The American Securitization Forum (ASF) has issued an extensive White Paper to clarify the legal principles and processes underpinning the assignment and transfer of home mortgages and the creation of mortgage-backed securities (MBS). As the study articulates, many of the principles underlying the transfer of mortgage notes and mortgages are centuries old and validated through extensive case law.
Recently, however, in the midst of the worst housing crisis since the Great Depression, some have questioned whether these traditional principles can be reconciled with modern securitization systems. The study makes clear that the answer is an unequivocal yes. Common law, as well as the Uniform Commercial Code (UCC), continue to validate the legality and enforceability of proper ownership rights in securitizations.
“As our study highlights, the principles and processes involved in securitiza-tion result in valid and enforceable transfer of ownership of mortgage notes and underlying mortgages,” said Tom Deutsch, executive director of the ASF. “Further, the transfer and legal effectiveness of such ownership is not diminished by the fact that the right to foreclose maybe subject to additional conditions and requirements of a particular mortgage.”
Two documents lie at the heart of most residential mortgage transactions. They are the “mortgage note” in which a borrower promises to repay the loan plus interest and the “mortgage” which is held as security. Most mortgage notes are considered negotiable and may be sold and transferred multiple times under provisions of the UCC which has been adopted by all 50 states and the District of Columbia. The law of negotiable items has been developed over hundreds of years as a way to encourage commerce by making such instruments, including negotiable mortgage notes, as liquid and transferable as possible.
Under the UCC, the assignment and transfer of ownership of a mortgage note is most commonly effected by endorsing the note, which may be a blank endorsement that does not identify a person to whom the note is payable or a special indorsement that does. Thus, under this mechanism, the securitization process provides a valid transfer of mortgage notes to trustees. In addition, the UCC permits a person without possession to enforce a mortgage note where the note has been lost, stolen or destroyed. Courts have consistently upheld this right nationwide.
Importantly, when ownership of a mortgage note is transferred in accordance with common securitization processes, ownership of the mortgage is also automatically transferred pursuant to the general common law rule that “the mortgage follows the note.” The rule that “the mortgage follows the note” dates back centuries and has been codified in the UCC. In essence this means, and numerous courts have affirmed, that the assignment of a mortgage to a trustee does not need to be recorded in real property records in order for it to be a valid and binding transfer.
“The longstanding and consistently applied rule in the United States is that ‘the mortgage follows the note,” said Deutsch. “When a mortgage note is transferred in connection with a securitization, ownership of the mortgage automatically follows and is transferred to the mortgage note transferee.”
In some transactions, the mortgage originator names Mortgage Electronic Registration Systems (MERS) as its nominee and record keeper and MERS becomes the mortgagee of record. The use of MERS has been challenged, however, on the grounds MERS does not have the authority to foreclose on a mortgage. As a general matter, though, courts in a number of jurisdictions have found the assignment and transfer of mortgages to MERS does not adversely impact the ability to foreclose on a mortgage.
Certainly, there are several minority decisions that, in some form, have taken issue with MERS. But it is important to note that not one of these decisions has invali-dated a mortgage where MERS is the nominee and not one of these decisions has challenged MERS’ ability to act as a central system to track changes in the ownership and servicing of mortgage loans.
Thirteen major U.S. law firms noted in the document have reviewed the White Paper and believe that the Executive Summary contained therein represents a fair summary of the legal principles presented.
Click here to view the White Paper, “Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market.”
For more information, visit www.americansecuritization.com.
