Failure to prove mortgage note ownership at the time of filing in New York left the lender unable to complete a judicial foreclosure.
Recent New York case law has confirmed that before a lender in the state files a complaint to judicially foreclose on a mortgage securing a defaulted loan, the foreclosing lender must have a legal or an equitable interest in the mortgage, the physical possession of the underlying promissory note, plus all necessary chain of title ownership assignments of the note.(1)
A retroactive assignment of the note to a foreclosing lender after it filed the complaint does not give the lender the legal standing to foreclose.(2) And a written assignment claiming an earlier effective assignment date prior to the complaint filing is deficient without proof that the physical delivery of the note and mortgage occurred on such earlier date.
Here is the common lender practice for proper endorsement and delivery of the note: When a loan is sold under an assignment agreement, the loan seller completes an endorsement form (often labeled “Allonge”). In the endorsement the seller describes the note and terms (lender, borrower, original principal amount and date), references the underlying assignment agreement, states the note is payable by the seller to order of the purchaser (sometimes without recourse), and then signs and dates the endorsement.
The endorsement is then stapled (physically attached) to the note (making the endorsement an allonge). Then the note is physically transferred with the allonge to the loan purchaser against the loan purchaser’s dated receipt — creating proof of the note assignment and endorsement, and physical transfer on a certain date.
A recent court order in a foreclosure action shows the importance of using the above allonge methodology.(3) In that case the promissory note was purportedly endorsed to the plaintiff lender by another bank prior to the plaintiff’s commencement of the foreclosure action.
The plaintiff’s affidavit at the time of its motion for an order of reference (a procedural motion made after the filing of the complaint) indicated that the original note was then in its possession, but per the court that was not proof that “the plaintiff actually possessed the note and mortgage at the time the [foreclosure] action was filed.”
The court found that while the endorsement was “payable to order,” it also appeared to be on a separate page, made no specific reference to the subject note, and was undated.
The court held that “[P]laintiffs failure to submit proper proof of a valid indorsement [sic] or assignment, and failure to otherwise prove that the plaintiff was the holder of the note and mortgage at the time the action was commenced, requires denial of the plaintiff’s motion for an order of reference.”
Fortunately, the court’s order was without prejudice to renew the motion, so the lender has another opportunity to prove note ownership as of the time of the foreclosure action commencement.
- (1) Exceptions, e.g., lost note affidavits, are not addressed.
- (2) A lender’s standing to sue based on a mortgage promissory note starts with proving that the lender owns the note. See Gretchen Morgenson, Foreclosures Hit a Snag for Lenders, The New York Times, November 15, 2007, (last reviewed 7/27/10) (“Lawyers who represent troubled borrowers complain that trustees overseeing home loan pools often do not produce proof, usually in the form of a mortgage note, that their investors own a foreclosed property. And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership. Such proof gives a creditor standing to foreclosure against a borrower and is required by law.
(“‘The big issue in all these cases, whether we are dealing with a bankruptcy court, a state court or a federal court, is who really owns the mortgage note, and that is allegedly what they securitized,’ said O. Max Gardner III, a lawyer who represents borrowers in foreclosure in Shelby, N.C. ‘A collateral question is, has that mortgage note really been transferred and assigned to the securitization trust? If not, then they really don’t have standing. It’s Law School 101.'”) - (3) IndyMac Bank F.S.B. v. Garcia, 2010 NY Misc. LEXIS 2795; 2010 NY Slip Op 51127u (June 22, 2010).
