Money v Paper

If the actual facts fail to show ownership of the debt, then paper instruments indicating transfer of a mortgage (or a note) are just that: paper. If what is written on paper conflicts with the facts then the actual facts take precedence. In no case that I have reviewed (among thousands) has there ever been any proof of payment for transfer of a mortgage or deed of trust. If you demand it in discovery your adversary will fight to the death to prevent you from learning what really happened.

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THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.

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It is the absence of assertions regarding the debt ownership and transfer that reveals the truth here. Industry standards for banking require both a warranty of ownership of the debt and the ability to confirm the existence and ownership of the debt. You will never see even an assertion from the parties seeking foreclosure that they are the owner of the underlying DEBT or that they ever paid for the right to collect from the “borrower.” Instead, their assertion is that they own the PAPER, to wit: the note and mortgage.

The absence of consideration is why nobody is alleging that they are holders of the note and mortgage in due course which would eliminate virtually all borrower defenses and shift the risk of loss to the maker of the note.

The logic is irrefutable: the absence of an assertion of being a holder in due course (HDC)  is evidence of no consideration, shifting the burden onto the would-be forecloser to show that there was consideration or value paid in hand.

If they did assert the status of holder in due course then they would need to prove consideration as well as that the purchaser was acting in good faith and without knowledge of borrower defenses. By not asserting HDC they create an elliptical argument that they don’t need to prove or even allege consideration or value paid in hand.

They have now elevated that nonsense into the orbit of illusion: they assert that borrowers have no right to challenge the conditions precedent to the effectiveness of the instruments upon which they rely to show legal standing and prima facie elements of a case in foreclosure.

No bank would let you borrow money using a note that had been endorsed or a mortgage that had been assigned unless they received a warranty of title, confirmation of the existence and ownership of the debt, and proof of authority of the person endorsing or assigning the paper. It just doesn’t happen.

And if they DID have proof of paying value for the underlying debt, contests to foreclosure would be virtually nonexistent. The exception being bad accounting and mistakes in the escrow account, or the delivery of default notices. Any party with a portfolio of mortgages on which they seek to foreclose should be more than anxious for the opportunity to show that the loans were properly securitized and that nobody was being cheated.

But the same banks, who set those standards, want us to accept an endorsed (indorsed) note and an assignment of mortgage without any warranty of title, confirmation of the existence and ownership of the debt and proof of authority of the person executing the document.

The industry standard for an assignment of mortgage is clearly set forth in MultiState Mortgage Assignment – Single Family – Fannie Mae Uniform Instrument Form 3741. It starts with “For value received, the undersigned holder of a Mortgage (herein “assignor)…” The instrument itself places two conditions on the effectiveness of the assignment: (1) value received and (2) assignor is a “holder” of the mortgage.

The clear meaning is that the assignor must receive value — which conforms with Article 9 UCC which is adopted in all 50 states of the union. Just like a promissory note where it is customary to execute the note first before receiving a loan, the assignor can sign (if the signature is actually authorized) the assignment of mortgage. Whether it is effective as an instrument is wholly dependent upon whether the facial statements on the assignment are true — unless the homeowner waives an objection to it.

The purpose of the requirement that value be paid in hand is to assure that the debt is being transferred. This refers to the underlying obligation not the note, which is a paper instrument that is also subject to challenge.

Thus at the very least you are entitled to confirm warranty of title, confirmation of the existence and ownership of the debt and proof of authority of the person executing the document.

in 1974, in my first semester of first year in law school, one of the main points drilled in by Professor Sam Bader was that the debt is not the note and the note is not the debt. The note is evidence of the debt but is not the debt itself.

The debt is determined by what actually happened. If someone delivers money to you it is presumed not to be gift; hence a debt is created with or without paper. If you sign a note, expecting to get a loan and you don’t get the loan, the note is subject to some very basic defenses — mainly that the note is evidence of a transaction that never occurred or that the assignment of mortgage  or indorsement of a note is evidence of a transaction that never occurred.

Professor Bader also made it clear that the main error in litigation over loan transactions occurs when the Court (the Judge, who also went to law school), makes the error of equating the underlying debt with the paper that has been executed. Blind justice mandates that we apply the rule of law without regard to the external effect of those decisions. Instead, courts have intentionally or unintentionally “forgotten” the most basic principle of contract law.

The absence of any consideration in the origination or transfer of “loans” means that there was no value attached to the execution of the transfer documents or even the original loan documents. And THAT means that the debt is not present in the courtroom where foreclosures are routinely being allowed.

PRACTICE NOTES: What would you expect if you were reviewing an alleged transaction that involved hundreds of thousands of dollars? You would expect correspondence and agreements to reflect the purchase — not a single document out of context that purports to show an origination or transfer.

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