The Negotiation and Assignment of The Promissory Note

Posted on November 19, 2008. Filed under: Uncategorized |

Below is a rather typical process wherein a promissory note is NEGOTIATED and the mortgage ASSIGNED.

Step 0 – Delivery of the Promissory Note to Corresonding Institution
[This step may be OMITTED in the instance that a mortgage is originated by the primary mortgage servicer actually funding the loan at the table]

The mortgage loan is closed in the name of a small correspondent mortgage lender making the loan pursuant to a written commitment by the corresponding lender to purchase the loan immediately after closing. The corresponding lender FUNDS the loan at the table, usually by wiring the funds for the loan to the closing agent, typically a real estate attorney or a title company (this practice varies across the country). The corresponding lender is funding the particular loan it has agreed to purchase and the purchase price of the loan is set forth in the written commitment.

At the closing the borrower — the mortgagor — executes the promissory note and a mortgage or deed of trust security instrument.

Immediately following the closing the deed (if a purchase) and mortgage or deed of trust are RECORDED in the county records.

The promissory note is immediately ENDORSED over to the correspondent lender with an endorsementby the closing lender “Pay To [Name of Corresponding Lender]” signed [person] [Title] [Name of Closing Lender (Mortgagee)]. This endorsement is typically UNDATED.

The smaller lender also executes a mortgage assignment (UNLESS the mortgagee is MERS) and this assignment is typically contemporaneously recorded together with the mortgage or deed of trust.

The ENDORSED promissory note is delivered by overnight courier to the corresponding institution.

NEGOTIATION of a Promissory Note under the UCC is by ENDORSEMENT and DELIVERY.

At the conclusion of step ZERO, the Corresponding Lender OWNS the loan and has custody of the promissory note. The originating lender has fully disposed of all of its interest and has delivered both the promissory note and a recorded mortgage or deed of trust and assignment of that instrument.

Step 1 – Delivery of the Promissory Note to the Warehousing Lender
Where there is NOT a small originator making the loan and the mortgage servicer makes the loan ITSELF, the process BEGINS HERE. In this instance, the borrower is the maker of a promissory note and the grantor of a mortgage or deed of trust in favor of the originating servicer instead of the smaller correspondent.

The Corresponding Lender typically funds these loans using a revolving “warehousing line of credit” with a commercial bank. The corresponding lender gives the warehousing bank a security interest in the loans it is funding. The warehousing bank therefor typically expects to HOLD the promissory note as collateral for this warehousing loan.

Accordingly, the Corresponding Lender ENDORSES THE PROMISSORY NOTE IN BLANK and forwards the actual promissory note to EITHER the warehousing bank OR forwards the promissory note to an Institutional CUSTODIAN. In either case, the Corresponding Lender remains the OWNER of the promissory note pending its sale to a mortgage investor and the warehousing bank is the holder of the promissory note, which serves as collateral for its loan to the Corresponding Lender.

Step 2 – Delivery of the Promissory Note to a Mortgage Investor
At this point in the process there are four rather distinct paths that the mortgage ownership may take.

Variant A – Portfolioing the Loan
If the corresponding lender is a depository institution, particularly a thift institution, the corresponding institution may elect toportfolio the loan. That is the lender may choose to hold the closed loan as an investment. But this is VERY UNUSUAL in the case of fixed rate mortgages. Usually, depository institutions are gathering liabilities — deposits — with fairly SHORT maturities (e.g. 6 month CDs, 1 Year CDs, 2 Year CDs). There exists a great deal of interest rate pricing peril in funding long term maturities with short term deposits. It is BETTER to fund an asset with liabilities which reprice at intervals similar to the interest rate repricing characteristics of the asset.

As a consequence, ONLY adjustable rate mortgages tend to be portfolioed. Everything else is SOLD. And many adjustable rate mortgages are sold, as well.

In a portfolio situation, the corresponding institution may very well be also funding its own loans WITHOUT a warehousing lender. In this circumstance, the promissory notes MAY remain in the vaults of the corresponding institution.

Variant B – Selling the Whole Loan To Another Depository Institution
A second variant is similar to the first, however, the corresponding lender may SELL the loan to another depository entity that desires to portfolio this loan. The sale may be either servicing retained or servicing released. When servicing is retained, there will be a servicing agreemetn between the seller and the purchaser. With the sale, the corresponding lender would either deliver the promissory note to the purchaser OR have the warehousing lender deliver the promissory note to the purchaser OR have the institutional custodian EITHER deliver the promissory note to the purchaser OR deliver a custodial receipt to the purchaser and continue to act as custodian for the new entity.

A mortgage assignment would also need to be executed. At one time, ALL such assignments would have been recorded, but this no longer seems to be the case. When MERS is the nominee, this somewhat obviates the need to RECORD the assignment, but it does NOT absolve the seller of the need to timely execute an assignment.

Variant C – Sale or Exchange of the Mortgage for MBS with a GSE
A third variant is the sale or exchange of the mortgage for mortgage backed securities to a GSE (FNMA or FHLMC). In this instance, the promissory note is delivered either by the corresponding lender, the warehousing lender or the institutional cusdian directly to either FNMA or FHLMC or their designated custodian. Again, the institutional custodian holding the promissory note for either the corresponding lender OR the warehousing lender may effect delivery by simply delivering a custodial receipt to the GSE and then continue to hold the promissory note as custodian for the GSE.

Again, this transaction requires a written mortgage assignment. This assignment is typically NOT recorded and the corresponding lender would usually continue to act as a servicer for FNMA or FHLMC. Neither FNMA nor FHLMC services its own mortgages. All sales or excchanges with either of these GSE involve servicing retained transactions. The seller has entered into a seller – servicers agrreement with FNMA and FHLMC.

With the SALE or exchange of the promissory note, either the GSE or a TRUST set up by the GSE is the owner of the promissory note. Usually an institutional cusdian is the holder of the promissory note. The seller-servicer would almost NEVER be the holder during the routine servicing of the mortgage loan.

Variant D – Sale or Exchange of the Mortgage To a Private Conduit
Each of the major Wall Street investment banking concerns operates its own “private conduit” to purchase mortgage product for securitization. The larger mortgage companies therefore typically sell some of their production directly to these private conduits.

The private conduits traditionally served as outlet for so-called non-conforming mortgage product. These used to be mostly jumbo mortgages in excess of the FNMA and FHLMC loan limits OR loans that otherwise did not meet FNMA and FHLMC underwriting standards.

The Subprime and Alt-A markets emerged as these Wall Street conduits developed a larger appetite for non-conforming mortgage product. As various petroleum exporting countries and national sovereign wealth funds accumulated dollars due to the balance of payments imbalance, these funds needed a place to INVEST their dollars. Wall Street encouraged them to invest in mortgage securities and mortgage derivatives. Wall Street also sold this paper to many commercial banks and various other institutional investors.

A sale to the private conduits tends to be a little different than the sale to the GSEs. The private conduits tended to work on an epic scale and therefore tended to only buy the production of larger enterprises. These enterprises often gathered and aggregated mortgage debt through both corresponding activities (Step 0) and whole loan purchases (Step 1, Variant B).

The larger entities typically SOLD their production to a bankruptcy remote corporate affiilate. For example, New Century Mortgage sold its production to NC Capital Corporation (The “A” to “B” transaction).

In turn, these aggregating affiiliates would accumulate a vast pool of mortgage debt and then sell it to a Wall Street aggregator. These aggregators tend to have names like “Morgan Stanley Mortgage Capital, Inc.” (the “B” to “C” transaction).

The Wall Street investment banking concern would then prepare a registration statement for a securitization. Most of the time, there was a preliminary registration statement and then a supplemental registration statement that had the specific detailed quantative information about the mortgages going into the pool.

Each of these trusts typically called for the Wall Street investment bank’s aggregator to act as the “depositor” for a trust that was stood up as of the closing date set forth in the registration statement. Upon that closing, the aggregator sold or exchanged the mortgages to the institutional trustee for the trust being created (e.g. Deutsche Bank).

Upon closing, the Wall Street aggregator would deliver the promissory notes OR the custodial receipts for these promissory notes to the institutional trustee (the “C” to “D” transaction). In turn, the institutional trustee would issue trust certificates with characteristics and rights as set forth in the trust indenture and the registration statement. The registration statement would also specify the identity of the institutional custodian and the master servicer. The institutional custodian would then hold the promissory notes and the master servicer would handle the borrower interactions, servicing these loans.

Note that in this variant, the ownership of the promissory notes shifts from A to B to C to D. Negotiation of a promissory note is by endoresment and delivery. Since ALL of the notes are endorsed in BLANK, negotiation is by PHYSICAL DELIVERY. So the promisssory notes OR custodial receipts evidencing and entitling the holder to custody rights must be transferred from A to B to C to D to effect this type of transaction.

Also, under the statutes of frauds of most states, a written assignment from A to B to C to D is also required.

The Location of the Promissory Note Under Routine Servicing
The vast bulk of new mortgage originations are handled using variants C (GSE) and D (private conduits). Note that in EITHER instance, the promissory note is NOT typically in the hands of the servicer. Neither is it in the hands of either the GSE or the institutional trustee. The promissory note is in the hands of the institutional custodian.

Because the promissory note is endorsed IN BLANK, it is a negotiable bearer intrument. It is like holding a BLANK CHECK (which is also a negotiable bearer instrument).

Accordingly, the institutional investors and the custodians GET NERVOUS about having these outside of their vaults.

When a Default and Foreclosure Take Place
When a mortgage goes into default (or when a servicer PRECIPITATES a default by fraud), the servicer typically orchestrates the foreclosure. But very often the servicer does this by engaging the servicers of national “foreclosure specialists”, such as Fidelity, FANDO, and or NDex. These institutional “foreclosure specialists” take charge and call the shots.

There is also some indication that some foreclosure specialists and/or servicers begin fabircating documents in support of the foreclosure.

Bear in mind that the Servicer is SELDOM the owner of the mortgage debt except in variant “A” or “B” where whole loan ARMs are held by depository institutions. (The portfolio loans are mostly Treasury Indexed or Cost of Funds Indexed. The LIBOR indexed ARMs are mostly for securitization and sale to foreign investors.)

As explained above, the servicer is also not typically the HOLDER of the promissory note.

But servicers are in a hurry to initiate foreclosure and rely upon the fact that most borrowers do NOT defend against the foreclosure suit. So the servicer never bothers to obtain the promissory note before initiating foreclosure.

Instead, they simply rely upon fabricated documents and false and perjured affidavits as evidence in their premature foreclosures.

Federal standing rules require that a plaintiff have a pecuniary interest in the subject matter of the suit.

The Promissory Note as Evidence
One of the problems presented by this process is that even when a plaintiff appears in court with a promissory note, the promissory does NOT actually show WHEN a particular entity came into ownership OR custody of the promissory note.

As explained above, ENDORSEMENT — like your endorsement on a check — is UNDATED. And there is NO INDICATION on the promissory note as to the date of DELIVERY or of any negotiation or exchange of the promissory note by DELIVERY of the promisrry note endorsed in BLANK.

Once upon a time, many whole loan assignments were RECORDED. Moreover, the GSEs were pretty good about INSISTING that mortgages sold to the GSEs were assigned in favor of the GSEs, even if this assignment was never recorded.

But in the rush to securitization, the subprime lenders and the Wall Street investment banking concerns GOT GREEDY and cut a few corners. One of the corners they often cut was the creation of contemporaneous A to B, B to C and C to D assignments.

While the ENDORSEMENTS were UNDATED, the assignments traditionally were not only DATED, but also NOTARIZED to assure that the assignment was eligible for recording in the public land records for a county. So the assignment has often been the BEST EVIDENCE as to the date that a transaction took place.

But when the assignment was NOT properly executed, the mortgage investor is WITHOUT good evidence as to the DATE each transaction took place.

To overcome this problem, some mortgage servicers, “foreclosure specialists” and/or their law firms have been engaging in fabrication of assignments to use in support of their foreclosure suits. These fabrications can be readily identified and PROVEN by those experienced in mortgage practice.

Aggressive discovery is a big help in detecting and PROVING evidence fabrication.

Who Owns the Promissory Note and Who Owns the Securities?
The question as to WHO owns the promissory note is one that actually doesn’t necessarily have to be answered, though you need to aggressively press for an answer in discovery. It is the PLAINTIFF’s burden of proof to demonstrate standing and authority to institute the foreclosure suit.

You need to learn the identity of the holder primarily to DEFEAT the allegations and assertions of the plaintiff.

The owenrship of the underlying mortgage securities is COMPLETELY irrelevant. Owners of the mortgage securities issued by a trust do NOT have the authority to foreclose. The institutional trustee acts on behalf of the holders of the trust certificates. That is how a trust works. But the trust cannot act without proving that it is either the owner or the holder of the promissory note.

Bear in mind that the institutional custodian typically has the promissory note. The servicer is orchestrating the foreclosure, usually through a foreclosure specialist. The institutional trustee acting on behalf of the mortgage trust is very passive in this process EXCEPT as regards interactions with the certificate holders. The institutional trustee is usually the owner. The custodian is theholder. The sevicer is neither the owner nor the holder.

In a contested foreclosure case, the servicer will usually ultimately locate and obtain the promissory note. But this usually doesn’t happen until AFTER the institution of the suit. The servicer will then seek to use fabricated evidence or perjured affidavits to PROVE that it was the holder at the institution of the suit.

Similarly, the servicer often causes the creation of a fabricated assignment.

Aggressive discovery can often PROVE that allegations made in the servicer’s pleadings are false, that affidavits contain false and perjured statements and that evidence presented to the court has been fabricated.

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The Negotiation and Assignment of The Promissory Note



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