Foreclosure Help Blog

Why Can’t Lenders Produce the Note in Foreclosure Cases?

There is a growing trend among borrowers to defend foreclosure lawsuits by requesting mortgage lenders and servicing companies to provide the original note. When the lenders can not find the original note, judges are deciding that any foreclosure proceedings must be placed on hold until the note can be produced. Without this document, it can be almost impossible to prove that one bank has the right to foreclose on the home.

Few borrowers, though, truly understand the importance of finding out who or what is the real owner of their mortgage debt. Obviously, the owner is the only party that can approve any final loan modification or other negotiation scenario, or move ahead with a foreclosure in the case of default, but there are numerous other legal aspects that make proving ownership of a loan extremely important.

In fact, the owner is the only party that has a right to foreclosure on the mortgage, as it is the owner of the contract. While the origination company may once have been the owner and may retain servicing rights, the vast majority of mortgages over the past few years have been securitized and sold to investors. The actual owner may be a trust, which retains the loan documents for those investing in the mortgage security.

These trusts, though, are often empty boxes, simply legal fictions created on paper that own these notes and documents, but have no resources or locations in which to store all of the paperwork. Documents are easily lost and the chain of ownership from one party to another may be confused or simply missing.

This creates a problem for these owners of the notes, as they can be held liable for a long list of actions taken by themselves or third parties. For instance, the owner of a loan can be held liable for actions regarding abusive lending practices, their own misconduct in the transaction, actions of third parties including the originator of the loan, and abuses by mortgage servicing companies hired to collect payments and pursue foreclosure.

Under the concept of assignee liability, the owner of a note may be held liable for predatory lending practices engaged in the originator of the loan. If a mortgage is later found to be fraudulent, abusive, or predatory, the trust or investors in the debt security may find they own nothing more than an invalid investment that ends up costing them more than they bought it for.

As well, under the various theories of agency relationships, the trust owners of these mortgage documents can be held accountable for abuses that mortgage servicers engage in. And it is no secret that servicing companies engage in a long list of fraudulent tactics against borrowers. If the owner of the note can not be adequately proven, it may be impossible to hold the right party accountable.

The real issue of ownership of a note is raised during the foreclosure process. The courts have stated that forfeiture of property is a harsh legal remedy and should only be used as a last resort. The borrowers and lenders, in the case of foreclosure, should attempt to work out an agreement to avoid the loss of the home through the legal process.

But when the courts can not determine which company owns the debt, and no company moving ahead with foreclosure can produce the note, how can a judge be sure that foreclosure is being used as a last resort? The owner of the note is the final authority on any mortgage modification, short sale, or forbearance agreement, any of which may help borrowers stop foreclosure before the house is sold at a public auction.

From liability issues to making sure that foreclosure is the final remedy for the discharge of a debt, the actual owner of a note is extremely important. When lenders can not produce the note in court, the entire process is called into question, and no one can be assured that the foreclosure is anything but an enormous fraud, with banks simply making up ownership issues in order to throw people out of their houses.