Produce the Note and Deficiency Judgments

Some Magically Produce Some Not!

Via: Foreclosure Industry

May 6, 2010 by christine

In speaking with Michael Hirschtick yesterday, he raised a very interesting point that I don’t think a lot of people realize: that enforcement of the Note and foreclosing on the Mortgage are two separate things.

I’ll say that again.

There are two parts to a home loan: the Mortgage and the Note. They are two separate and distinct things. A Mortgage (or Deed of Trust) is basically the instructions on what to do if a borrower defaults on a loan; the Note gives them the right to collect money.

The lender can foreclose on the Mortgage or Deed of Trust and take the home, but pursuing a deficiency judgment is a separate issue entirely. It requires them to demonstrate they are entitled to enforce the Note to collect the deficiency. This means that the Note must have the chain of assignment or an allonge showing how it got to them.

Another example is in a bankruptcy case where the debt is discharged but the lien remains. If you get through a bankruptcy and are no longer responsible for the debt, that doesn’t mean the lien is gone. The bank can still foreclose on the property or repossess the car.

As a side note, this is why bankruptcy is so effective at beating the bank. The bank tries to get a Motion to Lift Stay, you or your lawyer objects. You raise all the issues relating to standing, real party in interest, etc. The bank can’t take the house unless the court says it’s OK, and bankruptcy judges are increasingly siding with homeowners.

Last week I read Neil Garfield’s post about the Bellistri v. Ocwen Loan Servicing case in Missouri.

It took me awhile to figure out what he was getting at, but I think he was making the same point as Michael. The Bellistri case is here if you want to read it. The light finally went on for me and I got it, and my guess is that a lot of other people will get it when they read this post.

Bellistri wasn’t a homeowner, but I agree with Garfield in saying that the case may help homeowners. Bellistri’s lawyer successfully argued that the Note and Mortgage were split because MERS’ name appeared on the Note but not the Deed of Trust at the time of origination, and therefore, MERS doesn’t have any right to assign the Deed of Trust to Ocwen.

As Garfield says, “factually, the note and DOT are split and according to the Restatement 3rd (of the UCC,) they can never be put back together again.

Thus, this argument would seem to apply to deficiencies as well. If a bank wants to enforce the Note and collect a deficiency judgment, they have to demonstrate that they have the right to enforce the Note. Awhile ago I wrote a post about deficiency judgments, and while I still think they are going to be a problem for some people (especially if you don’t fight back), I doubt as many people will be responsible for deficiencies if the bank can’t prove it has the right to enforce the Note.

Additionally, I think a good short sale negotiator would realize this with respect to getting a bank to waive a deficiency as part of the deal. As a homeowner, I personally wouldn’t agree to pay a deficiency as part of a short sale deal unless the bank proves it has the right to collect one.

If you’re in a judicial foreclosure state that allows deficiencies, such as in Jane’s case, and all of the sudden, the bank’s lawyers are waiving the deficiency, it could be because they cannot produce the Note. Look at the clues…did they attach an assignment and not the Note to the original complaint? This could be a signal that they don’t have the Note. In some states the bank isn’t required to be in possession of the Note to begin foreclosure proceedings, but if you defend yourself and they are all of the sudden waiving the deficiency, it could mean they don’t have the original Note.

Here’s another reason to fight back: let’s say you don’t care about the house for whatever reason, but you’re concerned about the deficiency. If you fight long enough, the bank may just agree to waive the deficiency if you let them foreclose on it. For example, in Jane’s case, the bank originally requested a deficiency judgment but mysteriously agreed to waive the deficiency in a later pleading. This was AFTER she raised the issue of the enforcement of the Note. So, in some cases, it makes sense to fight back because of the deficiency, even when you don’t care about the property.

Look closely….are there similar clues in your situation? If you’re not sure, get a loan audit from someone who can help you figure it out.

Related Story: new-mers-standing-case-splits-note-and-mortgage-bellistri-v-ocwen-loan-servicing-mo-app-20100309

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