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IPFS News Link • Housing

Halloween Foreclosure-Gate Roundup

See, the loan is supposed to go from the originator to the sponsor to the depositor (really just a straw corporation - necessary to get bankruptcy-remote treatment) and then to to the trust. This means there should be at least three assignments on the physical note. The alternative is that the note could have been endorsed in blank. But if it was, then it is identical to any other sort of bearer instrument - you have to have physical possession of the original, and if it is lost or destroyed, unless you can prove it was destroyed, you're cooked. You can endorse a check (which is just a demand-payment note) any number of times. But if you endorse it to cash, then anyone who has physical possession of it can cash it, while at the same time it becomes nearly impossible to prove who's supposed to have it in the event it "disappears." This is very similar to a $100 bill - the commonly held sort of bearer instrument we all handle in our daily lives. If you burn a $100 bill or put it in the paper shredder, Treasury is not required to replace it for you, and in fact unless you can prove that you had possession of it, generally by providing them a substantial amount of the remaining pieces of it, they won't. These issues get rather complex in the context of the UCC (Uniform Commercial Code) yet they are very important. There are two ways one can possess an instrument (in this case a mortgage note) in the general sense - you can be an "assignee" or you can be a "holder in due course." The difference is that in the latter case you are not financially responsible if the person(s) in front of you did something wrong, where in the former case you are! Why is this important? Primarily because if the Trust is a Holder in Due Course they are entitled to collect, including perfection of the security interest, even if there was fraud in the inducement against the borrower! That is, the borrower's recourse does not extend through the MBS structure. But this protection only exists if the formalities granting a Holder In Due Course status were complied with. If they weren't then the MBS Trust is an assignee and has successor liability for the acts all the way back to the originator. The Bankruptcy Judge was thus correct to demand that Wells show up with proof of the status of that note - not a simple assertion. He is required (and in fact foreclosure judges should be required) before granting a judgment that is the perfection of said security interest to determine whether the alleged owner of it can actually document having possession - that is, the right to foreclose at all, and further, whether they can escape questions of propriety in acquisition of the debt in the first place.

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