What happens when a lender can’t produce the original note?

Reblogger Sharon Alters
Real Estate Agent with Coldwell Banker Vanguard Realty - 904-673-2308

Here is the most thorough explanation I have read to date concerning the issues surrounding lenders producing the original note when a property is in short sale or foreclosure.

Original content by Rick Misitano

A growing number of homeowners around the country are using a foreclosure defense that may help them retain their homes. It’s called “Produce the Note” (as also being jointly advocated by The Consumer Warning Network) and we want you to know this is not a mere technicality that should be treated lightly by the lender or by the Court.

Everyone needs to understand the importance of this issue. When a lender can’t produce the original note, allowing a foreclosure to proceed puts the homeowner at risk of owing that debt again to another party in the future. Therefore, great caution must be taken before a judge can allow someone who can’t produce the original note to cash in on your home.

What if Your Lender CAN’T Produce the Note?

So, what happens when the lender tells the Court it can’t produce the original note, because it is lost? Let’s start with the basics. If a lender wants to foreclose on a property, it has to be able to show that it is, in fact, the appropriate person to whom the money is owed. That right to foreclose belongs ONLY to the person who has legitimate POSSESSION OF THE ORIGINAL NOTE - not a copy, not an electronic entry, but the original note itself with the original signature of the person(s) who allegedly owes the money along with appropriate raised notary seal and signature. So, if you are faced with a foreclosure, you have every right to demand that the person or entity trying to take your property, first prove to the Court that they have the legal right do to so in the first place by proving they have legal possession of the original promissory note.

In my opinion, an original mortgage note is much like legal tender and should be guarded and protected as such by the person holding such an asset. Loosing an original mortgage note is like loosing a $100 bill or a gift card or a lottery ticket. What if I scratched that million dollar ticket and just stuck it somewhere and misplaced it? Do you think I could just show up at lottery headquarters and claim my prize without having the winning ticket? The same principle applies to the person or entity claiming to be the legal holder of an original mortgage note. He who holds the note holds the key.

What the Lender Must Do

What often happens, however, is that the lender claims it doesn’t have the original note, because that note has been lost or destroyed. If the lender is making such a claim, the law requires the lender to prove all of the following under the “Uniform Commercial Code”, which is a set of laws governing commercial transactions that many states have adopted. It contains a specific provision on this subject (Section 3-309) which states that a person can enforce a promissory note without having the original, BUT only under certain limited circumstances.

1. The person or entity has to swear and attest that it no longer has the original note;
2. The person or entity has to prove that it was properly in possession of the note and was entitled to enforce it WHEN it lost possession of the note;
3. The person or entity has to prove it didn’t “lose” possession simply because it transferred the note to someone else (i.e., it’s not really lost); and
4. The person or entity has to prove that it cannot produce the original note because the instrument was destroyed or its whereabouts cannot be determined or it was stolen by someone who had no right to it.

All of these matters have to be definitively proven by the person or entity trying to foreclose on the property. It is not the obligation of the borrower to prove or disprove any of this. The borrower can challenge the right of the person or entity trying to foreclose and demand proof.

The Court’s Important Role

It is up to the Court to determine whether the lender has satisfactorily proven why it no longer can produce the original note. The Court also has to be satisfied that when the original note was lost, the person trying to foreclose on the property had possession of the note at the time it was lost. Until the Court has been satisfied of all of this, the foreclosure cannot proceed.

It is also important for the Court itself to understand that this issue is not merely a “technicality” and the judge should not be satisfied with anything less than full proof of this issue. The Court itself needs to appreciate the fact that if it should agree that an original note has been legitimately lost (and allows the foreclosure to proceed) it is the borrower who is still at risk.

Why? Because incredibly, even if a Court has found that the original note is lost and the foreclosure sale is finalized, if someone later turns up with the original note and proves that it is the proper holder of the note, and not the person who foreclosed on the property, the original borrower is STILL LIABLE.

That’s right. Someone took your home and the Court allowed it because it believed that the lender proved that the note was lost and it was the proper party. Then someone legitimate shows up in the future with the actual note and you still owe that person the money even though your property was taken with the blessing of the Court. Trust me, this is a very serious issue regarding post foreclosures and post pre-foreclosure short-sales. It has happened to three of our own clients! These homeowners had the need to sell their property by means of a negotiated short-sale (so they could avoid a foreclosure) only to find out that the entity claiming to have the legal right and authority to enter into such negotiations and accept such settlements sold their note to another entity and weren’t even aware of it. Several months later, the newly assigned lenders (now claiming to be the rightful owners of our client’s original notes) have since come forward and have also filed suite seeking to recover their entire outstanding principle balances owed to them (prior to the homeowners closing their short-sale transactions with the wrong note holders).

How fair is that?!?! It’s not! And that’s why homeowners need to start fighting back when someone is trying to take their home by foreclosure, especially since an overwhelming percentage of mortgages granted over the last 3 to 5 years have been packaged into securities and re-sold and re-assigned numerous times since the inception of the borrower's original note and mortgage. In some states, homeowners have better than a 50/50 chance of being successful in defending themselves against a completed foreclosure. Why wouldn’t anyone who owns a home do everything in their power to protect and defend it?

All the Best,

Rick D. Misitano, Senior Paralegal
Law Offices of James M. Bosco & Associates
Methuen Executive Park
240 Pleasant Street
Methuen, Massachusetts 01844
Phone: (978) 687-8804
Fax: (978) 687-8872
boscolaw@comcast.net

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Debe Maxwell, CRS
www.iCharlotteHomes.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
Charlotte Homes for Sale - Charlotte Neighborhoods

All I can say is thankfully those newly assigned lenders came forth PRIOR to Closing on the short sale with the original owners--what in the world would happen if they had done so AFTER the Closing?  I wonder where the NAR is on this--could we be effected in any way with regards to the legal issues?  I wouldn't think so but, it's certainly something to consider.

Ahh...the short sale sagas continue!  I just lost one b/c of BOA and am absolutely livid!  We received approvals and then they withdrew the approval!  Just like that!  My client is going to work with a consumer advocate attorney from the capital and will most likely be suing BOA.  All I can say, (and I'm a BOA stockholder!) is I'm in my client's corner on this!  (WAY off topic, I know but, I just had to ventilate!) LOL

Have a wonderful Wednesday...

Jan 26, 2010 03:17 PM #1
Ambassador
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Robert Vegas Bob Swetz
Realty ONE Group - Las Vegas, NV
Las Vegas Henderson Homes for Sale

Hang Them! (just kidding) and from what I have been hearing through the grapevine some lenders don't want to find the note because there is a great possibility that their financing was crooked!

VB ;o)

Jan 26, 2010 03:22 PM #2
Rainmaker
1,142,035
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Sharon, I have mixed feelings about this. Notes have been sold and packaged so mnay times that I would imagine very few lenders can find the original notes. But don't you think if the borrower has been making payments to company that that's pretty good evidince that they feel they owe them money? Certainly I am not for folks losing their homes to fraudsters (I wonder if this has ever happened bacause the wrong entity foreclsoed?) BUT I am also not a fan of loopholes that make very little sense.

Jan 27, 2010 07:59 AM #3
Rainmaker
1,079,273
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Debe, that is absolutely infuriating! Maybe they sold the note.

VB, you bring up a very good point. I'm sure that is the case in some instances.

Bryant, I agree. I just thought this was a fascinating explanation of the process and what happens sometimes. When Barnett Bank was sold to another bank and then became Bank of America while the ink was still drying on the sale of Barnett to the other bank, employees who were losing their jobs were so angry they shredded files. A builder we knew in Orlando had a son who went in to make his car payment and they said he didn't owe any money, they didn't have any record of it!

Jan 27, 2010 08:17 AM #4
Rainmaker
637,750
Don Sabinske
Don Sabinske, Sabinske & Associates Inc. - Zimmerman, MN
Sabinske & Associates Inc.

You have some very good points here.  And, some I actually have never encountered, but it is great to learn from others here on the Rain.  I never thought I'd see a day where I had never seen something come up...but here's proof.  Thanks for the headsup.

Jan 27, 2010 08:46 AM #5
Rainmaker
1,079,273
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Don, Rick gave the best explanation of what happens here that I have read, that's why I reblogged it.

Jan 27, 2010 01:07 PM #6
Anonymous
Anonymous

ahahahahaha this is so me. orig loan country wide. my realtor even told me they were gonna resell my note ad id get a letter and maybe a few more saying im supposed t pay them now. he said just throw it away... im behind i nevershould have bee allowed to buy a 149,000 house its in bad shape. they didnt even get my name righton the deed. should i get a lawyer? or what

Jan 28, 2011 06:37 PM #7
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Sharon Alters

Realtor - Homes for Sale Fleming Island FL
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