Are You Sure You Really Own That Mortgage?

March 9, 2017 at 9:58 am Leave a comment

To foreclose on property in New York State, a lender must prove that it took physical possession of the mortgage note prior to the foreclosure, or that a valid assignment of the note to the foreclosing party has been made. This is easier said than done. Today’s blog includes citations to relevant case law in this area because for those of you who deal with mortgages, servicing and assignments, this is an area worthy of close scrutiny. So grab another cup of coffee to stay awake, and let’s get started.

First, let’s remember some basics. In order to foreclose on property, the lender or its assignee must possess both the mortgage and the note. The general rule is that once a promissory note is properly assigned, the mortgage transfers with it. Bank of N.Y. v. Silverberg, 86 A.D.3d 274, 280, 926 N.Y.S.2d 532 (2011).

Which brings me to the inspiration for today’s blog, the case of US Bank Trust, NA v. Morales, 54 Misc. 3d 1217(A) (N.Y. Sup. Ct. 2017), which was published in yesterday’s New York Law Journal. In 2006, the homeowners purchased a house in Monroe, NY for $403,000. They took out a 30 year mortgage, which was recorded in Orange County. The original lender, Home Funds Direct, named MERS as its nominee. MERS subsequently assigned the note to US Bank Trust. This assignment was also recorded in Orange County, NY. The homeowners defaulted in June of 2013; a foreclosure was commenced in April of 2016. The homeowners argued that the bank did not have the right to foreclose on the property, because it had not sufficiently demonstrated that it was the holder of both the note and the mortgage. It is widely understood that such standing can be established with either a written assignment of the note or the physical delivery of the note to the foreclosing party prior to the commencement of a foreclosure action, but New York courts continue to grapple with what documentation establishes that such a transfer has been executed.

In this case, US Bank Trust attached an affidavit of an employee of Caliber Home Loans; the affidavit explained that Caliber was servicing the loan on behalf of US Trust and was also acting as its attorney in fact. The servicer employee complied with NYS Regulations by personally reviewing the original note and the assignment of the mortgage. The plot thickens however, because he also explained that Wells Fargo was holding the original note as custodian. This fact was fatal to the bank’s foreclosure action. Even though the servicing agent explained that the original note could be obtained from Wells Fargo, it did not have physical possession of the note prior to commencing the foreclosure. Because Wells Fargo, not Caliber, was in physical possession of the note, the evidence failed to establish that the foreclosing party had standing to bring the foreclosure.

But wait. The plaintiffs argued that note was assigned to them from MERS to US Bank. The court’s response demonstrates just how fact-sensitive these inquiries have become. The note in this case identified Home Funds Direct as the lender and the note holder. According to the court, there was no endorsement to MERS on the note—which would give MERS the authority to assign—nor any information on the allonge indicating that MERS received an assignment of the note. This meant that MERS’ assignment of the note to US Bank Trust was invalid.

As if this isn’t complicated enough, the case law I have referenced in this blog relates specifically to New York’s Second Department. The key point is that the case law in this area remains fluid and highly fact-sensitive. As it stands right now, the better you document mortgage transfers and servicing rights, the better off you will be. This is one area where detailed procedures and an eye on case law is absolutely crucial.

 

Entry filed under: Legal Watch, New York State. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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