SJC To Consider “Produce The Note” Foreclosure Defense In MERS Mortgage Case

by Rich Vetstein on September 8, 2011

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

Update: Update (6/22/12): SJC Issues Final Opinion (click to read)

SJC Orders Additional Briefing On Potential Impact of Ruling (1/6/12)

Oral Argument Analysis (10/3/11)

Do Lenders Need To Hold Both Promissory Note & Mortgage At Foreclosure?

In a rare “sua sponte” (on their own) direct appellate review, the Massachusetts Supreme Judicial Court has agreed to hear an appeal considering the controversial “produce the note” defense in foreclosure cases and whether a foreclosing lender must possess both the promissory note and the mortgage in order to foreclose. Based on arguments asserted by the lender, the court may also consider the circumstances by which a mortgage granted to Mortgage Electronic Registration System (MERS) can be effectively foreclosed in Massachusetts.

This could be a very important decision — potentially as important as the landmark U.S. Bank v. Ibanez case issued in the spring. A ruling against the lenders could expose a gaping and fatal legal black hole with many foreclosure-bound mortgages that were hastily bundled and sold to Wall Street during the real estate boom years. A rejection of the borrower’s arguments as recently made by a bankruptcy judge in Worcester, however, could significantly reduce some MERS induced anxiety and heartburn presently being experienced by lenders and foreclosure attorneys.

The case is Eaton v. Federal National Mortgage Association (Fannie Mae), SJC-11041. The court will hear arguments in October, with a decision coming several months later. The court is also seeking amicus, or friend of the court, briefs from interested parties.

Where’s The Note?

As with many sub-prime mortgage borrowers, Henrietta Eaton had defaulted on her mortgage to Green Tree Mortgage. This was a MERS mortgage originally granted to BankUnited then assigned to Green Tree. Green Tree foreclosed in 1999 and assigned its winning bid to Fannie Mae who attempted to evict Eaton in January 2010.

Eaton was able to obtain an injunction from the Superior Court halting the eviction on the grounds that Green Tree did not possess the promissory note underlying the mortgage when the foreclosure occurred. This has been coined the “produce the note” defense and has been gaining steam across across the country. This is the first Massachusetts appellate case that I’m aware of to consider the defense and surrounding legal issues.

The Superior Court judge, Francis McIntyre, wrote a well-reasoned 10 page opinion, explaining that Massachusetts has long recognized that although the promissory note and the mortgage can travel different paths after the borrower signs them, both instruments must be “reunited” to foreclose. “The mortgage note has a parasitic quality, in that its vitality depends on the promissory note,” the judge ruled. As is becoming increasingly prevalent, neither Green Tree nor Fannie Mae could located the original signed promissory note; they were only able to produce a copy endorsed in blank without an amendment, or allonge, indicating when it was endorsed or who held it at the time of the foreclosure. Without the note properly endorsed and assigned to Green Tree, the foreclosure was a nullity, the judge held.

Potential Impacts Far and Wide

As I mentioned before, a ruling that foreclosing lenders must produce both the note and mortgage held by the same entity would drastically alter existing foreclosure practice in Massachusetts, and may open existing foreclosures to legal challenge. Although I don’t practice in foreclosures, I do know that rarely, if ever, are properly endorsed and assigned promissory notes in the hands of lenders when they foreclose. As with this case, they are typically endorsed in blank, that is, to no one, and in storage somewhere in New Jersey or Ohio held by a loan servicer. In fact, obtaining such promissory notes from lenders can be nearly impossible. They are often lost, missing pages, or destroyed.

This case, which is typical, illustrates the problem with the entire system. According to Fannie Mae’s brief, after the loan funded, the note was indorsed in blank and allegedly transferred to Fannie Mae. How does an entity as sophisticated as Fannie Mae purchase a loan without getting the promissory note properly indorsed and assigned to it? God only knows. So the best Fannie could do was produce a copy of the note indorsed to no one. That’s just great…

The mortgage took a different path along the securitization trail. This was a MERS mortgage, so it was originally granted to MERS, the electronic registry who admittedly acts only as a “nominee” and holds no financial stake in the loan. A Mass. bankruptcy court judge recently voided the foreclosure of a MERS mortgage for some of these reasons. Now while the paper is held by Fannie Mae, the mortgage supposedly gets assigned to Green Tree, the loan servicer, which like MERS has no financial stake in the loan. Green Tree then conducts the foreclosure sale, although it has no real financial interest in the loan–that remains with Fannie Mae. Now it doesn’t take a Louis Brandeis to ask, why didn’t the mortgage get assigned to Fannie Mae, and why didn’t Fannie Mae conduct the foreclosure sale since it held all the financial cards in this transaction? I would love someone to explain this to me because I don’t get it, and I’m not the only one. At this point, the whole system is FUBAR.

Of course, a favorable ruling for lenders would preserve the status quo and business-as-usual atmosphere for foreclosures in Massachusetts, while upholding the effectiveness of the MERS mortgage. The SJC wasn’t afraid to drop a bombshell in U.S. Bank v. Ibanez. Eaton v. Fannie Mae may be next. At the very least, the SJC joins a steady stream of jurists who have concerns about the way in which foreclosures are being conducted in a post-subprime world. When the decision comes down, I’ll be on it!


Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure defense and title defect cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure and title dispute.

Previous post:

Next post: