of the instruent under the aree-ent, ut Y enerally would not e entitled to enforce the instruent until it otained ossession of the instruent. d.
12 CC 3-301 also erits a erson without ossession to enforce a ortae note where, in certain circustances, there has eenistaken ayent as dened in CC 3-418(d).
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
17/31
14
nder Article 3, a holder in due course of a neotiale ortae note takes the ortae note free of
(a) all rior clais to or reardin the ortae note y any erson and () ost defenses to enforceaility of
the ortae note that ay e raised y arties with who the holder in due course has not dealt. See CC
3-305 and 3-306; see also proident bank . Counity Hoe mortae Cor., 498 F. Su. 2d 558, 565
(..N.Y. 2007). e defenses to which a holder in due course ay e suject are found in CC 3-305, and
include:
a defense of the olior ased on (i) infancy of the olior to the etent it is a defense to
a sile contract, (ii) duress, lack of leal caacity, or illeality of the transaction which,
under other law, nullies the oliation of the olior, (iii) fraud that induced the olior
to sin the instruent with neither knowlede nor reasonale oortunity to learn of its
character or its essential ters, or (i) dischare of the olior in insolency roceedins.
CC 3-305(a)(1).
How Is a Mortgage Note Transferred Under Article 9 of the UCC?
e sale of ortae notes is also oerned, in sinicant art, y Article 9. Article 9 estalishes
(1) whether the interests of a transferee of a ortae note hae oth attached and ecoe erfected so
that those interests will reail oer conictin clais of third arties and (2) the rihts of the transferee in and
to the underlyin ortae that secures the ortae note.
Article 9 addresses the sale of ortae notes, reardless of whether they are neotiale or non-
neotiale.13 more secically, Article 9 alies to a sale of . . . roissory notes. CC 9-109(a)(3). A
roissory note is dened as an instruent that eidences a roise to ay a onetary oliation, does
not eidence an order to ay, and does not contain an acknowledent y a ank that the ank has receiedfor deosit a su of oney or funds. CC 9-102(a)(65).14 gien this road denition, residential ortae
notes in coon use today are tyically roissory notes for uroses of Article 9.
nder Article 9, the sale of a ortae note (whether or not the ortae note is neotiale) is deeed
a secured transaction and the transferees security interest is autoatically erfected when it attaches (ore on
attachent and erfection elow). See CC 9-309(4). While security interests are ost coonly thouht
of as the liens otained y lenders, the CC denes the ter security interest to also include any interest of
a . . . uyer of . . . a roissory note in a transaction that is suject to Article 9. CC 1-201()(35) (ehasis
13 Article 9 also alies to the creation of a lien on, or a less-than-ownershi security interest in, a ortae note. because ostassinents and transfers of ortae notes in loan securitiations are of the ownershi of the ortae notes, not a ere lien onor security interest in the notes, this aer addresses only outriht sales of ortae notes under Article 9. e rinciles discussedelow reardin attachent of a uyers interest in a sale of ortae notes are identical to those that aly in the contet of thecreation of a lien on ortae notes, and the rinciles reardin erfection of the interest in the ortae notes are likewise erysiilar. Althouh . . . Article [9] occasionally distinuishes etween outriht sales of receiales and sales that secure an oliation,neither . . . Article [9] nor the denition of security interest (Section 1-201(37)) delineates how a articular transaction is to e
classied. at issue is le to the courts. CC 9-109 ct 4.
14 nder Article 9, the ter instruent is dened roadly as a neotiale instruent or any other writin that eidences a riht tothe ayent of a onetary oliation, is not itself a security areeent or lease, and is of a tye that in ordinary course of usinessis transferred y deliery with any necessary indorseent or assinent. CC 9-102(a)(47).
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
18/31
15
added). n addition, the denition of secured arty includes a erson to which . . . roissory notes hae een
sold. CC 9-102(a)(72)().
before a uyers security interest in a ortae note can e erfected under Article 9, the security
interest ust attach. A security interest attaches when (1) alue has een ien for the sale, (2) the seller has
rihts in the ortae note or the ower to transfer rihts in the ortae note to the uyer and (3) either (a)
the ortae note is in the ossession of the uyer ursuant to a security areeent of the seller or () the seller
has sined a written or electronic security areeent that descries the ortae note. See CC 9-203().
Article 9 denes security areeent as an areeent that creates or roides for a security interest, CC
9-102(a)(73), which, in the contet of a ortae loan securitiation, would include an areeent ursuant to
which ortaes and ortae notes are sold and transferred fro one entity to another. Such an areeent,
norally a oolin and sericin areeent or trust areeent, tyically will roide that the transfer of
the ortae note ursuant thereto eects a sale of the ortae note, which would thus, under Article 9,
constitute a security areeent.
Sinicantly, the attachent of a security interest in a ortae note that is itself secured y a security
interest or other lien on ersonal or real roerty is also attachent of a security interest in the security interest,
ortae or other lien. CC 9-203() (ehasis added). 15 Siilarly, under CC 9-308(e), erfection of
a security interest in a roissory note also erfects a security interest in a security interest, ortae, or
other lien on ersonal or real roerty securin the riht. CC 9-308(e) (ehasis added). n other words,
erfection of a security interest (which includes a sale to a uyer) in a ortae note ursuant to Article 9 also
erfects a security interest in the ortae that secures the note.
perfection of the interest in the ortae note is iortant ecause it roides the transferee of the
ortae note with a riht in the ortae note and ortae suerior to that of a susequent lien creditor of the
seller. And, erfection roides the transferee of the ortae note with a riht in the ortae suerior to that
of a susequent lien creditor of the ortaee, which includes a ankrutcy trustee (see CC 9-102(a)(52)). See
CC 9-308 ct. 6.
Transfer of Mortgage Notes: Conclusion
n suary, under the CC, the transfer of a ortae note that is a neotiale instruent is ost
coonly eected y indorsin the note, which ay e a lank or secial indorseent, and delierin the
ortae note to the transferee (or the aent actin on ehalf of the transferee). As the residential ortae
notes in coon usae tyically are neotiale instruents, this is the ost coon ethod of transfer.
n addition, een without indorseent, the assinent can e eected y transferrin ossession under CC 3-203(a). moreoer, the sale of any ortae note also eects the assinent and transfer of the ortae
under Article 9. e attachent and erfection of the uyers interest in the ortae note attaches and erfects
15 e coents to CC 9-203 eressly roide that Susection () codies the coon-law rule that a transfer of an oliationsecured y a security interest or other lien on ersonal or real roerty also transfers the security interest or lien. CC 9-203ct. 9; see also estateent (ird) of proerty (mortaes) 5.4(a) (1997). e sae holds true for CC 9-308(e), under whicherfection of a security interest in a ortae note also accolishes erfection of a security interest in the ortae. See CC 9-308 ct. 6.
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
19/31
16
the uyers interest in the underlyin ortae that secures the ortae note. Securitiation areeents oen
roide oth for (a) the indorseent and transfer of ossession to the trustee or the custodian for the trustee,
which would constitute a neotiation of the ortae note under Article 3 of the CC and () an outriht sale
and assinent of the ortae note. us, reardless of whether the ortae notes in a securitiation trust
are deeed neotiale or non-neotiale, the securitiation rocess enerally includes a alid transfer of
the ortae notes to the trustee in accordance with the elicit requireents of the CC.
3. Assignment and Transfer of Ownership of Mortgages
As descried aoe, when a ortae loan is assined and transferred as art of the securitiation of
the loan in the secondary arket, oth the ortae note and the ortae itself are tyically sold, assined,
and hysically transferred to the trustee that is actin on ehalf of the mbS inestors or to a trustee-desinated
docuent custodian ursuant to a custody areeent. e assinent and transfer are usually docuented
and erfored in accordance with a oolin and sericin areeent.
What is the Relationship Between the Transfer of a Mortgage Note and the Transfer of Ownership of theMortgage?
When a ortae note is transferred in accordance with coon ortae loan securitiation
rocesses, the ortae is also autoatically transferred to the ortae note transferee under the CC and
the eneral coon law rule that the ortae follows the note. See, e.., Carenter . onan, 83 .S. 271,
275 (1873) (e transfer of the note carries with it the security, without any foral assinent or deliery, or
een ention of the latter.); mortae lect. eistration Sys., nc. . Coakley, 41 A..3d 674, 674 (N.Y. A.
i. 2d et. 2007) (the ortae . . . assed as an incident to the roissory note); estateent (ird)
of proerty, mortaes 5.4(a) (1997) (A transfer of an oliation secured y a ortae also transfers the
ortae . . . . ).
e rule that the ortae follows the note has een codied in the CC, ut the rules coon law
oriins date ack hundreds of years, lon efore the creation of the CC. As stated in the ocial coents
to CC 9-203(), that section codies the coon-law rule that a transfer of an oliation secured y a
security interest or other lien on ersonal or real roerty also transfers the security interest or lien. CC
9-203 ct. 9.
All states follow this rule.16 n addition to the codication of the rule under CC 9-203(), reorted
16 Howeer, in soe states, such as massachusetts and minnesota, courts hae held that the transfer of a ortae note without aneress transfer of the ortae ests in the note holder only an equitale interest in the ortae. See, e.., First Natl bank ofCae Cod . North Adas Hoosac Sas. bank, 7 mass. A. Ct. 790, 796 (1979); Jackson . mortae lect. eistration Sys., nc.,770 N.W.2d 487, 497, 500-01 (minn. 2009). is arraneent has een descried as follows: the holder of the ortae holds theleal title to the ortae in constructie trust for the enet of the ortae note holder. See First Natl bank of Cae Cod, 7mass. A. Ct. at 796. n oth states, howeer, case law suests that foreclosure roceedins ust e initiated y, or at least in thenae of, the holder of the leal title in the ortae. See Jackson, 770 N.W.2d at 500; .S. bank Natl Assn . ane, Nos. 08 mSC384283 (C), 08 mSC 386755 (C), 2009 W 3297551, at *11 (mass. and Ct. Oct. 14, 2009) (rejectin aruent that noteholders had authority to foreclose on ortaes for which their status as full ortaees was in disute) (currently on aeal to themassachusetts Suree Judicial Court).
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
20/31
17
court cases in nearly eery state and non-CC statutory roisions in soe states ake clear that the ortae
follows the note:
Alabama: Arour Fertilier Works . zills, 177 So. 136, 138 (Ala. 1937) (when the note is secured y
a ortae, such ortae follows the note).
Arizona: Ari. e. Stat 33-817 (e transfer of any contract or contracts secured y a trust deed
shall oerate as a transfer of the security for such contract or contracts.).
Arkansas: each . First Cty. bank, No. CA 07-05, 2007 W 2852599, at *1 (Ark. A. Ct. Oct. 3, 2007)
(Arkansas has lon followed the rule that, in the asence of an areeent or a lain anifestation of a
contrary intention, the security of the oriinal ortae follows the note or renewal thereof.).
California: Cal. Ci. Code 2936 (e assinent of a det secured y ortae carries with it the
security); n re Sta mortae & nest. Cor., 625 F.2d 281, 284 (9 th Cir. 1980) (in California, [A]
deed of trust is a ere incident of the det it secures and . . . an assinent of the det carries with it
the security. (internal quotation oitted)).
Colorado: Carenter . onan, 83 .S. 271, 275 (1873) (in an aeal fro the Suree Court of
Colorado Territory, the nited States Suree Court stated: e transfer of the note carries with it
the security, without any foral assinent or deliery, or een ention of the latter.).
Connecticut: Conn. gen. Stat. 49-17 (When any ortae is foreclosed y the erson entitled to
receie the oney secured therey ut to who the leal title to the ortaed reises has neer
een coneyed, the title to such reises shall, uon the eiration of the tie liited for redetion
and on failure of redetion, est in hi in the sae anner and to the sae etent as such title
would hae ested in the ortaee if he had foreclosed, roided the erson so foreclosin shallforthwith cause the decree of foreclosure to e recorded in the land records in the town in which the
land lies.); n re AmSCO, nc., 26 b.. 358, 361 (bankr. . Conn. 1982) (An assinent of the note
carries the ortae with it . . . .).
District of Columbia: Hill . Hawes, 144 F.2d 511, 513 (.C. Cir. 1944) (aer ortae note has een
cancelled, cancellation of any ortae follows as a atter of course and does not require a searate
action).
Florida: Caital nestors Co. . rs of state of morrison, 484 F.2d 1157, 1163 n.12 (4th Cir. 1973)
(at the ortae follows the note it secures and deries neotiaility, if any, fro the note is the
rule in Florida where the land under ortae in this case was located. (citin aniels . at, 237
So.2d 58, 60 (Fla. A. 1970); meyerson . boyce, 97 So.2d 488, 489 (Fla. A. 1957))); mariewic .
Terco proerties, 441 So.2d 1124, 1125 (Fla. ist. Ct. A. 1983) (when a note secured y a ortae
is assined, the ortae follows the note into the hands of the ortaee).
Illinois: Federal Natl mort. Assn . uiers, 314 ll. A.3d 631, 635, 732 N..2d 723, 727 (ll. Ct. A.
2000) (e assinent of a ortae note carries with it an equitale assinent of the ortae y
which it was secured. e assinee stands in the shoes of the assinor-ortaee with reard to the
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
21/31
18
rihts and interests under the note and ortae. . . . []n llinois, the assinent of the ortae note
is sucient to transfer the underlyin ortae.) (citations oitted).
Indiana: aow . badollet, 1 blackf. 416, 1826 W 1087, at *3 (nd. 1826) (a ortae . . . follows the
det into whose hands soeer it ay ass).
Iowa: breer County bank . astan, 34 owa 392, 1872 W 254, at *1 (owa 1872) (e transfer
of the note, secured y the ortae, carried the ortae with it as an incident to the det, and the
indorsee of the note could aintain an action in his own nae, to foreclose the ortae without any
assinent thereon whateer.).
Kansas: an. Stat. Ann 58-2323 (e assinent of any ortae as herein roided shall carry
with it the det therey secured.); bank Western . Henderson, 255 an. 343, 354, 874 p.2d 632, 640
(1994) ([T]he ortae follows the note. A erfected clai to the note is equally erfected as to the
ortae.).
Maryland: n re bird, No. 03-52010-JS, 2007 W 2684265, at *2-4 (bankr. .md. Set. 7, 2007) (enote and ortae are insearale; the forer as essential, the latter as an incident. An assinent of
the note carries the ortae with it . . . .).
Massachusetts: e transfer of a ortae note, without the eress transfer of the ortae, ests
in the note holder an equitale interest in the ortae (an interest that can e enforced y the note
holder) and the ortae holder is deeed to hold the ortae in constructie trust for the enet of
the note holder. See Weiner . brother, 263 mass. 61, 62 (1928); barnes . boardan, 149 mass. 106,
114 (1889); morris . bacon, 123 mass. 58, 59 (1877); First Natl bank of Cae Cod . North Adas
Hoosac Sas. bank, 7 mass. A. Ct. 790, 796 (1979); see also n re y proerties, nc., 109 b.. 10, 14
(bankr. . mass. 1989) ([]nder massachusetts coon law the assinent of a det carries with
it the underlyin ortae, without necessity for the rantin or recordin of a searate ortae
assinent.).
esite the aoe cited authorities, the massachusetts and Court in a recent oinion cast dout on
the ortae follows the note rule:
[]en a alid transfer of the note does not autoatically transfer the ortae. . . . e
holder of the note ay hae an equitale riht to otain an assinent of the ortae y
lin an action in equity, ut that is all it has. . . . e ortae itself reains with the ort-
aee (or, if roerly assined, its assinee) who is deeed to hold the leal title in trust for
the urchaser of the det until the foral assinent of the ortae to the note holder or,
asent such assinent, y order of the court in an action for coneyance of the ortae.
. . . but . . . the riht to et soethin and actually hain it are two dierent thins.
.S. bank Natl Assn . ane, Nos. 08 mSC 384283 (C), 08 mSC 386755 (C),
2009 W 3297551, at *11 (mass. and Ct. Oct. 14, 2009) (citations oitted).
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
22/31
19
e ane case aears to stand in stark contrast to the rinciles eodied in the CC.
e ane case is currently endin on aeal efore the massachusetts Suree Judicial
Court, that states hihest court.
Michigan: prie Fin. Ser. . vinton, 279 mich. A. 245, 257, 761 N.W.2d 694, 704 (mich. Ct. A.
2008) (the transfer of a note necessarily includes a transfer of the ortae with it) (citin ginser. Caitol City Wreckin Co., 300 mich. 712, 717, 2 N.W.2d 892 (1942)); Jones . Titus, 208 mich. 392,
397, 175 N.W. 257, 259 (mich. 1919) (when a note ien with a ortae was indorsed oer to a third
arty it carried with it the equitale title to the ortae).
Minnesota: Jackson . mortae lect. eistration Sys., nc., 770 N.W.2d 487, 497 (minn. 2009)
(Asent an areeent to the contrary, an assinent of the roissory note oerates as an equitale
assinent of the underlyin security interest.) (ehasis in oriinal).
Mississippi: Holes . mcginty, 44 miss. 94, 1870 W 4406, at *4 ([T]he ortae . . . follows the
det as an incident, and is a security for whosoeer ay e the enecial owner of it.).
Missouri: geore . Surka, 76 S.W.2d 368, 371 (mo. 1934) (when the holder of the roissory note
assins or transfers the note, the deed of trust is also transferred).
Montana: First Natl bank . va, 65 mont. 34, 212 p. 509, 511 (mont. 1922) (e note and ortae
are insearale; the forer as essential, the latter as an incident. An assinent of the note carries
the ortae with it, while the assinent of the latter alone is a nullity. e ortae can hae no
searate eistence.) (citations oitted).
Nebraska: n re nion packin Co., 62 b.. 96, 100 (bankr. . Ne. 1986) (with or without the
assinent of the ortae, the assinee of the roissory note has the riht to enforce the ortaesecurin the note).
New Hampshire: Southerin . mendu, 5 N.H. 420, 1831 W 1104, at *7 (N.H. 1831) (When a
ortaee transfers to another erson , the det which is secured y the ortae, he ceases to hae
any control oer the ortae. . . . And we are of the oinion, that the interest of the ortaee asses
in all cases with the det, and that it is not within the statute of frauds, ecause it is a ere incident to
the det, has no alue indeendent of the det, and cannot e searated fro the det.).
New Jersey: n re ennedy mort. Co., 17 b.. 957, 966 (bankr. . N.J. 1982) (Anyone interested in
acquirin an interest in the ortae would e olied to otain an interest in the det.).
New York: mortae lec. eistration Sys., nc. . Coakley, 41 A..3d 674, 838 N.Y.S.2d 622 (A.
i. 2007) (at the tie of the coenceent of this action, mS was the lawful holder of the
roissory note (see CC 3-204[1]; Franese . Fidelity N.Y. FSb, 214 A..2d 646, 625 N.Y.S.2d 275),
and of the ortae, which assed as an incident to the roissory note (see payne . Wilson, 74 N.Y.
348, 354-355; see also Weaer Hardware Co. . Solooit, 235 N.Y. 321, 139 N.. 353; matter of Falls,
31 misc. 658, 660, 66 N.Y.S. 47, a d. 66 A. . 616, 73 N.Y.S. 1134) (ehasis added); proident bank
. Counity Hoe mortae Cor.,498 F. Su. 2d 558, 564-65 (..N.Y. 2007) (alyin rincile
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
23/31
20
that the ortae follows the note).
North Carolina: iie grocery Co. . Hoyle, 204 N.C. 109, 167 S.. 469 (1933) (e ortae follows
the det.).
Ohio: .S. Natl bank Assn . marcino, 181 Ohio A.3d 328, 337 (2009) ([T]he neotiation of a
note oerates as an equitale assinent of the ortae, een when the ortae is not assined
or deliered. uck . Soers (1950), 100 N..2d 68, 75, 59 Ohio As. 400. various sections of the
nifor Coercial Code, as adoted in Ohio, suort the conclusion that the owner of a roissory
note should e reconied as the owner of the related ortae. . . . us, althouh the recorded
assinent is not efore us, there is sucient eidence on the record to estalish that aellee is the
current owner of the note and ortae at issue in this case, and, therefore, the real arty in interest.)
(citations to Ohios ersions of CC 9-109(a)(3), 9-102(a)(72)() and 9-203() oitted).
Oklahoma: zorn . van buskirk, 111 Okla. 211, 239 p. 151 (1925) (the ortae follows the note).
Pennsylvania: n re miller, No. 99-25616JA, 2007 W 81052, at *6 & n.7 (bankr. W.. pa. Jan.9, 2007) (citin and quotin with aroal gray, mortaes in pennsylania at 1-3 (1985) (the
ortae follows the note)).
South Carolina: midFirst bank, SSb . C.W. Haynes & Co., nc., 893 F. Su. 1304, 1318 (. S.C. 1994)
(South Carolina reconies the failiar and uncontroerted roosition that the assinent of a
note secured y a ortae carries with it an assinent of the ortae. Hahn . Sith, 157 S.C. 157,
154 S.. 112 (1930); ballou . Youn, 42 S.C. 170, 20 S.. 84 (1894).).
Texas: iry uer Cor. . Willias, 230 F.2d 330, 333 (5th Cir. 1956) (alyin Teas law) (e
rule is fully reconied . . . that a ortae to secure a neotiale roissory note is erely an incidentto the det, and asses y assinent or transfer of the note.).
Utah: Sith . Jaran, 211 p. 962, 966 (tah 1922) (e odern doctrine that the ortae follows
the note as an incident was thus lon ao reconied y this court . . . .).
Virginia: Yery . ynch, 3 gratt. 460, 1847 W 2384, at *8-10 (va. 1847) (the ortae follows the
det).
Virgin Islands: mC vp C . matthias, 234 F. Su. 2d 520, 523 (. v.. 2002) (citin and quotin
with aroal the STATmNT (TH) OF pOpTY, mOTgAgS 5.4(a) (1997). e
coent to this section further elains that [t]he rincile of this susection, that the ortaefollows the note, ... alies een if the transferee does not know that the oliation is secured y a
ortae.... ecordation of a ortae assinent is not necessary to the eectie transfer of the
oliation or the ortae securin it. d. 5.4 ct. (1997). Accordinly, in the virin slands,
no searate docuent secically assinin and transferrin the ortae which secures a note is
required to accoany the assinent of the oliation, ecause the ortae autoatically follows
the note.).
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
24/31
21
Washington: Nance . Woods, 79 Wash. 188, 189, 140 p. 323, 323 (Wash. 1914) (the ortae follows
the note).
As entioned aoe, the eneral coon law rule that the ortae follows the note is codied
in Article 9 of the CC. Section 9-203() of the CC states: e attachent of a security interest in a riht
to ayent or erforance secured y a security interest or other lien on ersonal or real roerty is alsoattachent of a security interest in the security interest, ortae, or other lien.17 CC 9-203() (ehasis
added). e hrase security interest in this roision includes a uyers ownershi interest ecause CC
1-201()(35) denes security interest to include any interest of a . . . uyer of . . . a roissory note in
a transaction that is suject to Article 9. us, under Article 9, a sale of a ortae note eans that the
uyers rihts attach not only to the ortae note itself ut also to the ortae that secures the ortae
note. moreoer, under CC 9-308(e), those rihts are erfected and can e enforced aainst third arties.18
eardin the iact of these CC roisions, one treatise states: Article 9 akes it as lain as ossile that
the secured arty need not record an assinent of ortae, or anythin else, in the real roerty records
in order to erfect its rihts in the ortae. J. mconnell and J. Sith, Secured Transactions nder thenifor Coercial Code, 16.09[3][].
Courts in seeral states hae ared and alied the ortae follows the note rule in cases where
the ortae assinent was not recorded y the transferee.19 See, e.., Natl iestock bank . First Nat. bank,
203 .S. 296, 307-08 (1906) (citin with aroal a decision of the Suree Court of ansas for the roosition
that where a ortae uon real estate is ien to secure ayent of a neotiale note, and efore its aturity
the note and ortae are transferred y indorseent of the note to a ona de holder, the assinent, if there
e a written one, need not e recorded); Jackson . mortae lec. eistration Sys., nc., 770 N.W.2d 487,
497-98, 500 (minn. 2009) (alyin the ortae follows the note rule where there was no assinent of the
ortae); mC vp C . matthias, 234 F. Su. 2d 520, 523 (. v.. 2002) (ecordation of a ortaeassinent is not necessary to the eectie transfer of the oliation or the ortae securin it.); Federal
Natl mort. Assn . uiers, 314 ll. A. 3d 631, 635, 732 N..2d 723, 727 (ll. Ct. A. 2000) (because the
assinent of the det, with nothin ore, is sucient to resere the ortae lien, it cannot follow that the
lien is soehow etinuished for the failure to record the assinent. erefore, we are ersuaded that the
17 Courts hae osered that CC 9-203() codies the ortae follows the note rule. See, e.., .S. Natl bank Assn . marcino,181 Ohio A.3d 328, 337 (2009) (quotin with aroal Ocial Coent 9 to CC 9-203: susection () [of CC 9-203]
codies the coon-law rule that a transfer of an oliation secured y a security interest or other lien on ersonal or real ro-erty also transfers the security interest or lien).
18 As discussed aoe, CC 9-308(e) roides that erfection of a security interest in a riht to ayent or erforance alsoerfects a security interest in a security interest, ortae, or other lien on ersonal or real roerty securin the riht. CC 9-308(e) (ehasis added).
19 n ost states, recordin of an assinent of ortae is enerally not required to ensure the enforceaility of the assinent ofortae as etween the assinor and assinee, and anyone with knowlede thereof. t is eyond the scoe of this aer to discussin detail the otential risks to the ortae transferee of not recordin a ortae assinent. ose risks iht include, aonothers, delayin the transferees aility to foreclose on the ortae, failin to receie notices that ay o to the ortaee of re-cord, and otherwise leain the assinee oen to nelient or fraudulent actions or inactions y the ortaee of record that couldind the ortae transferee and iair the alue or enforceaility of the ortae. Siilarly, when an assinent of ortaeis not recorded, the assinor ay e liale for certain oliations iosed uon a ortaee of record, such as the oliation toroide a ay-o stateent or ortae release within a desinated tie eriod.
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
25/31
22
ortae lien and riority osition inure to the enet of the assinee and that recordin the assinent is
unnecessary to resere the security for the det.); n re ennedy mortae Co., 17 b.. 957, 964 (bankr. .N.J.
1982)(e fact that assinents of ortaes ay e recorded does not aect the alidity of an assinent
of a ortae which has not een recorded.).
Courts hae also ared and alied the ortae follows the note rule een when there was no
actual searate written assinent of the ortae. See, e.., Carenter . onan, 83 .S. 271, 275 (1873) (e
transfer of the note carries with it the security, without any foral assinent or deliery, or een ention
of the latter.); Chase Hoe Fin., C . Fequiere, 119 Conn. A. 570, 989 A.2d 606, 610-11 (Conn. Ct. A.
2010) (general Statutes 49-17 [which codies the ortae follows the note rule] erits the holder of
a neotiale instruent that is secured y a ortae to foreclose on the ortae een when the ortae
has not yet een assined to hi. (ehasis added)); .S. Natl bank Assn . marcino, 181 Ohio A.3d 328,
337 (2009) (holdin that ank was the current owner of a ortae note and the related ortae desite
the fact that there is no eidence on the record that aellee is the current assinee of the note and ortae,
and ndin that the neotiation of a note oerates as an equitale assinent of the ortae, een when the
ortae is not assined or deliered (citin uck . Soers, 100 N..2d 68, 75, 59 Ohio As. 400 (1950));
mC vp C . matthias, 234 F. Su. 2d 520, 523 (. v.. 2002) (the rincile that the ortae follows
the note, . . . alies een if the transferee does not know that the oliation is secured y a ortae); n re
nion packin Co., 62 b.. 96, 100 (bankr. . Ne. 1986) (with or without the assinent of the ortae,
the assinee of the roissory note has the riht to enforce the ortae securin the note); morris . bacon,
123 mass. 58, 59 (1877) (note holder that endorsed and deliered ortae note to ank as security for a
loan, ut without an assinent of the ortae, was required y the court to transfer the ortae to the
ank); breer County bank . astan, 34 owa 392, 1872 W 254, at *1 (owa 1872) (e transfer of the
note, secured y the ortae, carried the ortae with it as an incident to the det, and the indorsee of the
note could aintain an action in his own nae, to foreclose the ortae without any assinent thereon
whateer.); Southerin . mendu, 5 N.H. 420, 1831 W 1104, at *8 (N.H. 1831) (the riht of the ortaee
efore foreclosure is . . . assinale y a ere assinent of the det, without deed or writin).
Coon mbS ractices, as descried aoe, are consistent with the eneral rule that the ortae
follows the note: ursuant to the oolin and sericin areeent that oerns a ortae-loan securitiation,
and the lanuae of assinent tyically contained in such an areeent, the ortae note and the ortae
itself are sold, assined, transferred and deliered to the trustee, and the transferor also tyically deliers a
written assinent of the ortae that is in lank in recordale for. Courts hae held that the lanuae of
assinent contained in a oolin and sericin areeent, alon with the corresondin transfer, sale and
deliery of the ortae note and ortae, are sucient to transfer the ortae to the transferee/trustee
or its desinee or noinee. See, e.., Wells Faro bank, N.A. . onoer, No. 3:05 Cv 1924 (CF), 2009 W
2710229, at *3 (. Conn. Au. 21, 2009) (mbS oolin areeent ested authority in ool trustee to rin leal
action in the eent of default); .S. bank N.A. . Cook, No. 07 C 1544, 2009 W 35286, at *2-3 (N.. ll. Jan. 6,
2009) (mbS oolin trust areeent eected an assinent of the ortae at issue to the ool trustee); n re
Sauels, 415 b.. 8, 18 (bankr. . mass. 2009) (e [poolin and Sericin Areeent] itself [y which the
mbS loan trust was created], in conjunction with the schedule of ortaes deosited throuh it into the ool
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
26/31
23
trust, sered as a written assinent of the desinated ortae loans, includin the ortaes theseles.);
mC mortae Cor. . Chaudhri FSb, 400 N.J. Suer. 126, 141, 946 A.2d 578, 588 (N.J. Suer. Ct. 2008) (any
[ortae] assinent shall ass and coney the estate of the assinor in the ortaed reises, and the
assinee ay sue thereon in his own nae. (citin New Jersey Stat. Ann. 46:9-9 and byra Holdin Co. .
boren, 2 N.J. Suer. 331, 336, 63 A.2d 822 (N.J. Ch. i. 1949)); aSalle bank N.A. . ehan bros. Holdins,
nc., 237 F. Su. 2d 618, 632-33 (. md. 2002) (mbS oolin areeent ranted trustee authority to rin suit
on ehalf of trust); aSalle bank N.A. . Noura Asset Caital Cor., 180 F. Su. 2d 465, 470-71 (S..N.Y.
2001) (lanuae in the oolin and sericin areeent for mbS trust eectually assined ortae to the
ool trustee).20
What is the Relationship Between the UCC and State Real Property Laws?
Article 9 does not aly to the creation or transfer of an interest in or lien on real roerty, . . .
ecet to the etent that roision is ade for . . . liens on real roerty in Sections 9-203 and 9-308. CC
9-109(d)(11) (ehasis added). As discussed aoe, CC 9-203() roides that, when a security interestin a ortae note attaches, a security interest in the underlyin ortae also attaches, and CC 9-308(e)
roides the sae reardin the erfection of the security interest. See CC 9-203 ct. 9 (the ortae
follows the note rule codied into CC 9-203() and 9-308(e)). n addition, CC 9-109() akes clear
that Article 9 does aly to ortae notes een thouh Article 9 does not oern the creation of the ortae
itself:
e alication of this article [9] to a security interest [reeer that this ter is dened
to include any interest of a uyer of a roissory note in a transaction suject to Article
9] in a secured oliation [e.., ortae note] is not aected y the fact that the olia-
tion [e.., ortae note] is itself secured y a transaction or interest [e.., creation of the
ortae or deed of trust itself] to which this article does not aly.
CC 9-109().21
e creation of an interest in or lien on real roerty, includin a ortae, is
oerned y the non-CC law of the state in which the roerty is located. See, e.., Oreon . Corallis Sand
and grael Co., 429 .S. 363, 378-79 (1977).ikewise, the enforceaility of ortaes (includin the riht and
20 Althouh the rule is the ortae follows the note when a ortae note is assined, soe case law indicates that the conerse isnot true and that the ortae note does not necessarily follow the ortae if there is an atteted assinent of the ortaealone or searate fro the ortae note. See, e.., bellistri . Ocwen oan Sericin, C, 284 S.W.3d 619, 623 (mo. Ct. A.2009) (An assinent of the deed of trust searate fro the note has no force.); Saon mort. Ser., nc. . Hillery, No. C-08-4357mC, 2008 W 5170180, at *4-5 (N.. Cal. ec. 9, 2008) (For there to e a alid assinent, there ust e ore than just assin-ent of the deed [of trust] alone; the note ust also e assined.); n re Wilhel, 407 b.. 392, 400-05 (bankr. . daho 2009);elley . shaw, 39 Cal.2d 179, 192 (1952) (n any eent, elleys urorted assinent of the ortae without an assinentof the det which is secured was a leal nullity.). is is consistent with the lonstandin asect of the ortae follows the noterule that the note and ortae are insearale; the forer as essential, the latter as an incident. n re bird, No. 03-52010-JS, 2007
W 2684265, at *2-4 (bankr. .md. Set. 7, 2007).
21 CC Article 3, which alies to neotiale ortae notes, does not aly to ortaes theseles ecause ortaes do not tthe denition of neotiale instruent in CC 3-104(a).
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
27/31
24
ethod to foreclose) is suject to all of the conditions recedent and requireents that are set forth in the
articular ortae itself and in all alicale state and local laws. ose conditions recedent and rocedural
requireents ary fro ortae to ortae and fro state to state. us, ownershi of a ortae (i.e.,
without notice to the ortaor or the ulic, without judicial roceedins (where required), without
satisfaction of other conditions recedent or rocedural requireents in the ortae itself or in alicale
state law), does not always ie the holder of the ortae the leal aility to foreclose on the ortae.
ouh a discussion of the other necessary rerequisites to foreclosure is eyond the scoe of this aer, the
fact that other stes ay need to e taken y the owner of a ortae note, or the owner of a ortae, is
neither unique nor surrisin in our leal and reulatory syste and does not diinish an otherwise leally
eectie transfer of the ortae note and ortae.
How Does the Use of MERS Aect ese Issues?
e use of mS as the noinee for the enet of the trustee and other transferees in the ortae
loan securitiation rocess has een a suject of litiation in recent years. See, e.., bellistri . Ocwen oanSericin, C, 284 S.W.3d 619, 623 (mo. Ct. A. 2009). Soe cases address the authority or aility of mS
or transferees of mS to foreclose on a ortae for which mS is or was the ortaee of record. See, e..,
Saon mort. Ser., nc. . Hillery, No. C-08-4357 mC, 2008 W 5170180, at *4-5 (N.. Cal. ec. 9, 2008). As
a eneral atter, the assinent and transfer of a ortae to mS as noinee of and for the enet of the
enecial owner of the ortae does not adersely iact the riht to foreclose on the ortae.
ecisions in any jurisdictions suort this conclusion. See, e.., n re mortae lect. eistration
Sys., nc. (mS) iti., No. 2:09-d-2119, 2010 W 4038788, at *8 (. Ari. Set. 30, 2010) (plaintis hae
not cited any leal authority where the nain of mS . . . was cause to enjoin a non-judicial foreclosure as
wronful.); Coonwealth proerty Adocates, C . mortae lect. eistration Sys., nc., No. 2:10-Cv-340 TS, 2010 W 3743643, at *3 (. tah Set. 20, 2010) (mS as noinee has authority to foreclose); Taylor
. eutsche bank Natl Trust Co., No. 509-4035, 2010 W 3056612, at *3 (Fla. A. Au. 6, 2010) ([T]he
written assinent of the note and ortae fro mS to eutsche bank roerly transferred the note and
ortae. . . . e transfer, oreoer, was not defectie y reason of the fact that mS lacked a enecial
ownershi interest in the note at the tie of the assinent, ecause mS was lawfully actin in the lace
of the holder and was ien elicit and areed uon authority to ake just such an assinent.); mortae
lect. eistration Sys., nc. . bellistri, No. 4:09-Cv-731 CAS, 2010 W 2720802, at *15 (.. mo. July 1, 2010)
([a]s the noinee of the oriinal lender or the lenders assins, mS has are leal title to the note and
deed of trust securin it, and this is sucient to create standin to initiate foreclosure roceedins); Silas .gmAC mortae, C, No. Cv-09-265-pHx-gmS, 2009 W 4573234, at *8 (. Ari. Jan. 5, 2010) (mS
eowered to foreclose where mS is desinated on deed of trust as eneciary); iessner . mortae lec.
eistration Sys., 618 F. Su. 2d 1184, 1187-91 (. Ari. 2009) (mS and trustee under deed of trust are
authoried to institute non-judicial foreclosure roceedin); Jackson . mortae lec. eistration Sys., nc.,
770 N.W.2d 487, 501 (minn. 2009) (rejectin aruent that transfer of ortae note to mS is a transfer that
ust e recorded efore foreclosure); eynoso . paul Financial, C, No. 09-3225 SC, 2009 W 3833298, at *2
(N.. Cal. No. 16, 2009) (nain of mS as initial eneciary under deed of trust, as noinee for the lender,
8/8/2019 ASF White Paper 11-16-10 Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Mar
28/31
25
and the susequent transfer of the deed of trust fro mS to a transferee was eectie and did not hinder
transferees riht to foreclose); blau . Aericas Sericin Co., No. Cv-08-773, 2009 W 3174823, at *8 (.
Ari. Set. 29, 2009) (mS authoried under deed of trust to act on ehalf of lender and transfer its interests);
Farahani . Cal-Western econ. Cor., No. 09-194, 2009 W 1309732, at *2-3 (N.. Cal. may 8, 2009) (mS
authoried to ursue non-judicial foreclosure action); vaque . Aurora oan Sers., No 2:08-c-01800-CJ-
JJ, 2009 W 1076807, at *1 (. Ne. Ar. 20, 2009) (loan docuents suciently deonstrate mS standin
with resect to the loan and the foreclosure); pfannenstiel . mortae lect. eistration Sys., nc., No. Cv
S-08-2609, 2009 W 347716, at *4 (.. Cal. Fe. 11, 2009) (disissin laintis clai that mS lacked
authority to foreclose); Trent . mortae lect. eistration Sys., nc., 288 Fed. A 571, 572 (11th Cir. 2008)
(mS has the leal riht to foreclose on the detors roerty and is the ortaee); peyton . econtrust
Co., No. TC021868, Notice of ulin, at 2 (Cal. Suer. Ct. County of os Aneles S. Cent. ist. Oct. 15, 2008)
(mS ay foreclose under California law); Johnson . mortae lect. eistration Sys., nc., 252 Fed. A
293, 294 (11th Cir. 2007) (suary judent for mS on its action for foreclosure of laintis roerty);
n re Sith, 366 b.. 149, 151 (bankr. . Colo. 2007) (mS has standin to conduct foreclosure on ehalf of
the eneciary); mortae lect. eistration Sys., nc. . eoredo, 955 So.2d 33, 34 (Fla. ist. Ct. A. 2007)
(because, howeer, it is aarent and we so hold that no sustantie rihts, oliations or defenses are
aected y use of the mS deice, there is no reason why ere for should oercoe the salutary sustance
of erittin the use of this coercially eectie eans of usiness.); mortae lect. eistration Sys., nc.
. ventura, Cv054003168S, 2006 W 1230265, at *1 (Conn. Suer. Ar. 20, 2006) (mS i