Laurence E. Platt, nation’s leading real estate and consumer finance lawyer, gave a very precise presentation on the issues associated with title recording and transfer in the mortgage market. His address was truly a practitioner’s guide and focused on four points.
The starting point was transfer of enforceable interest. Two pieces of legal documents are relevant for the purposes of mortgage transfers – promissory note and mortgage document. While the note is an actual promise to pay, the mortgage represents an interst in real property. Both these documents are dictated entirely by state law. The Uniform Commercial Code (‘UCC’), accepted by most state jurisdictions has dealt with the transfer of note in two provisions:
a) Article 3 – applicable when the note qualifies as a negotiable instrument. Transfer in such cases is effected by delivery – actual or constructive and endorsement.
b) Article 9 – applicable when the note falls short from qualifying as negotiable instrument. Transfer is effected by a purchase agreement that identifies with particularity the note being transferred.
UCC has clarified that mortgage follows the note, i.e. if note is properly transferred mortgage follows. However, Mr. Platt pointed out that a series of questions remain in real property law applicable in different State jurisdictions.
Next, he attended to the Securitization document (‘Sec Doc’) creating a special, sometimes higher standard of effective transfer. The Sec Doc may impose contractual requirements that exceed the applicable state law. The question arises, what shall be the consequences of not satisfying the standard for effective transfer – whether it is legal or transactional. In case of note transfers, UCC contains cures that can be adopted. For instance, if Article 3 is not followed, there exists a safety net in Article 9. However a real problem exists in the area of state property law. A few have argued that the higher contractual replaces the applicable legal standard, i.e. UCC and property law, to become the governing law, nonetheless, as Mr. Platt mentioned there is not enough support for this proposition. In fact he remarked, a mortgage-backed security might be nothing more than a security backed by air.
The other issue he spoke about is a scenario where enforceable interest is acquired but still there is failure to foreclose. This is a major problem in the current crisis and he illustrated by means of an example of Virginia state law. Under Virginia state law, assignment of real property interest is not required. However a recent law introduced a requirement of prior assignment to successfully foreclose. This constitutes a real problem for creditors.
The final step in the enquiry is where does Mortgage Electronic Registration System (MERS) stand? MERS was created to establish stock holding like depository holding only electronic interest. The idea was to make mortgage loans seem like securities. However a numerous problems have surfaced with MERS:
a) Consumer issues: borrowers cant find out who owns the mortgage on their property
b) Local recording office do not receive fee when assignment were not required by law
c) Third party purchasers might not know who owns – nevertheless, it is not a market protection issue but an inherent risk.
MERS sort of acts like a nominee for the lender. If that were so, can it so also act in such capacity in a foreclosure proceeding? A few cases have held no for absence of an actual economic interest.
Finally, he attributed the alleged failure of servicers to record an assignment to the absence of the requirement in State Law.