MAX GARDNERS’ DIRTY DOZEN RULES FOR OWNERSHIP OF THE MORTGAGE NOTE - A BAKERS DOZEN.
Unbroken Chain of Transfers and Assignments
1. In the case of a Residential Mortgage-Backed Securitized Trust, it is always necessary for the Trust to establish an unbroken chain of transfers of the mortgage note from the originator to the trust. The objective of the securitization process is to make the mortgage notes as “bankruptcy remote” as is legally possible from any claims against the originator. Such claims would include those of a Trustee in a bankruptcy proceeding or the FDIC as a conservator in the case of a bank failure. The operative document for the mandatory note transfer rules in connection with mortgage notes is the PSAt. The applicable statutory law includes Articles 3 and 9 of the Uniform Commercial Code, the PSAt, any applicable special local statutes related to real estate law. Also, a mortgage note is transferred by negotiation. Negotiation means the transfer of possession by a person other than the issuer to a person who thereby becomes the holder.
Originator to Sponsor to Depositor to Trust
2. In the simplest securitized model, the parties to the mandatory chain of transfers include the originator, the sponsor, the depositor and the designated Trustee for the Trust. Almost every Trust is organized as a common law trust under the laws of Delaware or New York. The legal rights of common law trust are limited to the rights granted in the statutory enabling instrument. Each tranche of bond holders has a different interest in the principal and interest income streams generated by the mortgage notes in the Trust or from fees and charges recovered by the servicers from the consumers. The originator may also have a residual interest in the Trust by virtue of acquiring the lowest-rated tranches of bonds. The rights of these bond holders are specified in the Pooling and Servicing Agreement, the Prospectus and the Prospectus Supplement. The issue of ownership of the mortgage notes is not the same as whether or not the Trust has a perfected security interest in the residential r
Endorsement and Transfer of the Original Note
3. The original mortgage notes may be endorsed to a named transferee by each necessary party in the chain of transfers but: a. Generally, endorsements must appear at foot of the note if there is room for such endorsements (some cases have held substantial compliance is sufficient); b. If there is not sufficient room at foot or end of the note for such endorsements, then they may appear on an allonge, which must be permanently affixed to the note; c. The endorsements are not required to be notarized; d. The Endorsements do not have to be dated but must be signed by an authorized agent of transferor; e. If endorsed by an authorized agent, then some proof of the agency should be referenced and/or attached to the note; and f. The Trust should have a designated document custodian who holds the original notes for the Trust as well as all of the delivery and receipt certificates regarding the notes.
Original Notes Endorsed in Blank But------
4. Original notes may be endorsed in blank by the originator but: a. If the first endorsement is in “blank” (no payee is named or designated) then the note becomes a “bearer instrument” by operation of law; b. There must be both a delivery and an acceptance receipt to document the transfer and delivery of the bearer note from the originator to the sponsor; c. There must be a delivery and an acceptance receipt to document the transfer and delivery of the bearer note from the sponsor to the depositor; d. There must be a delivery and an acceptance receipt to document the transfer and delivery of the bearer note from the depositor to the Trust; and e. The designated document custodian for the Trust should maintain possession of all such documents including the original bearer note. There should only be one original note.
The Pooling and Servicing Agreement
5. The Pooling and Servicing Agreement includes origination and cut-off dates for mortgage notes and transfer and delivery dates for the notes to the Trust but: a. The Trust has no authority to accept an equitable transfer of a note. Since each transfer must be a true sale for purposes of creating the bankruptcy remote structure, all transfers must following the steps designated in the structure; b. The Trust has no authority to claim an equitable interest in a note that has not been transferred to the Trust pursuant to strict terms and guidelines of the Pooling and Servicing Agreement; c. All steps in the transfer process must be true and complete sales between the parties in order to qualify the Trust for what is called REMIC qualification under the Internal Revenue Code; d. The Trust has no authority to accept a note for no consideration as collateral for a mortgage loan obligation since each transfer must be a true and bona fide sale between the parties; and e. The
Assignments of the Mortgage or the Deed of Trust
6. Assignments relate to real property instruments and have nothing to do with negotiable instruments or other non-negotiable instruments, which are regulated by Article 3 of the Uniform Commercial Code.
Assignments Strictly Regulated by State Property Law
7. Assignments are strictly regulated by applicable state law. The following are important concepts as they apply to assignments: a. Statute of Frauds applies to assignments since these are real property instruments. You cannot assign a mortgage or deed of trust in blank. There is no such thing as a bearer assignment with respect to a mortgage or deed of trust. An “incomplete instrument” is a real estate document that would fail to transfer any statutory rights to the grantee. b. Assignments in the context of Residential Mortgage-Backed Securitized Trusts apply only to mortgages and deeds of trust. You cannot assign a note, just like you cannot assign a mortgage or deed of trust in blank. There is no such thing as a “bearer” mortgage or a “bearer” deed of trust. c. The authority of the assignor must be independently established of record for the assignment of a mortgage or deed of trust to be valid. If a party is executing an assignment as an agent for the true assignor of r
Holder in Due Course Doctrine
8. The “Holder in due course” doctrine relates to the notes and has nothing to do with the mortgage or deed of trust. In order to assert a “holder in due course” status, the transfer of the note to the Trust via the required chain must occur before the note is in default and the transferee must take the note without knowledge or notice of any claims or defects in the document. If the note is in default during any link in the transfer process, the holder in due course status is lost.
The A to D Invalid Assignment
9. Any assignment of a mortgage or deed of trust from the originator directly to the Trust is per se invalid. This is the case because such an assignment would disregard two essential players in the chain of assignments—the sponsor and the depositor. Since this aspect of the securitization process is controlled by applicable state real estate law, the Trust would have to be able to establish “good title” to the mortgage or deed of trust from the depositor. This could never be established with an originator assignment directly to the Trust assignment.
The A to D Invalid Negotiation of the Note
10. Any transfer of the mortgage note from the originator directly to the Trust would likewise be per se invalid. This is the case because such a transfer would disregard the “true sale” of the same note from the originator to the sponsor and the subsequent true sale from the sponsor to the depositor. Any “late” transfer of the note from the originator to the Trust would also be invalid because at that point in time the originator would have no ownership rights in the note. Under the Pooling and Servicing Agreement, the Trust may only purchase the note from the depositor. And, since each transfer must constitute a true and complete sale between the parties, consistent with the Pooling and Servicing Agreement, the Trust must be able to establish an unbroken chain of transfers and deliveries from the originator to the Trust. These rules apply whether or not the notes are endorsed to a named payee in each instance or are endorsed in blank at any process in the chain of transfers.
11. With respect to affidavits, simply attaching documents without first laying a proper evidentiary foundation for the admission of the documents is simply hearsay. Statements such a person collects and maintains as records and documents of a third-party do not satisfy the business records exception to the hearsay rule. The affiant must be able to state that the attached documents are created or maintained in the regular course of the affiant’s business, that their creation and maintenance are part of the regular course of the affiant’s business, and that the records were created at or about the time the transaction was recorded. The mere filing of records or documents maintained by other entities is insufficient to qualify the documents as business records. The need for such authentication applies to the assignments of the mortgages and deeds of trust and to the endorsements transfer and delivery receipts for the mortgage notes. In addition, if any part of the affidavit is based on d
Destroyed or Lost Notes
12. The enforcement of lost or destroyed or stolen mortgage notes is another issue that comes up in many of these cases. Under Section 3-309 of the UCC, a person not in possession of a mortgage note is entitled to enforce the instrument if the person seeking to enforce the instrument was in possession of the instrument before it was lost or who has directly or indirectly acquired ownership of the note from a person who was entitled to enforce the note when the loss of possession occurred and: a. The loss of possession was not the result of a transfer; or b. The loss of possession was not the result of a lawful seizure of the note; or c. The person cannot reasonably obtain possession of the note because: i. It was destroyed; ii. Its whereabouts cannot be determined; iii. It is in the wrongful possession of an unknown party; iv. The unknown party cannot be found; v. The unknown party is not amenable to service of process; vi. A reasonable search has been made for the no
The After-Acquired Property Doctrine13. The “After Acquired Property Doctrine”. Wickopedia says this is a common law doctrine which is applicable when real property or personal property to which party A obtains title only after falsely selling the property to party B for value. The actual sale occurs when party A did not have proper title. An example would be Colonel Sanders pretends to sell "My Old Kentucky Home" to Daniel Boone for $1000 (US) but does not own the property at the time and then uses the money to actually buy that same property from the true owner. The apparent outcome would be that Colonel Sanders and not Daniel Boone would own the property. Because the result of the set of transactions would be an injustice, a legal concept called the "After-acquired-title doctrine" vests the legal title in the property in party B even though buying it before party A had legal title to the property and therefore, had no right to transfer the title. This is an application of the principle of equity to property law.