Tag Archives: Permanent Editorial Board for the Uniform Commercial Code

Should The Mortgage Follow The Note?

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

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

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

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

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

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

Open Season on Homeowners

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A case coming out of California, Peng v. Chase Home Finance LLC et al., No. B245436 (California Courts of Appeal Second App. Dist., Div. 8, April 8th, 2014, has attracted a lot of attention in the blogosphere. This is particularly notable because this case is not to be published in the official reports and thus has no precedential value. Judge Rubin’s dissent has attracted much of the attention. It opens,

The promissory note signed by appellants Jeffry and Grace Peng obligated them to repay their home loan. In August 2007, Freddie Mac acquired the promissory note from Chase. Based on Freddie Mac owning the note, appellants seek to amend their complaint to allege Chase did not have authority to enforce the promissory note or to foreclose on their home, but the majority rejects appellants’ proposed amendment. Relying on case law rebuffing a homeowner’s challenge to a creditor-beneficiary’s authority to foreclose, the majority notes that courts have traditionally reasoned that the homeowner’s challenge is futile because, even if successful, the homeowner “merely substitute[s] one creditor for another, without changing [the homeowner’s] obligations under the note.” (Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 271.) The only party prejudiced by an illegitimate creditor-beneficiary’s enforcement of the homeowner’s debt, courts have reasoned, is the bona fide creditor-beneficiary, not the homeowner.

Such reasoning troubles me. I wonder whether the law would apply the same reasoning if we were dealing with debtors other than homeowners. I wonder how most of us would react if, for example, a third-party purporting to act for one’s credit card company knocked on one’s door, demanding we pay our credit card’s monthly statement to the third party. Could we insist that the third party prove it owned our credit card debt? By the reasoning of Fontenot and similar cases, we could not because, after all, we owe the debt to someone, and the only truly aggrieved party if we paid the wrong party would, according to those cases, be our credit card company. I doubt anyone would stand for such a thing. (Dissent, 1)

The dissent’s concern is justified. As Professor Whitman has recently noted on the Dirt Listserv and elsewhere, it is a “bizarre notion that anyone can foreclose a mortgage without showing that they have the right to enforce the note.” He also notes that the majority (and even the dissent) in Peng confuse ownership of the note with the right to enforce it. Until courts fully understand how the UCC governs the enforcement of notes, one should worry that some state court judges might declare an open season on homeowners as the majority does here in Peng.

(Non-)Enforcement of Securitized Mortgage Loans

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

The full information on this program is as follows:

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

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

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

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

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

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