Bankruptcy & Loan Modifications

I recently came across a great article drafted by a former paralegal of our firm, Rick D. Misitano regarding foreclosure defense.  Below are the pertinent parts of that article.
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.

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 a VERY valuable legal instrument, 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.

Let’s say (as an example) I scratched a million dollar winning lottery ticket and I just stuck it somewhere and misplaced it and now cannot find it. Do you think I could just show up at lottery headquarters and claim my prize without having the actual winning ticket? What if I made a photo copy of the ticket? Would I get my winnings then? What if you loaned me $100 and I tried to pay you back with a photo copy of a $100 bill? Would you accept my payment? What if I paid you back with a photo copy of a personal check made out to you for $100? Would you accept my payment then? Do you think your bank would honor a photo copy of my personal check made payable to you for the hundred bucks? Or do you think they would want the original check from me with my original signature so they can verify my check is authentic and is a payment I authorized? 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 and has an absolute duty to safeguard such an important legal instrument at all costs!

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 foreclosures! Homeowners pursuing a short-sale should be very concerned and should seek out the advice of legal counsel if seeking such option. Homeowners who are seeking to do a loan modification should be even more concerned! This issue has affected many of our our own clients who have retained us because they negotiated a short sale themselves (or via their real estate agents) and are now being sued by parties claiming to be the legal holders of their mortgage notes even after they have already sold their homes! 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 (and even years) later, the newly assigned lenders (now claiming to be the rightful owners of our client’s original notes) have since come forward and have 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). And (if you are a homeowner seeking a loan modification) you absolutely need to verify who currently holds your original note. Otherwise, if you enter into a loan modification agreement with the wrong party (or should be successful in getting your note totally re-written for better terms) you could be creating a whole new mortgage debt that you would be responsible for if there were someone else out there claiming to legally hold your original note.