tom deutsch testimony

8/8/2019 Tom Deutsch Testimony

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Statement of:

Tom Deutsch

Executive Director

American Securitization Forum

Testimony before the:

United States Senate Committee onBanking, Housing and Urban Affairs

Hearing on:

Problems in Mortgage Servicing from

Modification to Foreclosure, Part II

December 1, 2010



ASF Senate Banking TestimonyDecember 1, 2010

Chairman Dodd, Ranking Member Shelby, Members of the Committee, my name is Tom

Deutsch and as the Executive Director of the American Securitization Forum, I appreciate the

opportunity to testify here today on behalf of the 330 ASF member institutions who originate the

collateral, structure the transactions, serve as trustees, trade the bonds, service the loans and

invest the capital in the preponderance of residential mortgage- and asset-backed securities

(“RMBS”) and (“ABS”) in the United States, including those backed entirely by private capital

as well as those guaranteed by Ginnie Mae and the government sponsored enterprises (“GSEs

In this testimony, we seek first to highlight some of the key aspects of securitization as

well as its importance to the U.S. and global economy. Subsequently, we seek to address the

concerns raised by a few commentators that the banking and housing markets may be subject to

additional systemic risk because securitization trusts may not actually own the trillions of dollars

of mortgages that are supposed to be contained within those trusts. In addition to introducing the

white paper that ASF issued two weeks ago, we also examine a number of the new concerns that

have been raised since the introduction of that white paper. In particular, we discuss and provide

detailed background for four key components of valid loan transfers, including:

”)

such as Fannie Mae and Freddie Mac.

A. PSAs meet the requirement for a “complete” or “unbroken” chain of indorsement1

B. securitization trusts comply with New York trust law;

;

C.

RMBS trusts effectively achieve REMIC status; and

D. mistakes do not affect validity of transfer.

1 Note that the Uniform Commercial Code replaces the more common U.S. spelling of “endorsement” for the lesscommon “indorsement.” The UCC spelling is used throughout this testimony for consistency.




Ultimately, we find that the conventional process for loan transfers embodied in standard

legal documentation for mortgage securitizations has been adequate and appropriate to transfer

ownership of mortgage loans to the securitization trusts in accordance with applicable law and

contract. Since loan transfers have generally been effective, all of the dire consequences that a

few commentators have speculated on fade away, given the faulty premise that they start from.

Moreover, a number of the concerns that have been raised that securitization professionals have

uniformly opted out of use of laws such as the Uniform Commercial Code (“UCC

I.

”) to set a

higher bar for transfers, but then subsequently and systematically failed to meet that higher bar,

appear on their face to be illogical assertions and patently false.

Role and Importance of Securitization to the Financial System and U.S.

Economy

Securitization—generally speaking, the process of pooling and financing consumer and

business assets in the capital markets by issuing securities, the payment on which depends

primarily on the performance of those underlying assets—plays an essential role in the financial

system and the broader U.S. economy. Over the past 40 years, securitization has grown from a

relatively small and unknown segment of the financial markets to a mainstream source of credit

and financing for individuals and businesses alike.

In recent years, the role that securitization has assumed in providing both consumers and

businesses with credit is striking: currently, there is over $12 trillion of outstanding securitized

assets, including RMBS, ABS and asset-backed commercial paper (“ABCP”). This represents a

market nearly double the normal size of all outstanding marketable U.S. Treasury securities—




bonds, bills, notes, and TIPS combined.2

Between 1990 and 2006, issuance of MBS grew at an

annually compounded rate of 13%, from $259 billion to $2 trillion a year.3

The importance of securitization becomes more evident by observing the significant

proportion of consumer credit it has financed in the U.S. It is estimated that securitization has

funded between 30% and 75% of lending in various markets, including an estimated 59% of

outstanding home mortgages.

In the same time

period, issuance of ABS secured by auto loans, credit cards, home equity loans, equipment loans,

student loans and other assets, grew from $43 billion to $753 billion. In 2006, just before the

downturn, nearly $2.9 trillion in RMBS and ABS were issued. As these data demonstrate,

securitization is clearly an important sector of today’s financial markets.

4Securitization plays a critical role in non-mortgage consumer

credit as well. Historically, banks securitized 50-60% of their credit card assets.5

Meanwhile,

in the auto industry, a substantial portion of automobile sales are financed through auto ABS.6

Overall, recent data collected by the Federal Reserve Board show that securitization has provided

over 25% of outstanding U.S. consumer credit.7 Securitization also provides an important source

of commercial mortgage loan financing throughout the U.S., through the issuance of commercial

mortgage-backed securities (“CMBS

2 U.S. Department of the Treasury, “Monthly Statement of the Public Debt of the United States: August 31, 2009,”

(August 2009). < http://www.treasurydirect.gov/govt/reports/pd/mspd/2009/opds082009.pdf>.

”).

3 National Economic Research Associates, Inc. (NERA), “Study of the Impact of Securitization on Consumers,Investors, Financial Institutions and the Capital Markets,” pg. 16 (June 2009).<http://www.americansecuritization.com/uploadedFiles/ASF_NERA_Report.pdf >.4 Citigroup, “Does the World Need Securitization?” pg. 10-11 (Dec. 2008).<http://www.americansecuritization.com/uploadedFiles/Citi121208_restart_securitization.pdf>.5 Ibid., pg. 10.6 Ibid., pg. 10.7 Federal Reserve Board of Governors, “G19: Consumer Credit,” (September 2009).<http://www.federalreserve.gov/releases/g19/current/g19.htm>.




Over the years, securitization has grown in large measure because of the benefits and value it

delivers to transaction participants and to the financial system. Among these benefits and value

are the following:

1. Efficiency and Cost of Financing. By linking financing terms to the performance of a

discrete asset or pool of assets, rather than to the future profitability or claims-paying

potential of an operating company, securitization often provides a cheaper and more

efficient form of financing than other types of equity or debt financing.

2. Incremental Credit Creation. By enabling capital to be recycled via securitization,

lenders can obtain additional funding from the capital markets that can be used to support

incremental credit creation. In contrast, loans that are made and held in a financial

institution’s portfolio occupy that capital until the loans are repaid.

3. Credit Cost Reduction. The economic efficiencies and increased liquidity available from

securitization can serve to lower the cost of credit to consumers. Several academic

studies have demonstrated this result. A recent study by National Economic Research

Associates, Inc., concluded that securitization lowers the cost of consumer credit,

reducing yield spreads across a range of products including residential mortgages, credit

card receivables and automobile loans.8

4. Liquidity Creation. Securitization often offers issuers an alternative and cheaper form of

financing than is available from traditional bank lending, or debt or equity financing. As

8 National Economic Research Associates, Inc. (NERA), “Study of the Impact of Securitization on Consumers,Investors, Financial Institutions and the Capital Markets,” (June 2009), pg. 16.<http://www.americansecuritization.com/uploadedFiles/ASF_NERA_Report.pdf>.




a result, securitization serves as an alternative and complementary form of liquidity

creation within the capital markets and primary lending markets.

5. Risk Transfer. Securitization allows entities that originate credit risk to transfer that risk

to other parties throughout the financial markets, thereby allocating that risk to parties

willing to assume it.

6. Customized Financing and Investment Products. Securitization allows for precise and

customized creation of financing and investment products tailored to the specific needs of

both issuers and investors. For example, issuers can tailor securitization structures to

meet their capital needs and preferences and diversify their sources of financing and

liquidity. Investors can tailor securitized products to meet their specific credit, duration,

diversification and other investment objectives.9

Recognizing these and other benefits, policymakers globally have taken steps to help

encourage and facilitate the recovery of securitization activity. The G-7 finance ministers,

representing the world’s largest economies, declared that “the current situation calls for urgent

and exceptional action…to restart the secondary markets for mortgages and other securitized

assets.”

10

9 The vast majority of investors in the securitization market are institutional investors, including banks, insurancecompanies, mutual funds, money market funds, pension funds, hedge funds and other large pools of capital.Although these direct market participants are institutions, many of them—pension funds, mutual funds andinsurance companies, in particular—invest on behalf of individuals, in addition to other account holders.

The Department of the Treasury stated in March, 2009 that “while the intricacies of

secondary markets and securitization…may be complex, these loans account for almost half of

10 G-7 Finance Ministers and Central Bank Governors Plan of Action (Oct. 10, 2008).<http://www.treas.gov/press/releases/hp1195.htm>.




the credit going to Main Street,”11

underscoring the critical nature of securitization in today’s

economy. The Chairman of the Federal Reserve Board noted that securitization “provides

originators much wider sources of funding than they could obtain through conventional sources,

such as retail deposits” and also that “it substantially reduces the originator's exposure to interest

rate, credit, prepayment, and other risks.”12 Echoing that statement, Federal Reserve Board

Governor Elizabeth Duke stated that the “financial system has become dependent upon

securitization as an important intermediation tool,”13

and the International Monetary Fund (IMF)

noted in its Global Financial Stability Report that “restarting private-label securitization markets,

especially in the United States, is critical to limiting the fallout from the credit crisis and to the

withdrawal of central bank and government interventions.”14

Restoration of function and confidence to the securitization markets is a particularly

urgent need, in light of capital and liquidity constraints currently confronting financial

institutions and markets globally. As mentioned above, at present nearly $12 trillion in U.S.

assets are funded via securitization. With the process of bank de-leveraging and balance sheet

There is clear recognition in the

official sector of the importance of the securitization process and the access to financing that it

provides lenders, and of its importance to the availability of credit that ultimately flows to

consumers, businesses and the real economy.

11 U.S. Department of the Treasury, “Road to Stability: Consumer & Business Lending Initiative,” (March 2009).

<http://www.financialstability.gov/roadtostability/lendinginitiative.html>.12 Bernanke, Ben S., “Speech at the UC Berkeley/UCLA Symposium: The Mortgage Meltdown, the Economy, andPublic Policy, Berkeley, California.” Board of Governors of the Federal Reserve System (Oct. 2008).<http://www.federalreserve.gov/newsevents/speech/bernanke20081031a.htm>.13 Duke, Elizabeth A., “Speech at the AICPA National Conference on Banks and Savings Institutions, Washington,D.C.” Board of Governors of the Federal Reserve System (Sept. 2009).<http://www.federalreserve.gov/newsevents/speech/duke20090914a.htm>.14 International Monetary Fund, “Restarting Securitization Markets: Policy Proposals and Pitfalls.” Global Financial

Stability Report: Navigating the Financial Challenges Ahead (Oct. 2009), pg.33.<http://www.imf.org/external/pubs/ft/gfsr/2009/02/pdf/text.pdf>.

http://www.federalreserve.gov/newsevents/speech/bernanke20081031a.htm

http://www.federalreserve.gov/newsevents/speech/bernanke20081031a.htm




reduction still underway, and with increased bank capital requirements on the horizon, such as

those expected in Basel III, the funding capacity provided by securitization cannot be replaced

with deposit-based financing alone in the current or foreseeable economic environment. In fact,

the IMF estimated that a financing “gap” of $440 billion existed between total U.S. credit

capacity available for the nonfinancial sector and U.S. total credit demand from that sector for

the year 2009.15

Simply put, the absence of a properly functioning securitization market, and the funding

and liquidity this market has historically provided, adversely impacts consumers, businesses,

financial markets and the broader economy. The recovery and restoration of confidence in

securitization is therefore a necessary ingredient for economic growth to resume, and for that

growth to continue on a sustained basis into the future.

Moreover, non-bank finance companies, who have played an important role in

providing financing to consumers and small businesses, are particularly reliant on securitization

to fund their lending activities, since they do not have access to deposit-based funding. Small

businesses, who employ approximately 50% of the nation’s workforce, depend on securitization

to supply credit that is used to pay employees, finance inventory and investment, and other

business purposes. Furthermore, many jobs are made possible by securitization. For example,

a lack of financing for mortgages hampers the housing industry; likewise, constriction of trade

receivable financing can adversely affect employment opportunities in the manufacturing sector.

To jump start the engine of growth and jobs, securitization is needed to help restore credit

availability.

15 International Monetary Fund, “The Road to Recovery.” Global Financial Stability Report: Navigating the

Financial Challenges Ahead (Oct. 2009), pg. 29. <http://www.imf.org/external/pubs/ft/gfsr/2009/02/pdf/text.pdf >.

http://www.imf.org/external/pubs/ft/gfsr/2009/02/pdf/text.pdf

http://www.imf.org/external/pubs/ft/gfsr/2009/02/pdf/text.pdf




II.

By way of background, there are approximately 55 million first lien mortgages

outstanding in the United States today and an additional 25 million homes that have no mortgage

attached to them. The debt outstanding for these 55 million mortgages is nearly $9.75 trillion

dollars, of which approximately $7 trillion dollars resides in securitization trusts and are

beneficially owned by institutional investors around the world. Approximately $5.5 trillion

dollars of these loans are government guaranteed in Ginnie Mae and GSE RMBS, with an

additional $1.5 trillion in outstanding private-label RMBS that has no government backstop. An

additional $2.75 trillion dollars of mortgage debt is owned in the portfolios of commercial banks,

savings institutions and insurance companies. In addition to the $9.75 trillion of outstanding first

lien mortgages, approximately $1 trillion of second liens are currently outstanding in the United

States.

Transfers of Loans into the Secondary Mortgage Market

16

As part of the larger public discourse about the current state of the residential mortgage

market and the increasing number of foreclosures in America, a surprising number of concerns

have been raised in the last couple of months in the midst of the worst housing crisis since the

Great Depression that question whether the common legal procedures that have been used to

transfer residential mortgage loans into RMBS trusts were in fact legally valid. A number of

different dire outcomes have been raised if loans weren’t validly transferred, including borrower

confusion as to who to pay their mortgage to, large bank losses, and further housing market

16 Data compiled by Amherst Securities, based on information from the Federal Reserve Flow of Funds, FannieMae, Freddie Mac, Ginnie Mae and CoreLogic.




turmoil. A recent Congressional Oversight Panel Report (“COP Report”)17

But the key incorrect premise that each of these dire outcomes relies upon is that the $7

trillion dollars of outstanding securitized mortgage debt has not in fact been systematically

transferred in a legally sound manner. ASF believes these concerns are without merit and our

membership is confident that these methods of transfer are sound and based on a well-established

body of law governing the multi-trillion dollar secondary mortgage market. The conventional

process for loan transfers embodied in standard legal documentation for mortgage securitizations

has been adequate and appropriate to transfer ownership of mortgage loans to the securitization

trusts in accordance with applicable law. This process is sufficient to establish ownership by the

securitization trusts. Moreover the concerns that have been raised have not been supported by

substantiation that there are in fact any material signs of systematic fails in the system. Indeed,

the origin of these concerns is not clear: they are not the result of a series of court cases

supporting the arguments advanced and appear to be largely the result of academic theories. In

fact, even the COP Report states that “the Panel takes no position on whether any of these

arguments are valid or likely to succeed.”

has even suggested

that these issues could create systemic risk concerns if loans weren’t appropriately assigned to

securitization trusts.

18

As part of our members’ diligence into these public concerns, the ASF issued two weeks

ago a white paper legal study entitled “Transfer and Assignment of Residential Mortgage Loans

in the Secondary Mortgage Market” (the “

ASF White Paper

17 Congressional Oversight Panel, November Oversight Report, Examining the Consequences of Mortgage

Irregularities for Financial Stability and Foreclosure Mitigation (November 16, 2010)<

”), which is attached to this

http://cop.senate.gov/documents/cop-111610-report.pdf >.18 Ibid., pg. 25, footnote 75.

http://cop.senate.gov/documents/cop-111610-report.pdf

http://cop.senate.gov/documents/cop-111610-report.pdf




testimony as Attachment A. In the White Paper, the ASF exhaustively studied traditional legal

principles and processes, including common law, the Uniform Commercial Code and substantial

case history, and finds that traditional legal principles and processes, including the not codified

common law rule that “the mortgage follows the note,” are fully consistent with today’s complex

holding, assignment and transfer methods for mortgage loans, which are legally effective for

participants in the secondary mortgage market to transfer mortgage loans. Thirteen major U.S.

law firms noted in Exhibit A to the ASF White Paper reviewed the ASF White Paper and believe

that the Executive Summary contained therein represents a fair summary of the legal principles

presented. Although we believe the ASF White Paper answered a number of the concerns that

had previously been raised, some new concerns have been raised since the ASF White Paper has

been published. In this testimony, we address four of these new concerns.

A. PSAs Meet the Requirement for a “Complete” or “Unbroken” Chain of

Indorsement

In testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs

on November 16, 2010,19

19 Testimony of Professor Adam J. Levitin, U.S. Senate Committee on Banking, Housing and Urban AffairsHearing, November 16, 2010.

Mr. Adam J. Levitin, Associate Professor of Law at Georgetown

University Law Center, commented that while he did not disagree with the statements in the ASF

White Paper about how mortgage loans may be legally transferred pursuant to contract law and

the UCC, he believes that the ASF White Paper does not address some additional arguments as

to why mortgage loans might not have been legally transferred to RMBS trusts in many cases.

http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=df8cb685-c1bf-4eea-941d-cf9d5173873a









These arguments are outlined in Mr. Levitin’s testimony submitted to the Senate Committee for

these hearings, and further in testimony submitted to the House Financial Services Committee,

Subcommittee on Housing and Social Opportunity, on November 18, 2010.20

In his written testimony as well as his statements before the Senate Committee, Mr.

Levitin does not rely on the decisions in any court cases but instead discusses standard

provisions of documentation typically used to issue RMBS, which generally is in the form of a

pooling and servicing agreement (“

We seek to

address these concerns directly herein.

PSA”). A typical PSA includes a section requiring that legal

documents for each pooled mortgage loan be delivered to the trustee, or to a custodian on the

trustee’s behalf. This provision typically requires delivery of the original mortgage note, which

must bear the following indorsements: 1) either an indorsement in blank or an indorsement to

the trustee, and 2) a ‘complete’ or ‘unbroken’ chain of indorsements from the originator or

named payee to the person signing the indorsement in blank or to the trustee. The language does

not specify who must sign the indorsement in 1). The language used in these typical provisions

in any PSA uses either the word “complete” or “unbroken”, with no apparent difference in

intended meaning from deal to deal. The typical language does not

20Testimony of Professor Adam J. Levitin, House Financial Services Committee, Subcommittee on Housing andSocial Opportunity Hearing, November 18, 2010<

state, nor does it imply, that a

“complete” or “unbroken” chain means that all prior owners or holders of the note must appear

as part of the chain. Nor does any judicial proceeding consider or uphold this novel opinion. Nor

does Professor Levitin provide any third-party support for his interpretation of a typical PSA.

http://financialservices.house.gov/Media/file/hearings/111/Levitin111810.pdf >.

http://financialservices.house.gov/Media/file/hearings/111/Levitin111810.pdf






In his testimony, Mr. Levitin suggests, but without providing any source of authority for

his interpretation of contractual intent, that the typical PSA requirement for a “complete” chain

of indorsements was intended to mean that there must be a separate indorsement from each and

every person who was a prior owner of the note, including the originator, the securitization

sponsor and the depositor. From his interpretation flows a number of seemingly logical but

progressively more dire consequences, including:

i. the PSA was intended to supersede standard indorsement practice as codified in

the UCC;

ii. the parties universally failed to comply with this requirement to show an

expanded chain of indorsements;

iii. such failure violates the express terms of the PSA and therefore applicable trust

law requires that transfers of the mortgage loans to the trust are void;

iv. therefore the trusts don’t really own anything and the trusts furthermore violate

REMIC requirements;

v. as a result the banks that sold the loans really still own them; and

vi. the banks must repay all investors in full.

All of these consequences flow, however, from a single mistaken core premise—that the typical

PSA requirement for indorsements requires this expanded chain. As discussed below, this core

premise is incorrect, and therefore the consequences of this premise do not follow.

The typical PSA requirement for a complete or unbroken chain of indorsements to the

person signing the indorsement in blank means only that there be no gaps in the chain of




indorsements, and that the chain of indorsements be sufficient to effect a transfer to the trust

under applicable law. This provision would be interpreted in light of applicable law as well as

customary indorsement practice, and the intent of the parties as evidenced by their

contemporaneous conduct, all of which support the industry custom reading of a “complete” or

“unbroken” chain.

As is clear in the ASF White Paper, for mortgage notes that are negotiable instruments,

transfer may be made by negotiation in accordance with UCC Article 3, which requires an

indorsement. Once a negotiable mortgage note has been endorsed in blank, negotiation may be

effected by transfer of possession alone, until an indorsement has been made or completed in the

name of a specific person. In other words, if there is an indorsement in blank, the note may be

transferred to numerous successive parties without any need for a separate indorsement to each

purchaser. Sales of mortgage notes may also be made pursuant to UCC Article 9, and such a sale

is automatically perfected (without delivery of any mortgage note and with no requirement

relating to any indorsement) as long as value is given in accordance with an agreement that

specifies the mortgage loan to be conveyed, such as a loan schedule to a PSA.

In interpreting the typical PSA requirement for indorsements, we note that this

requirement appears in the section that relates to transfer and delivery of the mortgage loans to

the trustee. In this context, a “complete” or “unbroken” chain of indorsements is satisfied if the

indorsements are sufficient to transfer all rights in and to the mortgage notes to the trustee under

applicable law. Thus, for example, where the note was initially payable to originator A, then

sold to securitization sponsor B, who transferred to depositor C who in turn is transferring the




note to trustee D, a complete chain of indorsements could be: 1) an indorsement from A to B,

followed by an indorsement by B in blank, or 2) an indorsement by A in blank. Either of those

examples of indorsements, together with delivery of the note to D, would be sufficient to effect a

negotiation and transfer to D, and therefore would be a “complete” or “unbroken” chain of

indorsements as required by standard PSA language. Examples of an incomplete or broken

chain would be as follows: 1) no indorsement by A, or 2) an indorsement by A to X, followed by

an indorsement by B in blank. Importantly, for the purposes for which indorsement is required

by the PSA (which are limited to evidencing the transfer and delivery of the mortgage loans to

the trustee), an indorsement by A in blank is no less sufficient or effective

Moreover, the intended meaning of the typical PSA requirement for indorsements is

illustrated by the contemporaneous conduct of the parties to the transactions. Sellers into

securitizations generally deliver physical mortgage notes with indorsements in formats

(following the example above) such as 1) an indorsement from A to B, followed by an

indorsement by B in blank, or 2) an indorsement by A in blank. It was not at all typical nor

required to show an indorsement to or from the depositor (C in this example). Furthermore,

independent, third-party trustees and custodians checking in mortgage notes believed that a note

showing indorsements in these formats satisfied the requirement that there be a ‘complete’ or

than an indorsement

from A to B, followed by an indorsement from B to C, followed by an indorsement from C to D.

In other words, the typical PSA does not impose contractual requirements that exceed those

contained in the UCC, which has been adopted by all fifty states and the District of Columbia, as

it pertains to the transfer of an interest in a mortgage note.




‘unbroken’ chain of indorsements. This actual conduct demonstrates the intended meaning of

the indorsement requirements.

Mr. Levitin argues that the intended meaning of the typical PSA requirement for

indorsements is that the requirement for a ‘complete’ or ‘unbroken’ chain means that every prior

holder needs to have a separate indorsement to that holder. In other words that, following the

above example, there must be an indorsement from A to B, followed by an indorsement from B

to C, followed by an indorsement from C to D. Yet there is no persuasive basis for the

proposition that the parties intended that the typical PSA provisions required this expanded chain

of indorsements, nor is there any case law to support Mr. Levitin’s view.

Mr. Levitin argues that as a result of his interpretation the indorsement requirements

intended an expanded chain of indorsements, and the parties therefore intended to contract

around the UCC and impose upon themselves indorsement requirements that are in excess of

what is required to satisfy applicable UCC provisions. It is unclear and seemingly unreasonable

to practicing industry lawyers why parties to a transaction would contract around the UCC by

imposing significant additional indorsement requirements upon themselves, and then to have

systematically failed to observe those expanded requirements. On the other hand, it is very

reasonable to interpret the PSA language as not having been intended to require this expanded

chain of indorsements above and beyond UCC requirements for indorsements, where the actual

indorsement practice satisfied the UCC requirements.

Mr. Levitin offers the following argument to support the interpretation that an expanded

chain of indorsements was intended to be required under PSA contractual provisions:




“The reason for this additional requirement is to provide a clear evidentiary basis for all

of the transfers in the chain of title in order to remove any doubts about the bankruptcy

remoteness of the assets transferred to the trust. Absent a complete chain of

indorsements, it could be argued that the trust assets were transferred directly from the

originator to the trust, raising the concern that if the originator filed for bankruptcy, the

trust assets could be pulled back into the originator’s bankruptcy estate.”21

However, this argument overlooks the fact that each separate step in the chain of transfers

of ownership by each party from the originator to the trust is fully documented by a separate

contract. In other words, there is a contract covering the sale from A to B, and another contract

covering the sale from B to C, and the PSA itself documents the sale from C to D. There is no

need for an expanded chain of indorsements to make the chain of transfers of ownership any

more plain and evident than it already is. And there is no basis for the proposition that the

parties thought that an expanded chain of indorsements to override the UCC was necessary or

useful for this purpose.

B. Securitization Trusts Comply with New York Trust Law

Because the parties did not intend for the expanded chain of indorsements to be

contractually required under the PSA, the further argument that the transfers to the trusts were

void under New York trust law also fails.

21 Testimony of Professor Adam J. Levitin, U.S. Senate Committee on Banking, Housing and Urban AffairsHearing, November 16, 2010.http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=df8cb685-c1bf-4eea-941d-cf9d5173873a









Professor Levitin cites New York E.P.T.L. Section 7.2-4 as authority for the concept that

a transfer to a New York common law trust that is in contravention of the trust documents is

void. However, that section actually refers to any “sale, conveyance or other act of the trustee in

contravention of the trust ” [emphasis added], not sales or conveyances to the trust . This section

is intended to protect trust beneficiaries from unauthorized acts by the trustee. Cases interpreting

this section relate to wrongful acts by trustees with respect to assets that have previously been

transferred into the trust, such as acts that are illegal or which dissipate or impair assets of the

trust. Moreover, this section contains an exception for any such acts that are authorized by any

other provision of law. As we explained in the preceding section, the method used to convey the

mortgage loans to the trustee is consistent with the UCC.

In his November 18 written testimony, it is stated that “transfers to New York common

law trusts are governed by the common law of gifts.” No authority is given for that statement,

and we believe that this statement is not correct with respect to business or investment trusts,

where transfers are made to the trust for consideration in commercial transactions, and not as

gifts. The testimony then goes on to cite cases, which relate to the common law of gifts, for the

proposition that assets must be transferred in a way “such that no one else could possibly claim

ownership,” and then reads the cases to impose on all transfers to New York common law trusts

a requirement that “the mere recital of a transfer is insufficient to effectuate a transfer; there must

be delivery in as perfect a manner as possible.” The testimony goes on to argue that the

contractual language in each PSA that transfers and conveys ownership of the mortgage loans to

the trustee for the benefit of the investors is mere “recital” language that is ineffective in

transfers to common law trusts, and further suggests that delivery of the note with an




indorsement in blank is defective under this standard because it turns a note “into bearer paper to

which others could easily lay claim.”

The more recent of the cases cited in the testimony, Vincent v. Putnam, 248 N.Y. 76

(N.Y., 1928), involves a widow who received stocks and bonds by bequest from her husband,

where the will provided that as to bequeathed remainder property that upon her death “shall

remain at that time undisposed of”, such property would pass to the husband’s next of kin. The

widow attempted to dispose of the stocks and bonds shortly before her own death by gift to one

of her blood relatives. However, the only actions taken by the widow to effect the gift were to

deliver the stock and bond certificates to her own attorney, with a verbal instruction to give them

to her relative. This was not a transfer for consideration, and it was not a transfer to a common

law trust. This case is about delivery of property to an agent of the donor, with an instruction to

deliver the property to the intended donee, and the holding is that such delivery is not a

completed gift. The “mere words” in this case, that were insufficient to effect a conveyance,

were the verbal instruction to the widow’s attorney to make the gift, which instruction could

have been revoked at any time. We believe that the cases cited in the November 18 testimony do

not support the proposition that transfers of property to a New York common law trust, for

consideration in a commercial transaction, require a higher standard or more rigid set of transfer

requirements than would apply in any transfer for value of such property in any other

commercial transaction.

The notion that new legal decisions in all 50 states would be handed down with no legal

precedence to nullify trillions of dollars of mortgage securitization transactions simply because




the trusts acquired an interest in the pooled loans in accordance with applicable law but not in the

manner that Mr. Levitin claims the trust documents require, appears on its face to be an

unreasonable assertion. As noted above, we are confident that the standard processes of

delivering loans into securitization trusts are proper as a matter of law and contract, and we are

hard pressed to give any credence to an unsupported academic theory that the courts would

thwart the intentions and expectations of the parties by voiding transfers of mortgage loans.

C. RMBS Trusts Effectively Achieve REMIC Status

A final issue that we would like to address in this section relates to Real Estate Mortgage

Investment Conduits (“REMIC”), which is a tax election under federal income tax law frequently

used for RMBS under which trusts backed by qualified mortgages can issue multiple classes of

securities that are treated as debt, with the trust exempted from entity level taxation. One

argument that has been advanced by a couple commentators is that if the mortgage loans were

not validly transferred to the trust, any defect in the procedures used to make the transfer can

now not be cured without violating regulations that prohibit transfers of qualified mortgages to a

REMIC more than 90 days after it was created. We believe that this argument is without merit,

because the argument that there were wholesale failures to properly convey ownership of

mortgage loans to RMBS trusts are without merit as discussed above and in the ASF White

Paper.




D. Mistakes Do Not Affect Validity of Transfer

The fact that the ASF White Paper finds that the standard industry practices are legally

effective for participants in the secondary mortgage market to transfer mortgage loans does not

mean that mistakes never happen. From time to time mistakes are certain to occur, particularly

in a market where 55 million mortgages are transferred and/or serviced, and that is one reason

why typical language in a PSA provides the opportunity to cure mistakes. It is important,

however, to distinguish between document deficiencies that impair the validity of the transfer of

mortgage loans, on the one hand, and the additional steps that may be necessary to enforce the

loan documents against the borrowers, on the other hand. The three new concerns that

we counter in this testimony call into question the validity of a mortgage loan transfer. We

believe that these concerns are misplaced and that, in the ordinary course, document deficiencies

on a one-off basis may delay foreclosure while the paperwork is corrected or completed but will

not impair the initial transfer of the loan to the securitization trust.

In conclusion, the ASF greatly appreciates the invitation to appear before this Committee

to share our views related to these current issues. I look forward to answering any questions the

Committee may have.

Thank you.




ATTACHMENT A

ASF White Paper

Transfer and Assignment of Residential Mortgage Loansin the Secondary Mortgage Market

November 16, 2010



ASF White PAPer SerieS

Transfer and Assignment

of Residential Mortgage

Loans in the Secondary

Mortgage Market

NOVEMBEr 16, 2010



ASF Headquarters I One World Financial Center, 30th Floor I New York, NY 10281 I 212.412.7100

www.aericansecuritiation.co

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FOm O bY ANY OF TH AW FmS FNC bOW. TH NFOmATON

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pON N gA TO ANY pATCA FACTS O CCmSTANCS.

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© Aerican Securitiation Foru, nc. Noeer 2010. All rihts resered.



Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1. basic princiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2. Transfer of proissory Notes Secured y mortaes . . . . . . . . . . . . . . . . . . . 3

3. Assinent and Transfer of Ownershi of mortaes. . . . . . . . . . . . . . . . . . . 3

4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Exhibit A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Transfer and Assignment of Residential Mortgage Loans

in the Secondary Mortgage Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1. basic princiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2. Transfer of proissory Notes Secured y mortaes . . . . . . . . . . . . . . . . . . . 9

What Constitutes a “Neotiale nstruent?” . . . . . . . . . . . . . . . . . . . . . . .10

How is a Neotiale mortae Note Transferred? . . . . . . . . . . . . . . . . . . . . .11

Who may nforce A Neotiale mortae Note? . . . . . . . . . . . . . . . . . . . . .12

What ihts Aainst borrower efenses are Aailale to the Holder

of a Neotiale mortae Note? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

How s a mortae Note Transferred nder Article 9 of the CC? . . . . . . . . . .14

Transfer of mortae Notes: Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . 15

3. Assinent and Transfer of Ownershi of mortaes. . . . . . . . . . . . . . . . . . .16

What is the elationshi between the Transfer of a mortae Noteand the Transfer of Ownershi of the mortae? . . . . . . . . . . . . . . . . . . . . .16

What is the elationshi between the CC and State eal proerty aws? . . . . . .23

How oes the se of mS Aect ese ssues? . . . . . . . . . . . . . . . . . . . . .24

4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Table of Contents



1

Introduction

ecently, a few coentators hae raised a nuer of leal theories questionin whether securitiation

trusts, either those created y riate nancial institutions or those created y oernent sonsored

enterrises, such as ginnie mae, Fannie mae or Freddie mac, hae alid leal title to the seen trillion dollarsof ortae notes in those trusts. n an eort to contriute thorouh and well-researched leal analysis to

the discussion of these theories, the Aerican Securitiation Foru (“ASF”) issues the enclosed white aer

entitled “Transfer and Assinent of esidential mortae oans in the Secondary mortae market” (the

“White paer”). e White paer roides a detailed oeriew of the leal rinciles and rocesses y which

ortae loans are tyically held, assined, transferred and enforced in the secondary ortae arket and in

the creation of ortae-acked securities (“mbS”). ese rinciles and rocesses hae centuries-old oriins,

and they hae continued to e sound and alidated since the adent of mbS oer forty years ao.

While the real roerty laws of each of the 50 .S. states and the istrict of Coluia aect the ethod

of foreclosin on a ortae loan in default, the leal rinciles and rocesses discussed in this White paerresult, if followed, in a alid and enforceale transfer of ortae notes and the underlyin ortaes in each

of these jurisdictions. To e thorouh, the White paer undertakes a reiew of oth coon law and the

nifor Coercial Code (the “CC”) in each of the 50 .S. states and the istrict of Coluia. One of the

ost critical rinciles is that when ownershi of a ortae note is transferred in accordance with coon

securitiation rocesses, ownershi of the ortae is also autoatically transferred ursuant to the coon

law rule that “the ortae follows the note.” e rule that “the ortae follows the note” dates ack centuries

and has een codied in the CC. n essence, this eans that the assinent of a ortae to a trustee does

not need to e recorded in real roerty records in order for it to e a alid and indin transfer.

n suary, these traditional leal rinciles and rocesses are fully consistent with today’s co-le holdin, assinent and transfer ethods for ortae loans and those ethods are leally eectie

for articiants in the secondary ortae arket to transfer ortae loans. irteen ajor .S. law rs

noted in hiit A hae reiewed the White paer and eliee that the ecutie Suary contained therein

reresents a fair suary of the leal rinciles resented. ASF wishes to thank each of these rs and the

doens of reeinent mbS attorneys who hae contriuted to the deeloent of this White paer.

Tom Deutsch

Executive Director

American Securitization Forum



2

Executive Summary

1. Basic Principles

e two core leal docuents in ost residential ortae loan transactions are the roissory note

and the ortae or deed of trust that secures the orrower’s ayent of the roissory note. n a tyical

“riate-lael” ortae loan securitiation, each ortae loan is sold to a trust throuh a series of stes.

A ortae note and a ortae ay e sold, assined and transferred seeral ties etween the tie the

ortae loan is oriinated and the tie the ortae loan ends u with the trust. e leal rinciles that

oern the assinent and transfer of ortae notes and related ortaes are deterined, in sinicant

art, y the nifor Coercial Code (“CC”), which has een adoted y all 50 states and the istrict of

Coluia.1

e residential ortae notes in coon usae tyically are neotiale instruents. As a eneral

atter, under the CC, a neotiale ortae note can e transferred fro the transferor to the transferee

throuh the indorseent2 of the ortae note and the transfer of ossession of the note to the transferee or

a custodian on ehalf of the transferee. An assinent of the related ortae is also tyically deliered to

the transferee or its custodian, ecet in cases where the related ortae identies the mortae lectronic

eistration Syste (“mS”) as the ortaee. Such assinents enerally are in recordale for, ut

unrecorded, and are eecuted y the transferor without identifyin a secic transferee – a so-called assinent

“in lank.” nterenin assinents, in soe cases, ay e recorded in the local real estate records.

n soe ortae loan transactions, mS ecoes the ortaee of record as the noinee of the

loan oriinator and its assinees in the local land records where the ortae is recorded, either when the

ortae is rst recorded or as a result of the recordin of an assinent of ortae to mS. is eans

that mS is listed as the record title holder of the ortae. mS’ nae does not aear on the ortae

note, and the enecial interest in the ortae reains with the loan oriinator or its assinee. e docuents

ursuant to which mS acts as noinee ake clear that mS is actin in such caacity for the enet of

the loan oriinator or its assinee. When a ortae loan is oriinated with mS as the noinal ortaee

(or is assined to mS ost-oriination), mS tracks all future ortae loan and ortae loan sericin

transfers and other assinents of the ortae loan unless and until ownershi or sericin is transferred (or

the ortae loan is otherwise assined) to an entity that is not a mS eer. n this way, mS seres as

a central syste to track chanes in ownershi and sericin of the ortae loan. Fannie mae, Freddie mac

and ginnie mae, aon other oernental entities, erit ortae loans that they urchase or securitie

to e reistered with mS.

1 eferences to the CC are to the Ocial Tet of the model CC, as reised, issued y the National Conference of Coissionerson nifor State aws.

2 Note that the CC relaces the ore coon .S. sellin of “endorseent” for the less coon “indorseent.” e CC sell-in is used throuhout this ecutie Suary.



3

2. Transfer of Promissory Notes Secured by Mortgages

e law of neotiale instruents deeloed oer the centuries as a way to encourae coerce

and lendin y akin such instruents, includin neotiale ortae notes, as liquid and transferale as

ossile. e CC, with state-secic ariations, in sinicant art oerns the assinent and transfer of

ortae notes. Article 3 of the CC alies to the neotiation and transfer of a ortae note that is a“neotiale instruent,” as that ter is dened in Article 3. n addition, Article 9 of the CC alies to the sale

of “roissory notes,” a ter that enerally includes ortae notes.

n addition, as a eneral atter, the securitiation of a loan under a tyical oolin and sericin

areeent roides oth for the neotiation of neotiale ortae notes (y indorseent and transfer of

ossession to the securitiation trustee or the custodian for the trustee) and for an outriht sale and assinent

of all of the ortae notes and ortaes. us, whether the ortae notes in a ien securitiation ool

are deeed “neotiale” (as we eliee ost tyically are) or “non-neotiale” will hae little or no sustantie

eect under the CC on the alidity of the transfer of the notes. e tyical securitiation rocess eects alid

transfers of the ortae notes and related ortaes in accordance with the roisions of Articles 3 and 9 of the CC.

nder the CC, the transfer of a ortae note that is a neotiale instruent is ost coonly

eected y (a) indorsin the note, which ay e a lank indorseent that does not identify a erson to who

the ortae note is ayale or a secial indorseent that secically identies a erson to who the ortae

note is ayale, and () delierin the note to the transferee (or an aent actin on ehalf of the transferee). As

residential ortae notes in coon usae tyically are “neotiale instruents,” this is the ost coon

ethod to transfer the ortae note. n addition, een without indorseent, the transfer can e eected

y transferrin ossession under the CC. moreoer, the sale of any ortae note also eects the transfer

of the ortae under Article 9. Securitiation areeents oen roide oth for (a) the indorseent andtransfer of ossession to the trustee or the custodian for the trustee, which would constitute a neotiation of the

ortae note under Article 3 of the CC and () an outriht sale and assinent of the ortae note. us,

reardless of whether the ortae notes in a securitiation trust are deeed “neotiale” or “non-neotiale,”

the securitiation rocess enerally includes a alid transfer of the ortae notes to the trustee in accordance

with the elicit requireents of the CC.

n addition, Article 3 of the CC erits a erson without ossession to enforce a neotiale ortae

note where the note has een lost, stolen, or destroyed. Courts hae consistently ared the use of the salient

roisions of the CC to enforce lost, stolen or destroyed neotiale ortae notes that are owned y a

securitiation trust when the trust or its aent has roed the ters of the ortae notes and their riht toenforce the ortae notes.

3. Assignment and Transfer of Ownership of Mortgages

As stated aoe, when a ortae loan is assined and transferred as art of the securitiation of the

ortae loan in the secondary arket, oth the ortae note and the ortae itself are tyically sold,

assined, and hysically transferred to the trustee that is actin on ehalf of the mbS inestors or a trustee-



4

desinated docuent custodian ursuant to a custody areeent. e assinent and transfer are usually

docuented in accordance with a oolin and sericin areeent.

When a ortae note is transferred in accordance with coon ortae loan securitiation

rocesses, the ortae is also autoatically transferred to the ortae note transferee ursuant to the

eneral coon law rule that “the ortae follows the note.” e rule that “the ortae follows the note”

has een codied in the CC, ut the rule’s coon law oriins date ack hundreds of years, lon efore the

creation of the CC. As stated in the ocial coents to CC § 9-203(), the section “codies the coon-

law rule that a transfer of an oliation secured y a security interest or other lien on ersonal or real roerty

also transfers the security interest or lien.” CC § 9-203 ct. 9. All states follow this rule.3

n addition to the codication under CC § 9-203(), reorted court cases in nearly eery state and

non-CC statutory roisions in soe states ake clear that “the ortae follows the note.” eardin the

iact of these CC roisions, one treatise states: “Article 9 akes it as lain as ossile that the secured arty

need not record an assinent of ortae, or anythin else, in the real roerty records in order to erfect

its rihts in the ortae.” J. mconnell and J. Sith, Secured Transactions nder the nifor Coercial

Code, § 16.09[3][]. ndeed, courts in seeral states hae ared and alied the “ortae follows the note”

rule in cases where the ortae assinent was not recorded y the transferee and een when there was no

actual searate written assinent of the ortae.4

Coon securitiation ractices are consistent with the eneral rule that “the ortae follows the

note”: ursuant to the oolin and sericin areeent that oerns an mbS, and the lanuae of assinent

tyically contained in such an areeent, the ortae note and the ortae itself are sold, assined,

transferred and deliered to the trustee, and the transferor also tyically deliers a written assinent of

the ortae that is in lank in recordale for. Courts hae held that the lanuae of sale and assinent

contained in a oolin and sericin areeent, alon with the corresondin transfer, sale, and deliery of the

ortae note and ortae, are sucient to transfer the ortae to the transferee/trustee or its desinee or

noinee.

e creation of an interest in or lien on real roerty, includin a ortae, is oerned y the non-

CC law of the state in which the roerty is located. ikewise, the enforceaility of ortaes (includin

the riht and ethod to foreclose) is suject to all of the conditions recedent and requireents that are set

forth in the articular ortae itself and in all alicale state and local laws. ose conditions recedent

3 Howeer, in soe states, such as massachusetts and minnesota, courts hae held that the transfer of a ortae note without aneress transfer of the ortae ests in the note holder only an equitale interest in the ortae. is arraneent has eendescried as follows: the holder of the ortae holds the leal title to the ortae in constructie trust for the enet of theortae note holder. n oth states, howeer, case law suests that foreclosure roceedins ust e initiated y, or at least in thenae of, the holder of the leal title in the ortae.

4 n ost states, recordin of an assinent of ortae is enerally not required to ensure the enforceaility of the assinentof ortae as etween the assinor and assinee, and anyone with knowlede thereof. t is eyond the scoe of this ecutieSuary and the White paer to discuss in detail the otential risks to the ortae transferee of not recordin a ortae as-sinent. ose risks iht include, aon others, delayin the transferee’s aility to foreclose on the ortae, failin to receienotices that ay o to the ortaee of record, and otherwise leain the assinee oen to nelient or fraudulent actions orinactions y the ortaee of record that could ind the ortae transferee and iair the alue or enforceaility of the ort-ae. Siilarly, when an assinent of ortae is not recorded, the assinor ay e liale for certain oliations iosed uon aortaee of record, such as the oliation to roide a ay-o stateent or ortae release within a desinated tie eriod.



5

and rocedural requireents ary fro ortae to ortae and fro state to state. us, ownershi of a

ortae (i.e., without notice to the ortaor or the ulic, without judicial roceedins (where required),

without satisfaction of other conditions recedent or rocedural requireents in the ortae itself or in

alicale state law), does not always ie the holder of the ortae the leal aility to foreclose on the

ortae. ouh a discussion of the other necessary rerequisites to foreclosure is eyond the scoe of this

ecutie Suary and the White paer, the fact that other stes ay need to e taken y the owner of a

ortae note, or the owner of a ortae, is neither unique nor surrisin in our leal and reulatory syste

and does not diinish an otherwise leally eectie transfer of the ortae note and ortae.

e use of mS as the noinee for the enet of the trustee and other transferees in the ortae

loan securitiation rocess has een a suject of litiation in recent years reardin a ortae note holder’s

riht to enforce a ortae loan reistered in mS. Soe cases address the authority or aility of mS or

transferees of mS to foreclose on a ortae for which mS is or was the ortaee of record. As a eneral

atter, the assinent and transfer of a ortae to mS as noinee of and for the enet of the enecial

owner of the ortae does not adersely iact the riht to foreclose on the ortae. ecisions in any

jurisdictions suort this conclusion.

ere are seeral inority decisions that, in soe for, hae taken issue with mS. but none of

these decisions, to our knowlede, has inalidated a ortae for which mS is the noinee, and none of

these decisions has challened mS’ aility to act as a central syste to track chanes in the ownershi and

sericin of ortae loans.

Finally, it is iortant to reconie that the CC does not dislace traditional rules of aency law.

nder eneral aency law, an aent has authority to act on ehalf of its rincial where the rincial “anifests

assent” to the aent “that the aent shall act on the rincial’s ehalf and suject to the rincial’s control, and

the aent anifests assent or otherwise consents so to act.” Accordinly, the CC does not reent mS

or others, includin loan sericers, fro actin as the aent for the note holder in connection with transfers

of ownershi in ortae notes and ortaes. n short, rinciles of aency law roide mS and loan

sericers another leal asis for their resectie roles in the transfer of ortae notes and ortaes.

4. Conclusion

n suary, the lonstandin and consistently alied rule in the nited States is that, when a ortae

note is transferred, “the ortae follows the note.” When a ortae note is transferred and deliered to a

transferee in connection with the securitiation of the ortae loan ursuant to an mbS oolin and sericin

areeent or siilar areeent, the ortae autoatically follows and is transferred to the ortae note

transferee, notwithstandin that a third arty, includin an aent/noinee entity such as mS, ay reain as

the ortaee of record. both coon law and the CC conr and aly this rule, includin in the contet

of ortae loan securitiations.



6

Exhibit A

• Alston & bird p

• binha mcCutchen p

• Cadwalader, Wickersha & Ta p

• echert p

• Hunton & Willias p

• atten muchin osenan p

• & gates p

• owenstein Sandler pC

• mayer brown p

• O’meleny & myers p

• Orrick, Herrinton & Sutclie p

• Sidley Austin p

• SN enton S p



7

Transfer and Assignment of Residential Mortgage

Loans in the Secondary Mortgage Market

e einnins of the now ulti-trillion dollar secondary arket for residential ortae loans date

ack to the federal oernent’s creation of Fannie mae in 1938. Since then, the coleity of the secondary

ortae arket has increased, esecially as a result of the raid rowth and arket accetance of ortae-

acked securities (“mbS”) that ean in the 1980s. n contrast, the leal rinciles and rocesses y which

ortae-related roissory notes and security instruents (ortaes and deeds of trust) are assined and

transferred hae centuries-old oriins. Now, in the idst of the worst econoic and housin crisis since the

1930s, soe are questionin whether the traditional state law rinciles and rocesses of assinent and

transfer can e fully reconciled with today’s cole holdin, assinent and transfer systes for ortae-

related roissory notes and security instruents, and what ethods are leally eectie for articiants in

the secondary ortae arket to estalish, aintain and transfer ortae notes and security instruents.

is aer roides an oeriew of the leal rinciles and rocesses y which roissory notes and

related ortae security instruents are tyically held, assined, transferred and enforced in the secondary

ortae arket in connection with loan securitiations and the creation of mbS.1

1. Basic Principles

e two core leal docuents in ost residential ortae loan transactions are the roissory note

and the ortae or deed of trust that secures the orrower’s ayent of the roissory note. e roissory

note contains a roise y the orrower to ay the lender a stated aount of oney at a secied interest rate

(which can e ed or ariale) y a certain date. e tyical ortae or deed of trust contains a rant of a

ortae lien or other security interest in the orrower’s real roerty to the lender or, in a deed of trust, to a

trustee for the enet of the lender, to secure the orrower’s oliations under the roissory note.2

n a tyical “riate-lael” ortae loan securitiation, each ortae loan, which is eidenced y a

ortae note and secured y a ortae, is sold, assined and transferred to a trust throuh a series of stes:

• e loan oriinator or a susequent urchaser sells, assins and transfers the ortae loans

to a “sonsor,” which is tyically a nancial serices coany or a ortae loan conduit or

areator.

• e sonsor sells, assins and transfers the ortae loans to a “deositor,” which in turn

sells, assins and transfers the ortae loans to the trustee, which will hold the ortae

loans in trust for the enet of the certicateholders.

1 ssues related to a arty’s riht to foreclose or to enae in foreclosure-related actiities are enerally outside the scoe of this aer.

2 For ease of reference, “ortae” will e used throuhout uch of this aer to refer to oth ortaes and deeds of trust, and“ortae note” will e used to refer to a roissory note that is secured y a ortae.



8

• e trustee issues the mbS ursuant to a oolin and sericin areeent or trust aree-

ent entered into y the deositor, the trustee and a aster sericer or sericers.

• e trustee adinisters the ool assets, tyically relyin on the loan sericer to erfor

ost of the adinistratie functions reardin the ool of ortae loans. n addition, a

docuent custodian is oen desinated to conduct a reiew of the ortae loan docu-ents ursuant to the requireents of the oolin and sericin areeent and to hold

the ortae loan docuents for the loans included in the trust ool.

• n eneral, the loan docuents are assined and transferred fro the deositor to the

trustee throuh the indorseent of the ortae note and the transfer of ossession of

the ortae note to the trustee or a custodian on ehalf of the trustee. An assinent

of the related ortae is also tyically deliered to the transferee or its custodian, ecet

in cases where the related ortae identies mortae lectronic eistration Systes

(“mS”) as the ortaee. Such assinents enerally are in recordale for, ut un-

recorded, and are eecuted y the transferor without identifyin a secic transferee – a

so called assinent in lank.

• n soe ortae loan transactions, mS ecoes the ortaee of record as the no-

inee of the loan oriinator and its assinee in the local land records where the ortae

is recorded, either when the ortae is rst recorded or as a result of the recordin of an

assinent of ortae to mS. is eans that mS is listed as the record title hold-

er of the ortae. mS’ nae does not aear on the ortae note, and the enecial

interest in the ortae reains with the loan oriinator or its assinee. e docuents

ursuant to which mS acts as noinee ake clear that mS is actin in such caacity

for the enet of the loan oriinator or its assinee. When a ortae loan is oriinated

with mS as the noinal ortaee (or is assined to mS ost-oriination), mS

tracks all future ortae loan and loan sericin transfers and other assinents of

the ortae loan unless and until ownershi or sericin is transferred (or the loan is

otherwise assined) to an entity that is not a mS eer. n this way, mS seres

as a central syste to track chanes in ownershi and sericin of the loan. Fannie mae,

Freddie mac and ginnie mae, aon other oernental entities, erit loans that they

urchase or securitie to e reistered with mS.

As art of the loan securitiation rocess detailed aoe, a ortae note and a ortae ay e

sold, assined and transferred seeral ties fro one entity to another. e leal rinciles that oern the

assinent and transfer of ortae notes and ortaes are enerally deterined y state law. See, e..,

n re Cook, 457 F.3d 561, 566 (6th Cir. 2006) (state law oerned whether transferee had suerior interest in

roissory note secured y ortae). As such, these rinciles can ary deendin uon the state in which

the assinor of the ortae notes, the underlyin roerty, or the releant ortae-related docuents are



9

located. e assinent and transfer of a ortae note, on the one hand, and of a ortae, on the other

hand, are addressed searately elow.

2. Transfer of Promissory Notes Secured by Mortgages

e residential ortae notes in coon use in the secondary ortae arket tyically are

neotiale instruents. e law of neotiale instruents deeloed oer the centuries as a way to encourae

coerce and lendin y akin such instruents, includin neotiale ortae notes, as liquid and

transferale as ossile. See, e.., Oerton . Tyler, 3 pa. 346, 347 (1846) (“[A] neotiale ill or note is a courier

without luae”); 2 Frederick m. Hart & Willia F. Willier, Neotiale nstruents nder the nifor

Coercial Code § 1.01 (“Neotiale instruents lay such an iortant role in the odern coercial

world that it is dicult to realie that the strule for their eistence could e as lon and cole as it has

een, yet the eolution of the concet took centuries.”). Siilarly, the standardiation of the fors of ortae

notes and ortaes oer the ast thirty years or ore has contriuted to the liquidity and transferaility of

ortae notes and the underlyin ortaes. See peter m. Carroo, marketin the Aerican mortae:

e erency Hoe Finance Act of 1970, Standardiation and the Secondary market eolution, 39 eal

pro. pro. & Tr. J. 765, 799-800 (2004-2005) (“standardiation of ortae docuents created arketale

coodities. Once echaniss were in lace for the secondary arket to oerate, eents raidly oed

toward the ultiate oal: the creation of a security which has as its ase land [and] yet which will e as freely

transferale as stocks and onds” (internal quotation oitted)).

e nifor Coercial Code (“CC”), which, with state-secic ariations, has een adoted as

law y all 50 states and the istrict of Coluia, oerns, in sinicant art, the transfer of ortae notes.3

Article 3 alies to the neotiation and transfer of a ortae note that is a “neotiale instruent,” as that

ter is dened in Article 3. See CC §§ 3-102, 3-201, 3-203 and 3-204; see, e.., Swindler . Swindler, 355

S.C. 245, 250 (S.C. Ct. A. 2003) (Article 3 oerns neotiale ortae note). n addition, Article 9 alies

to the sale of “roissory notes,” a ter that enerally includes all ortae notes (oth neotiale and non-

neotiale). See CC §§ 1-201()(35) and 9-109(a)(3).4

e residential ortae notes in coon use today are tyically neotiale instruents for CC

uroses. n addition, as a eneral atter, the securitiation of a loan under a tyical oolin and sericin

areeent roides oth for the neotiation of neotiale ortae notes (y indorseent 5 and transfer of

ossession to the securitiation trustee or the custodian for the trustee) and for an outriht sale and assinent

of all of the ortae notes and related ortaes. us, whether the ortae notes in a ien securitiation

3 eferences to the CC are to the Ocial Tet of the model CC, as reised, issued y the National Conference of Coissionerson nifor State aws.

4 While Article 9 does not directly oern a ortae on real roerty, the fact that a ortae note is itself secured y a ortae

on real roerty does not render Article 9 inalicale to transfers of the ortae note. See CC § 9-109() (“e alication of this article [9] to a security interest in a secured oliation is not aected y the fact that the oliation is itself secured y a transac-tion or interest to which this article does not aly.”).

5 Note that the CC eschews the ore coon .S. sellin of “endorseent” for the less coon “indorseent.” e CC sell-in is used throuhout this aer.



10

ool are deeed “neotiale” (as we eliee ost tyically are) or “non-neotiale” will hae little or no

sustantie eect under the CC on the alidity of the transfer of the ortae notes. e tyical securitiation

rocess eects alid transfers of the ortae notes and related ortaes in accordance with the roisions

of Articles 3 and 9 of the CC.6

What Constitutes a “Negotiable Instrument?”

A “neotiale instruent” is dened as:

an unconditional roise or order to ay a ed aount of oney, with or without inter-

est or other chares descried in the roise or order, if it:

(1) is ayale to earer or to order at the tie it is issued or rst coes into ossession of

a holder;

(2) is ayale on deand or at a denite tie; and

(3) does not state any other undertakin or instruction y the erson roisin or order-

in ayent to do any act in addition to the ayent of oney, ut the roise or

order ay contain (i) an undertakin or ower to ie, aintain, or rotect collateral

to secure ayent, (ii) an authoriation or ower to the holder to confess judent

or realie on or disose of collateral, or (iii) a waier of the enet of any law intended

for the adantae or rotection of an olior.

CC § 3-104(a).

eference in a ortae note to a ortae does not aect the ortae note’s status as a neotialeinstruent. See CC § 3-106() (“A roise or order is not ade conditional [] y a reference to another

writin for a stateent of rihts with resect to collateral, reayent, or acceleration….”); see also nt’l

minerals & Che. Cor. . matthews, 321 S..2d 545, 547 (N.C. Ct. A. 1984) (“referrin to a ortae or

other collateral [in a ortae note] does not iair neotiaility” of the note); n re AOnline.co, 285 b..

805, 815-16 (bankr. ..N.Y. 2002) (reference in ortae notes to underlyin ortaes does not aect the

neotiaility of the notes).

e fact that a ortae note contains a ariale or adjustale interest rate also does not aect the

ortae note’s status as a neotiale instruent. at is ecause CC § 3-112() roides that “[i]nterest ay

e stated in an instruent[7

] as a ed or ariale aount of oney or it ay e eressed as a ed or arialerate or rates. e aount or rate of interest ay e stated or descried in the instruent in any anner and

ay require reference to inforation not contained in the instruent.” CC § 3-112().

6 Article 3 and Article 9 are not utually eclusie. Article 9 alies to the transfer of all “roissory notes,” which includes neotia-le and non-neotiale instruents. both Article 3 and Article 9 aly to “neotiale instruents.” With resect to non-neotialeinstruents, only Article 9 alies to the transfer.

7 CC § 3-104() denes “instruent” sily as a “neotiale instruent” for uroses of Article 3. As discussed in ore detailelow, the denition of “instruent” in Article 9 (oernin secured transactions) is soewhat ore eansie.



11

How is a Negotiable Mortgage Note Transferred?8

A neotiale ortae note is transferred when it is “deliered” y a erson other than the ortaor

for the urose of iin the transferee the riht to enforce the note. See CC § 3-203(a). “eliery” of a

ortae note occurs when there has een a oluntary transfer of ossession of the ortae note. See CC §

1-201()(15). As a eneral atter, the “[t]ransfer of an instruent, whether or not the transfer is a neotiation, ests in the transferee any riht of the transferor to enforce the instruent . . . .” CC § 3-203(). Accordinly,

a erson in ossession of the note ecoes a “erson entitled to enforce” if it can roe that it is the transferee.9

See CC § 3-301.

e easiest and ost coon way to transfer a neotiale ortae note is throuh “neotiation.”

Article 3 denes “neotiation” as “a transfer of ossession, whether oluntary or inoluntary, of an instruent

y a erson other than the issuer to a erson who therey ecoes its holder.” CC § 3-201(a). e “neotiation”

of a neotiale ortae note that is ayale to an identied erson or entity (such as the entity that oriinated

a ortae loan and whose nae aears as the ayee in the ortae note) – “requires transfer of possession

of the instruent and its indorsement y the holder.” CC § 3-201() (ehasis added). As elained elow,“indorseent” and “holder” are oth dened ters in the CC.

e “holder” of a neotiale ortae note is “the erson in ossession of [the ortae note] that

is ayale either to earer or to an identied erson that is the erson in ossession.” CC § 1-201()(21)

(A). n other words, uon the closin of a ortae loan, the “holder” of the ortae note is the entity

that is the ayee on the ortae note and that ossesses the note (either actually or constructiely). Aer a

neotiale ortae note has een neotiated, such as in connection with a loan securitiation, the “holder”

of the ortae note is the entity that ossesses the ortae note if the ortae note was indorsed to that

entity or if the ortae note was indorsed in lank or to earer.

e ter “indorseent” is dened to include “a sinature . . . that alone or accoanied y otherwords is ade on an instruent [in our case, a neotiale ortae note] for the urose of . . . neotiatin

the instruent.” CC § 3-204(a). Such an indorseent ay e either a “secial indorseent” or a “lank

indorseent.” See CC § 3-205. A “secial indorseent” is a written indorseent that secically “identies a

erson to who it akes the instruent ayale.” CC § 3-205(a). A “lank indorseent” is an indorseent

that does not identify a erson to who the instruent is ayale. See CC § 3-205(). mortae notes that

are transferred in connection with loan securitiations are tyically indorsed in lank with lanuae such as

“pay to the order of _____________,” where no nae is lled in the lank. e eect of an indorseent in

8 t is iortant to note that Article 3 does not concern “ownershi” of a ortae note, ut instead roides for the transfer of aortae note and the riht to enforce such notes. See CC § 3-301; CC § 3-203 ct. 1. A arty need not e the “owner” of theortae note to enforce it. See CC § 3-301 (“A erson ay e a erson entitled to enforce the instruent een thouh the er-son is not the owner of the instruent or is in wronful ossession of the instruent.”). us, a arty ay hae the riht to enforcethe instruent, ut not hae “ownershi” of that instruent. CC § 3-203 ct 1. For an eale of situations where a arty withthe riht to enforce an instruent is not also the “owner” of the instruent, see CC 3-203 ct. 1 and Note 12 infra.

9 Note also that CC § 3-203(c) roides for the scenario in which an instruent is transferred for alue without the indorseentthat, as descried in the tet elow, would e needed for the ortae note to hae een “neotiated.” nder that section, if a neo-tiale ortae note is transferred for alue as art of a loan securitiation, ut the transferor fails to indorse the note, the trans-feree of the note has the “secically enforceale riht to the unqualied indorseent of the transferor.” CC § 3-203(c); see Note12, infra (discussin distinction etween the riht to enforce a ortae note and ownershi of the ortae note).



12

lank is sinicant: “When indorsed in lank, an instruent ecoes ayale to earer and ay e neotiated

y transfer of possession alone until secially indorsed.” CC § 3-205() (ehasis added).10 See also CC §

3-201() (e neotiation of a neotiale ortae note that is ayale to earer (such as a neotiale ortae

note that has een indorsed in lank) is eected y “transfer of ossession alone.”).

e ter “ossession” is not dened in the CC. us, courts rely on coon law denitions of ossession

to interret that concet in the contet of the neotiation of an instruent such as a ortae note. See, e.., n re

elton motors, nc., 97 F.3d 22, 26 (2d Cir. 1996) (ecause Article 3 does not dene “ossession,” a court ust look

to the eneral law of the jurisdiction in deterinin whether a arty is in ossession of a neotiale instruent).

possession can e, and ery oen is, eected y an aent, noinee or desinee, such as the desinated custodian for

the securitiation trust. See, e.., midrst bank, Sb . C.W. Haynes and Co., nc., 893 F. Su. 1304, 1314-15 (.S.C.

1994) (constructie ossession eists when an authoried aent of the owner holds the note on ehalf of the owner);

Jenkins . ans, 31 A..2d 597, 598 (N.Y. A. i. 3d et. 1968) (aent had authority to ossess instruents for

rincial). n such cases, while the desinated custodian has “hysical” ossession of the ortae note, the trustee

for which the custodian holds the ortae note has “constructie” or “leal” ossession. See midrst bank, 893 F.

Su. at 1314-15; see also CC § 9-313 ct. 3 (“if the collateral is in [the] ossession of an aent of the secured arty

for the uroses of ossessin on ehalf of the secured arty, and if the aent is not also an aent of the detor, the

secured arty has taken actual ossession” (ehasis added)).

Who May Enforce A Negotiable Mortgage Note?

e aker of a ortae note is oliated to ay the note to the “erson entitled to enforce the

instruent.” CC § 3-412. e “erson entitled to enforce” a neotiale ortae note includes “(i) the holder

of the instruent, [and] (ii) a nonholder in ossession of the instruent who has the rihts of a holder.” CC

§ 3-301. Accordinly, to enforce a ortae note aainst the orrower, a erson ust enerally roe eitherthat it is a “holder” or that it is a transferee with the rihts of a holder. See CC § 3-301.

e rst cateory of ersons that ay enforce a ortae note is a “holder.” A “holder” of a neotiale

ortae note is “the erson in ossession of [the ortae note] that is ayale either to earer or to an

identied erson that is the erson in ossession.” CC § 1-201()(21)(A). e anner in which one ecoes

a “holder” is descried in the section aoe.

e second cateory contelated y CC § 3-301– a “nonholder in ossession who has the rihts of

a holder” – is ore dicult to dene. nder this clause, a erson would qualify as a “nonholder in ossession”

if ossession of the ortae note was transferred to hi fro the transferor, ut the transferor did not indorse

the ortae note. See CC § 3-203 ct. 2. n this circustance, the transferee is entitled to enforce theinstruent, ut to do so, the transferee ust rst roe oth ossession of the unindorsed ortae note and

roe the transfer of the ortae note y the holder to the transferee. See id.11 nder oth clauses, the erson

10 An indorseent is considered to e ade “on an instruent” for uroses of neotiation when it is ade either on the ortaenote itself or on a searate aer, oen referred to as an “allone,” that is aed to the note. See CC § 3-204(a). Once aed, theallone ecoes “art of the instruent.” d.

11 As noted aoe, the riht to enforce an instruent and the ownershi of that instruent are not necessarily the sae. See CC §3-203 ct. 1. us, a arty ay hae the riht to enforce the instruent, ut not hae “ownershi” of that instruent. d. A arty



13

seekin to enforce the ortae note ust hae ossession of the note.

CC § 3-301 also erits a erson without ossession to enforce a ortae note where the ortae

note has een lost, stolen, or destroyed within the eanin of CC § 3-309. See CC § 3-301. 12 Courts hae

consistently ared the use of CC § 3-309 to enforce lost, stolen or destroyed neotiale ortae notes that

a arty, such as a securitiation trustee, seeks to enforce when the arty has roen the ters of the ortae

notes and its riht to enforce the ortae notes (i.e., it has roen the transfer of the ortae note fro

the transferee). See, e.., n re montane, 421 b.. 65, 79 (. vt. 2009) (ndin that lainti who satised

requireents of CC § 3-309 could enforce lost ortae note); Waoner . mortae lect. eistration

Sys., nc., No. 2003-CA-002666-m, 2005 W 2175439, at *1 n.1 (y. A. Ct. Set. 9, 2005) (“e roissory

note was roen … y an adait concernin a lost or destroyed roissory note.”).

What Rights Against Borrower Defenses are Available to the Holder of a Negotiable Mortgage Note?

A key concet relatin to the neotiation of neotiale ortae notes is the “holder in due course”

doctrine. at is ecause where the “holder” of a neotiale ortae note is deeed a “holder in due course,”the holder takes the ortae note suject only to secic liited defenses of the orrower. e followin is a

rief suary of an eansie area of law. nder CC § 3-302(a):

[A] “holder in due course” eans the holder of an instruent if:

(1) the instruent when issued or neotiated to the holder does not ear such aarent

eidence of forery or alteration or is not otherwise so irreular or incolete as to

call into question its authenticity; and

(2) the holder took the instruent (i) for alue, (ii) in ood faith, (iii) without notice that

the instruent is oerdue or has een dishonored or that there is an uncured default

with resect to ayent of another instruent issued as art of the sae series, (i)

without notice that the instruent contains an unauthoried sinature or has een

altered, () without notice of any clai to the instruent descried in Section 3-306

[reardin clais of a roerty or ossessory riht in the instruent or its roceeds,

includin a clai to rescind a neotiation and to recoer the instruent or its ro-

ceeds], and (i) without notice that any arty has a defense or clai in recouent

descried in Section 3-305(a).

CC § 3-302(a).

need not e the “owner” of the note to enforce it. See CC § 3-301 (“A erson ay e a erson entitled to enforce the instruenteen thouh the erson is not the owner of the instruent or is in wronful ossession of the instruent.”). For eale, if x

(holder of an instruent ayale to x) sells the instruent to Y ursuant to a docuent coneyin all of x’s riht, title and interestin the instruent to Y, ut does not delier iediate ossession to Y, Y would hae ownershi of the instruent under the aree-ent, ut Y enerally would not e entitled to enforce the instruent until it otained ossession of the instruent. d.

12 CC § 3-301 also erits a erson without ossession to enforce a ortae note where, in certain circustances, there has eenistaken ayent as dened in CC § 3-418(d).



14

nder Article 3, a holder in due course of a neotiale ortae note takes the ortae note free of

(a) all rior clais to or reardin the ortae note y any erson and () ost defenses to enforceaility of

the ortae note that ay e raised y arties with who the holder in due course has not dealt. See CC

§§ 3-305 and 3-306; see also proident bank . Counity Hoe mortae Cor., 498 F. Su. 2d 558, 565

(..N.Y. 2007). e defenses to which a holder in due course ay e suject are found in CC § 3-305, and

include:

a defense of the olior ased on (i) infancy of the olior to the etent it is a defense to

a sile contract, (ii) duress, lack of leal caacity, or illeality of the transaction which,

under other law, nullies the oliation of the olior, (iii) fraud that induced the olior

to sin the instruent with neither knowlede nor reasonale oortunity to learn of its

character or its essential ters, or (i) dischare of the olior in insolency roceedins.

CC § 3-305(a)(1).

How Is a Mortgage Note Transferred Under Article 9 of the UCC?

e sale of ortae notes is also oerned, in sinicant art, y Article 9. Article 9 estalishes

(1) whether the interests of a transferee of a ortae note hae oth “attached” and ecoe “erfected” so

that those interests will reail oer conictin clais of third arties and (2) the rihts of the transferee in and

to the underlyin ortae that secures the ortae note.

Article 9 addresses the sale of ortae notes, reardless of whether they are neotiale or non-

neotiale.13 more secically, Article 9 alies to “a sale of . . . roissory notes.” CC § 9-109(a)(3). A

“roissory note” is dened as “an instruent that eidences a roise to ay a onetary oliation, does

not eidence an order to ay, and does not contain an acknowledent y a ank that the ank has receiedfor deosit a su of oney or funds.” CC § 9-102(a)(65).14 gien this road denition, residential ortae

notes in coon use today are tyically “roissory notes” for uroses of Article 9.

nder Article 9, the sale of a ortae note (whether or not the ortae note is neotiale) is deeed

a secured transaction and the transferee’s “security interest” is autoatically erfected when it attaches (ore on

“attachent” and “erfection” elow). See CC § 9-309(4). While security interests are ost coonly thouht

of as the liens otained y lenders, the CC denes the ter “security interest” to also include “any interest of

a . . . uyer of . . . a roissory note in a transaction that is suject to Article 9.” CC § 1-201()(35) (ehasis

13 Article 9 also alies to the creation of a lien on, or a “less-than-ownershi security interest” in, a ortae note. because ostassinents and transfers of ortae notes in loan securitiations are of the ownershi of the ortae notes, not a ere lien onor security interest in the notes, this aer addresses only outriht sales of ortae notes under Article 9. e rinciles discussedelow reardin attachent of a uyer’s interest in a sale of ortae notes are identical to those that aly in the contet of thecreation of a lien on ortae notes, and the rinciles reardin erfection of the interest in the ortae notes are likewise ery siilar. “Althouh . . . Article [9] occasionally distinuishes etween outriht sales of receiales and sales that secure an oliation,neither . . . Article [9] nor the denition of “security interest” (Section 1-201(37)) delineates how a articular transaction is to e

classied. at issue is le to the courts.” CC § 9-109 ct 4.

14 nder Article 9, the ter “instruent” is dened roadly as “a neotiale instruent or any other writin that eidences a riht tothe ayent of a onetary oliation, is not itself a security areeent or lease, and is of a tye that in ordinary course of usinessis transferred y deliery with any necessary indorseent or assinent.” CC § 9-102(a)(47).



15

added). n addition, the denition of “secured arty” includes “a erson to which . . . roissory notes hae een

sold.” CC § 9-102(a)(72)().

before a uyer’s “security interest” in a ortae note can e erfected under Article 9, the security

interest ust “attach.” A security interest attaches when (1) alue has een ien for the sale, (2) the seller has

rihts in the ortae note or the ower to transfer rihts in the ortae note to the uyer and (3) either (a)

the ortae note is in the ossession of the uyer ursuant to a security areeent of the seller or () the seller

has sined a written or electronic security areeent that descries the ortae note. See CC § 9-203().

Article 9 denes “security areeent” as “an areeent that creates or roides for a security interest,” CC §

9-102(a)(73), which, in the contet of a ortae loan securitiation, would include an areeent ursuant to

which ortaes and ortae notes are sold and transferred fro one entity to another. Such an areeent,

norally a oolin and sericin areeent or trust areeent, tyically will roide that the transfer of

the ortae note ursuant thereto eects a sale of the ortae note, which would thus, under Article 9,

constitute a “security areeent.”

Sinicantly, the attachent of a security interest in a ortae note that is itself “secured y a security

interest or other lien on ersonal or real roerty is also attachent of a security interest in the security interest,

ortae or other lien.” CC § 9-203() (ehasis added). 15 Siilarly, under CC § 9-308(e), erfection of

a security interest in a roissory note “also erfects a security interest in a security interest, ortae, or

other lien on ersonal or real roerty securin the riht.” CC § 9-308(e) (ehasis added). n other words,

erfection of a security interest (which includes a sale to a uyer) in a ortae note ursuant to Article 9 also

erfects a security interest in the ortae that secures the note.

perfection of the interest in the ortae note is iortant ecause it roides the transferee of the

ortae note with a riht in the ortae note and ortae suerior to that of a susequent lien creditor of the

seller. And, erfection roides the transferee of the ortae note with a riht in the ortae suerior to that

of a susequent lien creditor of the ortaee, which includes a ankrutcy trustee (see CC § 9-102(a)(52)). See

CC § 9-308 ct. 6.

Transfer of Mortgage Notes: Conclusion

n suary, under the CC, the transfer of a ortae note that is a neotiale instruent is ost

coonly eected y indorsin the note, which ay e a lank or secial indorseent, and delierin the

ortae note to the transferee (or the aent actin on ehalf of the transferee). As the residential ortae

notes in coon usae tyically are “neotiale instruents,” this is the ost coon ethod of transfer.

n addition, een without indorseent, the assinent can e eected y transferrin ossession under CC§ 3-203(a). moreoer, the sale of any ortae note also eects the assinent and transfer of the ortae

under Article 9. e attachent and erfection of the uyer’s interest in the ortae note attaches and erfects

15 e coents to CC § 9-203 eressly roide that “Susection () codies the coon-law rule that a transfer of an oliationsecured y a security interest or other lien on ersonal or real roerty also transfers the security interest or lien.” CC § 9-203ct. 9; see also estateent (ird) of proerty (mortaes) § 5.4(a) (1997). e sae holds true for CC § 9-308(e), under whicherfection of a security interest in a ortae note also accolishes erfection of a security interest in the ortae. See CC §9-308 ct. 6.



16

the uyer’s interest in the underlyin ortae that secures the ortae note. Securitiation areeents oen

roide oth for (a) the indorseent and transfer of ossession to the trustee or the custodian for the trustee,

which would constitute a neotiation of the ortae note under Article 3 of the CC and () an outriht sale

and assinent of the ortae note. us, reardless of whether the ortae notes in a securitiation trust

are deeed “neotiale” or “non-neotiale,” the securitiation rocess enerally includes a alid transfer of

the ortae notes to the trustee in accordance with the elicit requireents of the CC.

3. Assignment and Transfer of Ownership of Mortgages

As descried aoe, when a ortae loan is assined and transferred as art of the securitiation of

the loan in the secondary arket, oth the ortae note and the ortae itself are tyically sold, assined,

and hysically transferred to the trustee that is actin on ehalf of the mbS inestors or to a trustee-desinated

docuent custodian ursuant to a custody areeent. e assinent and transfer are usually docuented

and erfored in accordance with a oolin and sericin areeent.

What is the Relationship Between the Transfer of a Mortgage Note and the Transfer of Ownership of theMortgage?

When a ortae note is transferred in accordance with coon ortae loan securitiation

rocesses, the ortae is also autoatically transferred to the ortae note transferee under the CC and

the eneral coon law rule that “the ortae follows the note.” See, e.., Carenter . onan, 83 .S. 271,

275 (1873) (“e transfer of the note carries with it the security, without any foral assinent or deliery, or

een ention of the latter.”); mortae lect. eistration Sys., nc. . Coakley, 41 A..3d 674, 674 (N.Y. A.

i. 2d et. 2007) (“the ortae . . . assed as an incident to the roissory note”); estateent (ird)

of proerty, mortaes § 5.4(a) (1997) (“A transfer of an oliation secured y a ortae also transfers the

ortae . . . . ”).

e rule that “the ortae follows the note” has een codied in the CC, ut the rule’s coon law

oriins date ack hundreds of years, lon efore the creation of the CC. As stated in the ocial coents

to CC § 9-203(), that section “codies the coon-law rule that a transfer of an oliation secured y a

security interest or other lien on ersonal or real roerty also transfers the security interest or lien.” CC §

9-203 ct. 9.

All states follow this rule.16 n addition to the codication of the rule under CC § 9-203(), reorted

16 Howeer, in soe states, such as massachusetts and minnesota, courts hae held that the transfer of a ortae note without aneress transfer of the ortae ests in the note holder only an equitale interest in the ortae. See, e.., First Nat’l bank of Cae Cod . North Adas Hoosac Sas. bank, 7 mass. A. Ct. 790, 796 (1979); Jackson . mortae lect. eistration Sys., nc.,770 N.W.2d 487, 497, 500-01 (minn. 2009). is arraneent has een descried as follows: the holder of the ortae holds theleal title to the ortae in constructie trust for the enet of the ortae note holder. See First Nat’l bank of Cae Cod, 7mass. A. Ct. at 796. n oth states, howeer, case law suests that foreclosure roceedins ust e initiated y, or at least in thenae of, the holder of the leal title in the ortae. See Jackson, 770 N.W.2d at 500; .S. bank Nat’l Ass’n . ane, Nos. 08 mSC384283 (C), 08 mSC 386755 (C), 2009 W 3297551, at *11 (mass. and Ct. Oct. 14, 2009) (rejectin aruent that noteholders had authority to foreclose on ortaes for which their status as full ortaees was in disute) (currently on aeal to themassachusetts Suree Judicial Court).



17

court cases in nearly eery state and non-CC statutory roisions in soe states ake clear that “the ortae

follows the note”:

Alabama: Arour Fertilier Works . zills, 177 So. 136, 138 (Ala. 1937) (“when the note is secured y

a ortae, such ortae follows the note”).

Arizona: Ari. e. Stat § 33-817 (“e transfer of any contract or contracts secured y a trust deed

shall oerate as a transfer of the security for such contract or contracts.”).

Arkansas: each . First Cty. bank, No. CA 07-05, 2007 W 2852599, at *1 (Ark. A. Ct. Oct. 3, 2007)

(“Arkansas has lon followed the rule that, in the asence of an areeent or a lain anifestation of a

contrary intention, the security of the oriinal ortae follows the note or renewal thereof.”).

California: Cal. Ci. Code § 2936 (“e assinent of a det secured y ortae carries with it the

security”); n re Sta mortae & nest. Cor., 625 F.2d 281, 284 (9 th Cir. 1980) (in California, “[A]

deed of trust is a ere incident of the det it secures and . . . an assinent of the det ‘carries with it

the security.” (internal quotation oitted)).

Colorado: Carenter . onan, 83 .S. 271, 275 (1873) (in an aeal fro the Suree Court of

Colorado Territory, the nited States Suree Court stated: “e transfer of the note carries with it

the security, without any foral assinent or deliery, or een ention of the latter.”).

Connecticut: Conn. gen. Stat. § 49-17 (“When any ortae is foreclosed y the erson entitled to

receie the oney secured therey ut to who the leal title to the ortaed reises has neer

een coneyed, the title to such reises shall, uon the eiration of the tie liited for redetion

and on failure of redetion, est in hi in the sae anner and to the sae etent as such title

would hae ested in the ortaee if he had foreclosed, roided the erson so foreclosin shallforthwith cause the decree of foreclosure to e recorded in the land records in the town in which the

land lies.”); n re AmSCO, nc., 26 b.. 358, 361 (bankr. . Conn. 1982) (“An assinent of the note

carries the ortae with it . . . .”).

District of Columbia: Hill . Hawes, 144 F.2d 511, 513 (.C. Cir. 1944) (aer ortae note has een

cancelled, cancellation of “any ortae follows as a atter of course and does not require a searate

action”).

Florida: Caital nestors Co. . ’rs of state of morrison, 484 F.2d 1157, 1163 n.12 (4th Cir. 1973)

(“at the ortae follows the note it secures and deries neotiaility, if any, fro the note is the

rule in Florida where the land under ortae in this case was located.” (citin aniels . at, 237

So.2d 58, 60 (Fla. A. 1970); meyerson . boyce, 97 So.2d 488, 489 (Fla. A. 1957))); mariewic .

Terco proerties, 441 So.2d 1124, 1125 (Fla. ist. Ct. A. 1983) (when a note secured y a ortae

is assined, the ortae follows the note into the hands of the ortaee).

Illinois: Federal Nat’l mort. Ass’n . uiers, 314 ll. A.3d 631, 635, 732 N..2d 723, 727 (ll. Ct. A.

2000) (“e assinent of a ortae note carries with it an equitale assinent of the ortae y

which it was secured. e assinee stands in the shoes of the assinor-ortaee with reard to the



18

rihts and interests under the note and ortae. . . . []n llinois, the assinent of the ortae note

is sucient to transfer the underlyin ortae.”) (citations oitted).

Indiana: aow . badollet, 1 blackf. 416, 1826 W 1087, at *3 (nd. 1826) (“a ortae . . . follows the

det into whose hands soeer it ay ass”).

Iowa: breer County bank . astan, 34 owa 392, 1872 W 254, at *1 (owa 1872) (“e transfer

of the note, secured y the ortae, carried the ortae with it as an incident to the det, and the

indorsee of the note could aintain an action in his own nae, to foreclose the ortae without any

assinent thereon whateer.”).

Kansas: an. Stat. Ann § 58-2323 (“e assinent of any ortae as herein roided shall carry

with it the det therey secured.”); bank Western . Henderson, 255 an. 343, 354, 874 p.2d 632, 640

(1994) (“[T]he ortae follows the note. A erfected clai to the note is equally erfected as to the

ortae.”).

Maryland: n re bird, No. 03-52010-JS, 2007 W 2684265, at *2-4 (bankr. .md. Set. 7, 2007) (“enote and ortae are insearale; the forer as essential, the latter as an incident. An assinent of

the note carries the ortae with it . . . .”).

Massachusetts: e transfer of a ortae note, without the eress transfer of the ortae, ests

in the note holder an equitale interest in the ortae (an interest that can e enforced y the note

holder) and the ortae holder is deeed to hold the ortae in constructie trust for the enet of

the note holder. See Weiner . brother, 263 mass. 61, 62 (1928); barnes . boardan, 149 mass. 106,

114 (1889); morris . bacon, 123 mass. 58, 59 (1877); First Nat’l bank of Cae Cod . North Adas

Hoosac Sas. bank, 7 mass. A. Ct. 790, 796 (1979); see also n re y proerties, nc., 109 b.. 10, 14

(bankr. . mass. 1989) (“[]nder massachusetts coon law the assinent of a det carries with

it the underlyin ortae, without necessity for the rantin or recordin of a searate ortae

assinent.”).

esite the aoe cited authorities, the massachusetts and Court in a recent oinion cast dout on

the “ortae follows the note” rule:

[]en a alid transfer of the note does not autoatically transfer the ortae. . . . e

holder of the note ay hae an equitale riht to otain an assinent of the ortae y

lin an action in equity, ut that is all it has. . . . e ortae itself reains with the ort-

aee (or, if roerly assined, its assinee) who is deeed to hold the leal title in trust for

the urchaser of the det until the foral assinent of the ortae to the note holder or,

asent such assinent, y order of the court in an action for coneyance of the ortae.

. . . but . . . the riht to et soethin and actually hain it are two dierent thins.

.S. bank Nat’l Ass’n . ane, Nos. 08 mSC 384283 (C), 08 mSC 386755 (C),

2009 W 3297551, at *11 (mass. and Ct. Oct. 14, 2009) (citations oitted).



19

e ane case aears to stand in stark contrast to the rinciles eodied in the CC.

e ane case is currently endin on aeal efore the massachusetts Suree Judicial

Court, that state’s hihest court.

Michigan: prie Fin. Ser. . vinton, 279 mich. A. 245, 257, 761 N.W.2d 694, 704 (mich. Ct. A.

2008) (“the transfer of a note necessarily includes a transfer of the ortae with it”) (citin ginser . Caitol City Wreckin Co., 300 mich. 712, 717, 2 N.W.2d 892 (1942)); Jones . Titus, 208 mich. 392,

397, 175 N.W. 257, 259 (mich. 1919) (when a note ien with a ortae was indorsed oer to a third

arty it carried with it the equitale title to the ortae).

Minnesota: Jackson . mortae lect. eistration Sys., nc., 770 N.W.2d 487, 497 (minn. 2009)

(“Asent an areeent to the contrary, an assinent of the roissory note oerates as an equitale

assinent of the underlyin security interest.”) (ehasis in oriinal).

Mississippi: Holes . mcginty, 44 miss. 94, 1870 W 4406, at *4 (“[T]he ortae . . . follows the

det as an incident, and is a security for whosoeer ay e the enecial owner of it.”).

Missouri: geore . Surka, 76 S.W.2d 368, 371 (mo. 1934) (when the holder of the roissory note

assins or transfers the note, the deed of trust is also transferred).

Montana: First Nat’l bank . va, 65 mont. 34, 212 p. 509, 511 (mont. 1922) (“e note and ortae

are insearale; the forer as essential, the latter as an incident. An assinent of the note carries

the ortae with it, while the assinent of the latter alone is a nullity. e ortae can hae no

searate eistence.”) (citations oitted).

Nebraska: n re nion packin Co., 62 b.. 96, 100 (bankr. . Ne. 1986) (with or without the

assinent of the ortae, the assinee of the roissory note has the riht to enforce the ortaesecurin the note).

New Hampshire: Southerin . mendu, 5 N.H. 420, 1831 W 1104, at *7 (N.H. 1831) (“When a

ortaee transfers to another erson , the det which is secured y the ortae, he ceases to hae

any control oer the ortae. . . . And we are of the oinion, that the interest of the ortaee asses

in all cases with the det, and that it is not within the statute of frauds, ecause it is a ere incident to

the det, has no alue indeendent of the det, and cannot e searated fro the det.”).

New Jersey : n re ennedy mort. Co., 17 b.. 957, 966 (bankr. . N.J. 1982) (“Anyone interested in

acquirin an interest in the ortae would e olied to otain an interest in the det.”).

New York : mortae lec. eistration Sys., nc. . Coakley, 41 A..3d 674, 838 N.Y.S.2d 622 (A.

i. 2007) (“at the tie of the coenceent of this action, mS was the lawful holder of the

roissory note (see CC 3-204[1]; Franese . Fidelity N.Y. FSb, 214 A..2d 646, 625 N.Y.S.2d 275),

and of the ortae, which assed as an incident to the roissory note (see payne . Wilson, 74 N.Y.

348, 354-355; see also Weaer Hardware Co. . Solooit, 235 N.Y. 321, 139 N.. 353; matter of Falls,

31 misc. 658, 660, 66 N.Y.S. 47, a ’d. 66 A. . 616, 73 N.Y.S. 1134”) (ehasis added); proident bank

. Counity Hoe mortae Cor., 498 F. Su. 2d 558, 564-65 (..N.Y. 2007) (alyin rincile



20

that the ortae follows the note).

North Carolina: iie grocery Co. . Hoyle, 204 N.C. 109, 167 S.. 469 (1933) (“e ortae follows

the det.”).

Ohio: .S. Nat’l bank Ass’n . marcino, 181 Ohio A.3d 328, 337 (2009) (“[T]he neotiation of a

note oerates as an equitale assinent of the ortae, een when the ortae is not assined

or deliered. uck . Soers (1950), 100 N..2d 68, 75, 59 Ohio As. 400. various sections of the

nifor Coercial Code, as adoted in Ohio, suort the conclusion that the owner of a roissory

note should e reconied as the owner of the related ortae. . . . us, althouh the recorded

assinent is not efore us, there is sucient eidence on the record to estalish that aellee is the

current owner of the note and ortae at issue in this case, and, therefore, the real arty in interest.”)

(citations to Ohio’s ersions of CC §§ 9-109(a)(3), 9-102(a)(72)() and 9-203() oitted).

Oklahoma: zorn . van buskirk, 111 Okla. 211, 239 p. 151 (1925) (“the ortae follows the note”).

Pennsylvania: n re miller, No. 99-25616JA, 2007 W 81052, at *6 & n.7 (bankr. W.. pa. Jan.9, 2007) (citin and quotin with aroal gray, mortaes in pennsylania at § 1-3 (1985) (“the

ortae follows the note”)).

South Carolina: midFirst bank, SSb . C.W. Haynes & Co., nc., 893 F. Su. 1304, 1318 (. S.C. 1994)

(“South Carolina reconies the ‘failiar and uncontroerted roosition’ that ‘the assinent of a

note secured y a ortae carries with it an assinent of the ortae.’ Hahn . Sith, 157 S.C. 157,

154 S.. 112 (1930); ballou . Youn, 42 S.C. 170, 20 S.. 84 (1894).”).

Texas: iry uer Cor. . Willias, 230 F.2d 330, 333 (5th Cir. 1956) (alyin Teas law) (“e

rule is fully reconied . . . that a ortae to secure a neotiale roissory note is erely an incidentto the det, and asses y assinent or transfer of the note.”).

Utah: Sith . Jaran, 211 p. 962, 966 (tah 1922) (“e odern doctrine that the ortae follows

the note as an incident was thus lon ao reconied y this court . . . .”).

Virginia: Yery . ynch, 3 gratt. 460, 1847 W 2384, at *8-10 (va. 1847) (“the ortae follows the

det”).

Virgin Islands: mC vp C . matthias, 234 F. Su. 2d 520, 523 (. v.. 2002) (citin and quotin

with aroal the “STATmNT (TH) OF pOpTY, mOTgAgS § 5.4(a) (1997). e

coent to this section further elains that ‘[t]he rincile of this susection, that the ortaefollows the note, ... alies een if the transferee does not know that the oliation is secured y a

ortae.... ecordation of a ortae assinent is not necessary to the eectie transfer of the

oliation or the ortae securin it.’ d. § 5.4 ct. (1997). Accordinly, in the virin slands,

no searate docuent secically assinin and transferrin the ortae which secures a note is

required to accoany the assinent of the oliation, ecause the ortae autoatically follows

the note.”).



21

Washington: Nance . Woods, 79 Wash. 188, 189, 140 p. 323, 323 (Wash. 1914) (“the ortae follows

the note”).

As entioned aoe, the eneral coon law rule that “the ortae follows the note” is codied

in Article 9 of the CC. Section 9-203() of the CC states: “e attachent of a security interest in a riht

to ayent or erforance secured y a security interest or other lien on ersonal or real roerty is alsoattachent of a security interest in the security interest, ortae, or other lien.”17 CC § 9-203() (ehasis

added). e hrase “security interest” in this roision includes a uyer’s ownershi interest ecause CC

§ 1-201()(35) denes “security interest” to include “any interest of a . . . uyer of . . . a roissory note in

a transaction that is suject to Article 9.” us, under Article 9, a sale of a ortae note eans that the

uyer’s rihts attach not only to the ortae note itself ut also to the ortae that secures the ortae

note. moreoer, under CC § 9-308(e), those rihts are erfected and can e enforced aainst third arties.18

eardin the iact of these CC roisions, one treatise states: “Article 9 akes it as lain as ossile that

the secured arty need not record an assinent of ortae, or anythin else, in the real roerty records

in order to erfect its rihts in the ortae.” J. mconnell and J. Sith, Secured Transactions nder thenifor Coercial Code, § 16.09[3][].

Courts in seeral states hae ared and alied the “ortae follows the note” rule in cases where

the ortae assinent was not recorded y the transferee.19 See, e.., Nat’l iestock bank . First Nat. bank,

203 .S. 296, 307-08 (1906) (citin with aroal a decision of the Suree Court of ansas for the roosition

that “where a ortae uon real estate is ien to secure ayent of a neotiale note, and efore its aturity

the note and ortae are transferred y indorseent of the note to a ona de holder, the assinent, if there

e a written one, need not e recorded”); Jackson . mortae lec. eistration Sys., nc., 770 N.W.2d 487,

497-98, 500 (minn. 2009) (alyin the “ortae follows the note” rule where there was no assinent of the

ortae); mC vp C . matthias, 234 F. Su. 2d 520, 523 (. v.. 2002) (“ecordation of a ortaeassinent is not necessary to the eectie transfer of the oliation or the ortae securin it.”); Federal

Nat’l mort. Ass’n . uiers, 314 ll. A. 3d 631, 635, 732 N..2d 723, 727 (ll. Ct. A. 2000) (“because the

assinent of the det, with nothin ore, is sucient to resere the ortae lien, it cannot follow that the

lien is soehow etinuished for the failure to record the assinent. erefore, we are ersuaded that the

17 Courts hae osered that CC § 9-203() codies the “ortae follows the note” rule. See, e.., .S. Nat’l bank Ass’n . marcino,181 Ohio A.3d 328, 337 (2009) (quotin with aroal Ocial Coent 9 to CC § 9-203: “susection () [of CC § 9-203]

codies the coon-law rule that a transfer of an oliation secured y a security interest or other lien on ersonal or real ro-erty also transfers the security interest or lien”).

18 As discussed aoe, CC § 9-308(e) roides that “erfection of a security interest in a riht to ayent or erforance alsoerfects a security interest in a security interest, ortae, or other lien on ersonal or real roerty securin the riht.” CC §9-308(e) (ehasis added).

19 n ost states, recordin of an assinent of ortae is enerally not required to ensure the enforceaility of the assinent of ortae as etween the assinor and assinee, and anyone with knowlede thereof. t is eyond the scoe of this aer to discussin detail the otential risks to the ortae transferee of not recordin a ortae assinent. ose risks iht include, aonothers, delayin the transferee’s aility to foreclose on the ortae, failin to receie notices that ay o to the ortaee of re-cord, and otherwise leain the assinee oen to nelient or fraudulent actions or inactions y the ortaee of record that couldind the ortae transferee and iair the alue or enforceaility of the ortae. Siilarly, when an assinent of ortaeis not recorded, the assinor ay e liale for certain oliations iosed uon a ortaee of record, such as the oliation toroide a ay-o stateent or ortae release within a desinated tie eriod.



22

ortae lien and riority osition inure to the enet of the assinee and that recordin the assinent is

unnecessary to resere the security for the det.”); n re ennedy mortae Co., 17 b.. 957, 964 (bankr. .N.J.

1982) (“e fact that assinents of ortaes ay e recorded does not aect the alidity of an assinent

of a ortae which has not een recorded.”).

Courts hae also ared and alied the “ortae follows the note” rule een when there was no

actual searate written assinent of the ortae. See, e.., Carenter . onan, 83 .S. 271, 275 (1873) (“e

transfer of the note carries with it the security, without any foral assinent or deliery, or een ention

of the latter.”); Chase Hoe Fin., C . Fequiere, 119 Conn. A. 570, 989 A.2d 606, 610-11 (Conn. Ct. A.

2010) (“general Statutes § 49-17 [which codies the “ortae follows the note” rule] erits the holder of

a neotiale instruent that is secured y a ortae to foreclose on the ortae een when the ortae

has not yet een assined to hi.” (ehasis added)); .S. Nat’l bank Ass’n . marcino, 181 Ohio A.3d 328,

337 (2009) (holdin that ank was the “current owner” of a ortae note and the related ortae desite

the fact that “there is no eidence on the record that aellee is the current assinee of the note and ortae,”

and ndin that “the neotiation of a note oerates as an equitale assinent of the ortae, een when the

ortae is not assined or deliered” (citin uck . Soers, 100 N..2d 68, 75, 59 Ohio As. 400 (1950));

mC vp C . matthias, 234 F. Su. 2d 520, 523 (. v.. 2002) (the rincile “that the ortae follows

the note, . . . alies een if the transferee does not know that the oliation is secured y a ortae”); n re

nion packin Co., 62 b.. 96, 100 (bankr. . Ne. 1986) (with or without the assinent of the ortae,

the assinee of the roissory note has the riht to enforce the ortae securin the note); morris . bacon,

123 mass. 58, 59 (1877) (note holder that endorsed and deliered ortae note to ank as security for a

loan, ut without an assinent of the ortae, was required y the court to transfer the ortae to the

ank); breer County bank . astan, 34 owa 392, 1872 W 254, at *1 (owa 1872) (“e transfer of the

note, secured y the ortae, carried the ortae with it as an incident to the det, and the indorsee of the

note could aintain an action in his own nae, to foreclose the ortae without any assinent thereon

whateer.”); Southerin . mendu, 5 N.H. 420, 1831 W 1104, at *8 (N.H. 1831) (“the riht of the ortaee

efore foreclosure is . . . assinale y a ere assinent of the det, without deed or writin”).

Coon mbS ractices, as descried aoe, are consistent with the eneral rule that “the ortae

follows the note”: ursuant to the oolin and sericin areeent that oerns a ortae-loan securitiation,

and the lanuae of assinent tyically contained in such an areeent, the ortae note and the ortae

itself are sold, assined, transferred and deliered to the trustee, and the transferor also tyically deliers a

written assinent of the ortae that is in lank in recordale for. Courts hae held that the lanuae of

assinent contained in a oolin and sericin areeent, alon with the corresondin transfer, sale and

deliery of the ortae note and ortae, are sucient to transfer the ortae to the transferee/trustee

or its desinee or noinee. See, e.., Wells Faro bank, N.A. . onoer, No. 3:05 Cv 1924 (CF), 2009 W

2710229, at *3 (. Conn. Au. 21, 2009) (mbS oolin areeent ested authority in ool trustee to rin leal

action in the eent of default); .S. bank N.A. . Cook, No. 07 C 1544, 2009 W 35286, at *2-3 (N.. ll. Jan. 6,

2009) (mbS oolin trust areeent eected an assinent of the ortae at issue to the ool trustee); n re

Sauels, 415 b.. 8, 18 (bankr. . mass. 2009) (“e [poolin and Sericin Areeent] itself [y which the

mbS loan trust was created], in conjunction with the schedule of ortaes deosited throuh it into the ool



23

trust, sered as a written assinent of the desinated ortae loans, includin the ortaes theseles.”);

mC mortae Cor. . Chaudhri FSb, 400 N.J. Suer. 126, 141, 946 A.2d 578, 588 (N.J. Suer. Ct. 2008) (“any

[ortae] assinent shall ass and coney the estate of the assinor in the ortaed reises, and the

assinee ay sue thereon in his own nae.’” (citin New Jersey Stat. Ann. § 46:9-9 and byra Holdin Co. .

boren, 2 N.J. Suer. 331, 336, 63 A.2d 822 (N.J. Ch. i. 1949)); aSalle bank N.A. . ehan bros. Holdins,

nc., 237 F. Su. 2d 618, 632-33 (. md. 2002) (mbS oolin areeent ranted trustee authority to rin suit

on ehalf of trust); aSalle bank N.A. . Noura Asset Caital Cor., 180 F. Su. 2d 465, 470-71 (S..N.Y.

2001) (lanuae in the oolin and sericin areeent for mbS trust eectually assined ortae to the

ool trustee).20

What is the Relationship Between the UCC and State Real Property Laws?

Article 9 does not aly to “the creation or transfer of an interest in or lien on real roerty, . . .

ecet to the etent that roision is ade for . . . liens on real roerty in Sections 9-203 and 9-308.” CC §

9-109(d)(11) (ehasis added). As discussed aoe, CC § 9-203() roides that, when a security interestin a ortae note attaches, a security interest in the underlyin ortae also attaches, and CC § 9-308(e)

roides the sae reardin the erfection of the security interest. See CC § 9-203 ct. 9 (the “ortae

follows the note” rule codied into CC §§ 9-203() and 9-308(e)). n addition, CC § 9-109() akes clear

that Article 9 does aly to ortae notes een thouh Article 9 does not oern the creation of the ortae

itself:

e alication of this article [9] to a security interest [reeer that this ter is dened

to include any interest of a uyer of a roissory note in a transaction suject to Article

9] in a secured oliation [e.., ortae note] is not aected y the fact that the olia-

tion [e.., ortae note] is itself secured y a transaction or interest [e.., creation of the

ortae or deed of trust itself] to which this article does not aly.

CC § 9-109().21

e creation of an interest in or lien on real roerty, includin a ortae, is

oerned y the non-CC law of the state in which the roerty is located. See, e.., Oreon . Corallis Sand

and grael Co., 429 .S. 363, 378-79 (1977). ikewise, the enforceaility of ortaes (includin the riht and

20 Althouh the rule is “the ortae follows the note” when a ortae note is assined, soe case law indicates that the conerse isnot true and that the ortae note does not necessarily follow the ortae if there is an atteted assinent of the ortaealone or searate fro the ortae note. See, e.., bellistri . Ocwen oan Sericin, C, 284 S.W.3d 619, 623 (mo. Ct. A.2009) (“An assinent of the deed of trust searate fro the note has no ‘force.’”); Saon mort. Ser., nc. . Hillery, No. C-08-4357mC, 2008 W 5170180, at *4-5 (N.. Cal. ec. 9, 2008) (“For there to e a alid assinent, there ust e ore than just assin-ent of the deed [of trust] alone; the note ust also e assined.”); n re Wilhel, 407 b.. 392, 400-05 (bankr. . daho 2009);elley . shaw, 39 Cal.2d 179, 192 (1952) (“n any eent, elley’s urorted assinent of the ortae without an assinentof the det which is secured was a leal nullity.”). is is consistent with the lonstandin asect of the “ortae follows the note”rule that “the note and ortae are insearale; the forer as essential, the latter as an incident.” n re bird, No. 03-52010-JS, 2007

W 2684265, at *2-4 (bankr. .md. Set. 7, 2007).

21 CC Article 3, which alies to neotiale ortae notes, does not aly to ortaes theseles ecause ortaes do not tthe denition of “neotiale instruent” in CC § 3-104(a).



24

ethod to foreclose) is suject to all of the conditions recedent and requireents that are set forth in the

articular ortae itself and in all alicale state and local laws. ose conditions recedent and rocedural

requireents ary fro ortae to ortae and fro state to state. us, ownershi of a ortae (i.e.,

without notice to the ortaor or the ulic, without judicial roceedins (where required), without

satisfaction of other conditions recedent or rocedural requireents in the ortae itself or in alicale

state law), does not always ie the holder of the ortae the leal aility to foreclose on the ortae.

ouh a discussion of the other necessary rerequisites to foreclosure is eyond the scoe of this aer, the

fact that other stes ay need to e taken y the owner of a ortae note, or the owner of a ortae, is

neither unique nor surrisin in our leal and reulatory syste and does not diinish an otherwise leally

eectie transfer of the ortae note and ortae.

How Does the Use of MERS Aect ese Issues?

e use of mS as the noinee for the enet of the trustee and other transferees in the ortae

loan securitiation rocess has een a suject of litiation in recent years. See, e.., bellistri . Ocwen oanSericin, C, 284 S.W.3d 619, 623 (mo. Ct. A. 2009). Soe cases address the authority or aility of mS

or transferees of mS to foreclose on a ortae for which mS is or was the ortaee of record. See, e..,

Saon mort. Ser., nc. . Hillery, No. C-08-4357 mC, 2008 W 5170180, at *4-5 (N.. Cal. ec. 9, 2008). As

a eneral atter, the assinent and transfer of a ortae to mS as noinee of and for the enet of the

enecial owner of the ortae does not adersely iact the riht to foreclose on the ortae.

ecisions in any jurisdictions suort this conclusion. See, e.., n re mortae lect. eistration

Sys., nc. (mS) iti., No. 2:09-d-2119, 2010 W 4038788, at *8 (. Ari. Set. 30, 2010) (“plaintis hae

not cited any leal authority where the nain of mS . . . was cause to enjoin a non-judicial foreclosure as

wronful.”); Coonwealth proerty Adocates, C . mortae lect. eistration Sys., nc., No. 2:10-Cv-340 TS, 2010 W 3743643, at *3 (. tah Set. 20, 2010) (mS as noinee has authority to foreclose); Taylor

. eutsche bank Nat’l Trust Co., No. 509-4035, 2010 W 3056612, at *3 (Fla. A. Au. 6, 2010) (“[T]he

written assinent of the note and ortae fro mS to eutsche bank roerly transferred the note and

ortae. . . . e transfer, oreoer, was not defectie y reason of the fact that mS lacked a enecial

ownershi interest in the note at the tie of the assinent, ecause mS was lawfully actin in the lace

of the holder and was ien elicit and areed uon authority to ake just such an assinent.”); mortae

lect. eistration Sys., nc. . bellistri, No. 4:09-Cv-731 CAS, 2010 W 2720802, at *15 (.. mo. July 1, 2010)

(“[a]s the noinee of the oriinal lender … or the lender’s assins, mS has are leal title to the note and

deed of trust securin it, and this is sucient to create standin” to initiate foreclosure roceedins); Silas .gmAC mortae, C, No. Cv-09-265-pHx-gmS, 2009 W 4573234, at *8 (. Ari. Jan. 5, 2010) (mS

eowered to foreclose where mS is desinated on deed of trust as eneciary); iessner . mortae lec.

eistration Sys., 618 F. Su. 2d 1184, 1187-91 (. Ari. 2009) (mS and trustee under deed of trust are

authoried to institute non-judicial foreclosure roceedin); Jackson . mortae lec. eistration Sys., nc.,

770 N.W.2d 487, 501 (minn. 2009) (rejectin aruent that transfer of ortae note to mS is a transfer that

ust e recorded efore foreclosure); eynoso . paul Financial, C, No. 09-3225 SC, 2009 W 3833298, at *2

(N.. Cal. No. 16, 2009) (nain of mS as initial eneciary under deed of trust, as noinee for the lender,



25

and the susequent transfer of the deed of trust fro mS to a transferee was eectie and did not hinder

transferee’s riht to foreclose); blau . Aerica’s Sericin Co., No. Cv-08-773, 2009 W 3174823, at *8 (.

Ari. Set. 29, 2009) (mS authoried under deed of trust to act on ehalf of lender and transfer its interests);

Farahani . Cal-Western econ. Cor., No. 09-194, 2009 W 1309732, at *2-3 (N.. Cal. may 8, 2009) (mS

authoried to ursue non-judicial foreclosure action); vaque . Aurora oan Sers., No 2:08-c-01800-CJ-

JJ, 2009 W 1076807, at *1 (. Ne. Ar. 20, 2009) (loan docuents suciently deonstrate mS’ standin

“with resect to the loan and the foreclosure”); pfannenstiel . mortae lect. eistration Sys., nc., No. Cv

S-08-2609, 2009 W 347716, at *4 (.. Cal. Fe. 11, 2009) (disissin lainti’s clai that mS lacked

authority to foreclose); Trent . mortae lect. eistration Sys., nc., 288 Fed. A’ 571, 572 (11th Cir. 2008)

(mS “has the leal riht to foreclose on the detors’ roerty” and “is the ortaee”); peyton . econtrust

Co., No. TC021868, Notice of ulin, at 2 (Cal. Suer. Ct. County of os Aneles S. Cent. ist. Oct. 15, 2008)

(mS ay foreclose under California law); Johnson . mortae lect. eistration Sys., nc., 252 Fed. A’

293, 294 (11th Cir. 2007) (suary judent for mS on its action for foreclosure of lainti’s roerty);

n re Sith, 366 b.. 149, 151 (bankr. . Colo. 2007) (mS has standin to conduct foreclosure on ehalf of

the eneciary); mortae lect. eistration Sys., nc. . eoredo, 955 So.2d 33, 34 (Fla. ist. Ct. A. 2007)

(“because, howeer, it is aarent – and we so hold – that no sustantie rihts, oliations or defenses are

aected y use of the mS deice, there is no reason why ere for should oercoe the salutary sustance

of erittin the use of this coercially eectie eans of usiness.”); mortae lect. eistration Sys., nc.

. ventura, Cv054003168S, 2006 W 1230265, at *1 (Conn. Suer. Ar. 20, 2006) (mS is roer arty in

foreclosure).

ere are seeral inority decisions that, in soe for, hae taken issue with mS. but none of

these decisions, to our knowlede, has inalidated a ortae for which mS is the noinee, and none of

these decisions has challened mS’ aility to act as a central syste to track chanes in the ownershi and

sericin of loans:22 See ineard-guira . bank of A., Nat’l Ass’n, No. 10-1065-p, 2010 W 3945476, at

*4 (. Or. Oct. 6, 2010) (suestin that mS ay not qualify as a leitiate eneciary of a deed of trust

under Oreon law, and reliinarily enjoinin foreclosure action y mS); n re Allan, No. 08-31282-

el7, 2010 W 3366405, at *10 (bankr. . Or. Au. 24, 2010) (sae); mortae lec. eistration Sys., nc. .

Saunders, 2 A.3d 289, 297 (me. 2010); n re bo, No. 10-20086, 2010 W 2228289, at *5 (bankr W.. mo. June

3, 2010) (ndin that mS, as eneciary and noinee under the deed of trust lacked authority to assin

the ortae note ecause it neer “held” the note itself);23 n re Hawkins, No. b-s-07-13593-b, 2009 W

22 Soe inestors and loan sericers hae souht to lessen the risk of challenes to foreclosure ertainin to mS y assinin loansout of mS and to the note holder rior to the initiation of foreclosure.

23 e Court in n re bo eressly noted, ut did not decide, the question of whether mS had authority to assin the note as anaent of the lender or een as “a noinee eneciary.” n re bo, 2010 W 2228289 at *4. e sae court, in a later case, answeredthe question directly and found that mS, as the desinated “noinee for the lender and its assins,” “was the aent for [thelender] under the eed of Trust fro the incetion, and mS ecae aent for each susequent note-holder under the eed of Trust when each such note holder neotiated the Note to its successors and assins.” n re Tucker, No. 10-61004, 2010 W 3733916,at *6 (bankr. W.. mo. Set. 20, 2010) (“[w]hen [note-holder] acquired the riht to enforce the Note as the note-holder, mSheld the enecial interest in the eed of Trust on ehalf of [note-holder] and [note-holder] had the riht to enforce all the rihtsranted to [the oriinal lender] and its successors and assins in the eed of Trust”). us, the Court found that the Note and theeed of Trust were not slit ecause of mS’ status as aent for the note holders. d.



26

901766, at *3 (bankr. . Ne. mar. 31, 2009) (ndin that mS was not a true “eneciary” under a deed of

trust, that, under the CC, mS was not entitled to enforce the note, and that “[i]n order to foreclose, mS

ust estalish there has een a sucient transfer of oth the note and deed of trust, or that it has authority

under state law to act for the note’s holder”).24

Finally, it is iortant to reconie that the CC does not dislace traditional rules of aency law.

See CC § 1-103() (“nless dislaced y the articular roisions of [the nifor Coercial Code], the

rinciles of law and equity, includin the law [of ] . . . rincial and aent . . . suleent its roisions.”); see

also CC § 9-313 ct. 3 (rinciles of aency aly for uroses of deterinin “ossession” under Article 9).

nder eneral aency law, an aent has authority to act on ehalf of its rincial where the rincial “anifests

assent” to the aent “that the aent shall act on the rincial’s ehalf and suject to the rincial’s control,

and the aent anifests assent or otherwise consents so to act.” estateent (ird) of Aency § 1.01 (2006).

Accordinly, the CC does not reent mS or others, includin loan sericers, fro actin as the aent for

the note holder in connection with transfers of ownershi in ortae notes and ortaes. See, e.., n re

Tucker, No. 10-61004, 2010 W 3733916, at *6 (bankr. W.. mo. Set. 20, 2010) (ndin mS was the “aent

for [the lender] under the eed of Trust fro the incetion, and mS ecae the aent for each susequent

note-holder under the eed of Trust when each such note holder neotiated the Note to its successor and

assin”); in . A. mortae Network, nc., No. 1:09Cv162 A, 2010 W 3516475, at *3 (. tah Set. 2,

2010) (rejectin aruent that note and deed of trust were slit ecause Fannie mae held the note and mS

was listed as the noinal eneciary under the deed of trust and ndin that oth mS and the authoried

loan sericer had authority as aents of the note holder to act on ehalf of the note holder, includin the

initiation of foreclosure roceedins on the underlyin roerty); mich. Co. aws § 600.3204(1)(d) (“e

arty foreclosin the ortae is either the owner of the indetedness or of an interest in the indetedness

secured y the ortae or the sericin aent of the ortae.”); Hilon . mortae lect. eistration Sys.,

nc., No. 06-13055, 2007 W 1218718, at *3 (.. mich. Ar. 23, 2007); Caraantes . California econeyance

Co., No. 10-c-1407-g (AJb), 2010 W 4055560, at *9 (S.. Cal. Oct. 14, 2010) (“as sericer of the suject

loan in this case, Jp moran had the authority to record the Notice of efault and to enforce the ower of sale

under the eed of Trust”); birkland . Siler State Fin. Sers., nc., No. 2:10-Cv-00035-J-, 2010 W

3419372, at *3 (. Ne. Au. 25, 2010) (“mS, as noinee on a deed of trust, is ranted authority as an aent

on ehalf of the noinator (holder of the roissory note) as to the adinistration of the deed of trust, which

would include sustitution of trustees”). n short, rinciles of aency law roide mS and loan sericers

another leal asis for their resectie roles in the transfer of ortae notes and ortaes.

24 Soe arties to litiation, and coentators, hae relied uon the ansas Suree Court’s decision in andark National bank . esler, 216 p.3d 158 (an. 2009), to suort the roosition that the identication of mS as a noinee on a ortae isiroer. Howeer, reliance on the decision in esler for that roosition is islaced and stretches the decision well-eyond itsactual holdin. n esler, the Court erely held that mS, in its caacity as the noinee for the lender under a second-ositionortae, was not entitled to notice of a foreclosure sale y the holder of the senior ortae. See id. at 169-70. As the ansas A-eals Court that considered the case noted, “[w]hether mS ay act as a noinee for the lender, either to rin a foreclosure suitor for soe other urose, is not at issue….” andark Nat’l bank . esler, 192 p.3d 177, 180 (an. Ct. A. 2008).



27

4. Conclusion

n suary, the lonstandin and consistently alied rule in the nited States is that, when

a ortae note is transferred, “the ortae follows the note.” When a ortae note is transferred and

deliered to a transferee in connection with the securitiation of the ortae loan ursuant to an mbS

oolin and sericin areeent or siilar areeent, the ortae autoatically follows and is transferredto the ortae note transferee, notwithstandin that a third arty, includin an aent/noinee entity such as

mS, ay reain as the ortaee of record. both coon law and the CC conr and aly this rule,

includin in the contet of ortae loan securitiations. e leal rinciles and rocesses discussed aoe

roide for – and, if followed, result in – a alid and enforceale transfer of ortae notes and the underlyin

ortaes. e transfer and leal eectieness of ortae notes and ortaes are not diinished y the

fact that the enforceaility of ortaes, includin the riht to foreclose, is suject to the conditions recedent

and requireents that are set forth in the articular ortae itself and in the laws of the state in which the

ortaed roerty is located.

tom deutsch testimony

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