Much has been written recently on the subject of mortgage foreclosure under the rubric “show me the note,” which suggests that a consequence of the widespread practice of, first, originating and, second, pooling and reselling mortgage obligations, is that many of these mortgages may have become unenforceable. This claim is based, in part, upon the fact that many notes have been “separated” from the mortgages or deeds of trust that secure them, and, in part, upon the fact that many notes have simply been lost.
The suggestion that this current state of confusion will ultimately redound to the benefit of borrowers is, however, overstated.
“A real property loan generally involves two documents, a promissory note and a security instrument. The security instrument secures the promissory note. This instrument ‘entitles the lender to reach some asset of the debtor if the note is not paid. In California, the security instrument is most commonly a deed of trust (with the debtor and creditor known as trustor and beneficiary and a neutral third party known as trustee). The security instrument may also be a mortgage (with mortgagor and mortgagee, as participants). In either case, the creditor is said to have a lien on the property given as security, which is also referred to as collateral.’” Alliance Mortgage Company v. Rothwell (1995) 10 Cal.4th 1226, 1235.
When a loan is sold, the promissory note is assigned to whoever buys the note, together with the note’s security. The security follows the note automatically. (California Civil Code § 2936 (enacted 1872).)
“Similarly, this has long been the law throughout the United States: when a note secured by a mortgage is transferred, ‘transfer of the note carries with it the security, without any formal assignment or delivery, or even mention of the latter.’ Carpenter v. Longan, 83 U.S. 271, 275 (1872).” In re Vargas (2008) (PDF) 396 B.R. 511, 516, emphasis added.
Under California Civil Code section 2934, assignees of mortgages and deeds of trust can record their assignments, but there is no provision for recording assignments of promissory notes. In a simple transaction, therefore: Lender A makes a loan to Borrower B, and immediately sells and delivers the note, and records an assignment of the trust deed securing the note to Investor C, and tells Borrower B that their note has been sold. If Borrower B stops making payments to Investor C, Investor C (the note holder) instructs the trustee of its trust deed (the neutral third party) to foreclose on Borrower B.
If Investor C would then sell their note to Investor D, and Investor D to Investor E, and so forth and so on, each sale would require the recording of another assignment and the transfer of the original note to its new owner.
Simple, except a problem of keeping track of the note and security arose when the transaction described above was multiplied hundreds of thousands of times. The recording of assignments of hundreds of thousands of deeds of trust over and over again became tedious, and expensive, so a new private entity entitled “Mortgage Electronic Registration Systems, Inc.” (“MERS”) was created to enable mortgages and deeds to trust to be assigned only once (to MERS).
“MERS, Inc., is an entity whose sole purpose is to act as mortgagee of record for mortgage loans that are registered on the MERS System. This system is a national electronic registry of mortgage loans, itself owned and operated by MERS, Inc.’s parent company MERSCORP, Inc.” In re Kang Jin Hwang (2008) 396 B.R. 757, 761, emphasis added.
MERS became the “neutral third party” of choice because the promissory notes secured by the mortgages and deeds of trust assigned to MERS could be re-sold over and over again without the inconvenience of re-recording assignments of the mortgages and deeds of trust.
Simple, except someone forgot to keep track of the notes, and many notes got lost, never assigned, assigned and never transferred, or in some other way “separated” from the documents that secured them.
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Certainly the greater the buyer's "investment" in the deal, as represented by their releasing their deposit to the seller before close of escrow, the greater the likelihood the buyer will actually close the deal?
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