The New York Appellate Division, Second Department, has held that a lender does not have standing to commence a foreclosure action when the lender’s assignor was listed in the underlying mortgage instruments as a nominee and mortgagee for the purpose of recording, but never actually held the underlying notes. Bank of New York v. Silverberg, 926 N.Y.S.2d 532 (2d Dep’t 2011). The court’s decision casts doubt on the validity of loan assignments executed by the Mortgage Electronic Registration System (“MERS”), and has significant ramifications for the foreclosure process in New York, suggesting that foreclosing lenders may have to present substantially more robust documentation concerning the mortgage note’s history of assignment and transfer.
The Mortgage Agreements
In October 2006, Countrywide Home Loans, Inc. (“Countrywide”) allegedly loaned $450,000 to Stephen and Frederica Silverberg (“defendants”) to purchase residential real property. The mortgage named MERS as the mortgagee for purposes of recording, but stated that the underlying promissory note was in favor of Countrywide. The mortgage stated: “’MERS holds only legal title to the rights granted by the [defendants] . . . but, if necessary to comply with law or custom,” MERS had the right to foreclose and “to take any action required of [Countrywide].” Subsequently, in April 2007, the defendants allegedly signed a second mortgage on the same property, which again named MERS as the nominee and mortgagee of Countrywide, and executed a promissory note in Countrywide’s favor. The promissory note provided that Countrywide “may transfer this Note.”
In April 2007, the defendants signed a consolidation agreement which merged the two prior notes and mortgages into one loan obligation, once more naming MERS as nominee and mortgagee of Countrywide. While the consolidation agreement named Countrywide as the lender and note holder, Countrywide was not a party to this agreement. All of these agreements were recorded in the Suffolk County, New York Clerk’s office. In December 2007, the defendants allegedly defaulted on the consolidation agreement. On April 30, 2008, MERS assigned the consolidation agreement to the Bank of New York (“BoNY”), as trustee for a mortgage securitization vehicle, through a “corrected assignment of mortgage.”
On May 6, 2008, BoNY brought a foreclosure action against defendants. The defendants moved to dismiss the complaint for lack of standing. The trial court denied the motion to dismiss because MERS assigned the mortgages, as nominee of Countrywide, to BoNY before the foreclosure action commenced. The defendants appealed this decision and set forth several arguments as to the plaintiff’s lack of standing: (i) MERS and Countrywide did not transfer or endorse the notes described in the consolidation agreement to plaintiff, in violation of the Uniform Commercial Code; (ii) MERS never had authority to assign the mortgages; (iii) the mortgages and notes were unenforceable because they were bifurcated; and (iv) the trial court should not have considered the “corrected assignment of mortgage” because it was not authenticated.
Role of MERS
The Appellate Division first described the role of MERS in the mortgage process. Real estate mortgage participants created MERS in the 1990’s to “track ownership interests in residential mortgages.” MERS members subscribe to the MERS system for electronic processing and tracking of ownership and transfers of mortgages. As part of membership, members agree to appoint MERS as an agent for all mortgages registered with MERS. Further, in local county recording offices MERS is named the mortgagee of record. With the creation of MERS, banks were able to transfer mortgage interests more expeditiously and avoid the expense and inefficiency of recording each time a transfer occurs.
The Court’s Analysis
The Appellate Division presented the issue in the case as “whether MERS, as nominee and mortgagee for purposes of recording, can assign the right to foreclose upon a mortgage to a plaintiff in a foreclosure action absent MERS’s right to, or possession of, the actual underlying promissory note.” Generally, “in a mortgage foreclosure action, a plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced.” The court noted that while a mortgage typically follows the assignment of a promissory note, the reverse is not true. A transfer of a mortgage does not automatically transfer the note, and the underlying debt will be a nullity if not transferred along with the mortgage.
First, the court rejected the defendants’ argument that BoNY did not own the notes and mortgages based on the failure to provide proof of recording the corrected assignment, because an assignment need not be in writing; physical delivery will also effectuate an assignment. The court then found, however, that the consolidation agreement did not give MERS authority to assign the notes. Specifically, “as ‘nominee,’ MERS’ authority was limited to only those powers which were specifically conferred to it and authorized by the lender . . . . Hence, although the consolidation agreement gave MERS the right to assign the mortgages themselves, it did not specifically give MERS the right to assign the underlying notes.” The court determined that assignment of the notes was beyond MERS’ authority as nominee. Moreover, the record failed to show that the notes were physically delivered to MERS. Thus, because BoNY “merely stepped into the shoes of MERS,” BoNY had an interest only in the mortgages — not the notes — leaving BoNY without the power to foreclose.
Furthermore, the court commented that its earlier decision in MERS v. Coakley, 41 N.Y.S.2d 622 (2d Dep’t 2007), holding that MERS’ standing to foreclose is limited to circumstances where MERS actually holds the note before a foreclosure action is commenced. In the BoNY case, MERS never held the note, and thus the court found that Coakley did not apply. Even though BoNY contended that the language in the first and second mortgages gave MERS the right to foreclose, the consolidation agreement superseded those mortgages. Either way, broad language “cannot overcome the requirement that the foreclosing party be both the holder or assignee of the subject mortgage, and the holder or assignee of the underlying note, at the time the action is commenced.”
The court concluded that the corrected assignment was a nullity as MERS was never the lawful holder or assignee of the notes described in the consolidation agreement, and therefore did not have authority to assign the power to foreclose to plaintiff. Thus, plaintiff did not have standing to foreclose and the court granted defendants’ motion to dismiss.
The Appellate Division’s Silverberg decision may have broad implications for New York foreclosure practice. The decision suggests that, before commencing foreclosure proceedings, lenders must pay more careful attention to the documentation demonstrating that the entity bringing foreclosure proceedings holds the note and the mortgage in question. Where this documentation is arguably deficient, such deficiencies may often be curable, but where prior lenders in the chain of assignment have ceased to exist, or refuse to cooperate to remedy possible documentary deficiencies, the Appellate Division approach may significantly complicate efforts to foreclose on real property.
Other New York courts have upheld note assignments executed by MERS, and the Silverberg decision adds to a substantial body of conflicting authority regarding the question of MERS’ standing to bring foreclosure proceedings, and to assign mortgages and notes to entities that subsequently bring such proceedings. Compare In re Agard, 44 B.R. 231 (Bank. E.D.N.Y. 2011) (concluding that MERS lacks authority to assign mortgage notes) and LaSalle Bank N.A. v. Bouloute, 28 Misc. 3d 1227A (N.Y. Kings Co. 2010) (holding that a MERS assignee lacked standing to foreclose because MERS had limited agency powers) with Bank of New York v. Sachar, No. 0380904/2009 (N.Y. Bronx Co. 2011) (finding that MERS had broad power to assign mortgage and assignee took physical delivery of the note) and U.S. Bank v. Flynn, 27 Misc. 3d 802 (N.Y. Suffolk Co. 2010) (upholding MERS assignment of mortgage and note). Until the New York Court of Appeal, New York’s highest court, rules on these issues, the state of the law in New York concerning foreclosure standing is likely to remain unsettled.
Mortgage Assignment - How Real Estate Investors Profit
Mortgage assignment is a common practice among lenders. A mortgage deed, also called a deed of trust or trustee's deed or deed of trustee, gives a lender a security interest in the property mortgaged in return for money received. Lenders and mortgagors of deeds of trust often sell mortgages to third parties, like other lenders. If a trustee is assigning beneficial interest under a deed of trust, it should be recorded in writing. Mortgage assignment is a document that indicates that such an assignment of contract has happened. Once an assignment is recorded, a new lender stands in the shoes of the original lender.
Although a lender is not required to inform a borrower prior to mortgage assignment, s/he must send a notification after a mortgage sale has taken place informing the borrower how to make mortgage payments in the future. The borrower can negotiate mortgage terms with the new lender and seek mortgage modification.
A mortgage deed refers to a deed accompanied by a mortgaged loan note. Every mortgage deed involves two steps: a promissory note and a mortgage. A note has details like amount owed, term of loan, etc. and is proof of existence of a mortgage. The mortgage is the means through which a borrower pledges or mortgages property as security for money received. The note and mortgage are two sides of the same coin and are inseparable. A mortgage follows the note and thus assignment of mortgage note results in assignment of a mortgage. In other words, a mortgage cannot be assigned without transferring the note. Therefore, assignment of note and mortgage happen simultaneously.
Mortgage assignments are beneficial to both home sellers as well as buyers. For home sellers it can be an easy way to sell a home that has been on the market a long time. The benefit for home buyers is that they can buy a house without going through the process of qualifying for a bank loan and making a large down payment. There are many real estate companies offering attractive assignment programs that benefit sellers and buyers alike. Using the benefits of such a home mortgage assignment program will help you sell your home quickly or buy a home without dealing with bank formalities.
Once a mortgage has been transferred, it means that obligation of loan has transferred. In order to validly assign a mortgage, a mortgage assignment document should have the following details:
- description of the real estate so that there is clarity about the property
- the name of the original party as well as the third party
- contact information
- the date when the mortgage assignment became valid
Assignment of mortgage should be recorded before the government authority that deals with property ownership, property taxes, etc. If you are a borrower and you receive a notice that your mortgage has been transferred to another lender, you should get in touch with your lender and confirm it. You should also secure details of the person to whom the mortgage was sold to.
If you are a new lender and do not have a valid mortgage assignment document, you will be disadvantaged if you have to move for foreclosure. In the event mortgage payments stop, you may want to move the local court for foreclosure and take ownership of the property mortgaged. If there was no legal document created when you assign a mortgage, you will have no right to file for foreclosure. Therefore, it is important to document when you assign a mortgage. Click here to view our sample mortgage assignment form, also referred to as an assignment of mortgage form or mortgage assignment letter.
One drawback of mortgage assignment is that it all depends on a third party. For many, getting mortgages assigned is a kind of real estate investing practice. The third party to whom the mortgage is assigned to is a real estate investor who reaps the benefits of one of the party's desperateness. The investor third party is only concerned about reaping mortgage assignment profit from the mortgage assignment investing deal s/he has entered into and has no regard for the financial well being of the parties involved.
Mortgage Assignment FAQs
What is mortgage assignment?
Mortgage assignment, also called assignment of trustee's deed or assignment of deed of trustee, is the process of selling an existing mortgage to a third party. The borrower gets notice to make mortgage payments after the date of assignment of the mortgage deed to the new mortgagee. A mortgage assignment form satisfies lawful conveyance of the mortgage. An assignment of mortgage form also signifies that an assignment of contract has occurred and mortgage has been transferred.
Who can assign a mortgage?
A mortgage holder or a borrower can assign the mortgage to a third party. A lender can also assign a mortgage to another lender. In some cases, a homeowner can engage in assignment of mortgage, but the lender must give permission.
What are my benefits if I engage in HUD mortgage assignment program?
Homeowners can avoid foreclosure and can refinance their mortgage with the help of a mortgage assignment program offered by the U.S. Department of Housing & Urban development (HUD). In a real estate investing business, mortgage assignment program helps a real estate investor to sell his/her home really quickly.
What are the drawbacks of mortgage assignments?
There are a few drawbacks to assignment of a mortgage that you should be aware of. In case the buyer defaults on payments, you might have trouble collecting. Another disadvantage is that mortgage assignment depends on a third party-the new buyer, who is only concerned about getting mortgage assignment profit from a mortgage assignment deal.
Can you explain the process of mortgage assignment?
It is always advisable to utilize the services of a professional realtor or investor in the mortgage assignment investing business. Once you assign such a firm the task of mortgage assignment by signing a sales contract, they will do all the paperwork necessary for a mortgage assignment program. You will be required to submit additional documents related to the mortgage in order to assign the mortgage. The mortgage will then be advertised. Once a buyer is located, your realtor will require you to sign remaining paperwork and will prepare closing documents.
Documents required for a mortgage assignment are:
- loan details including loan number, loan type and terms of loan
- an authorization to discharge Loan Information
- purchase contract and addendum to contract identifying conditions of mortgage assignment
- seller's disclosure document
- mortgage assignment letter
- document assigning insurance contract
- an acknowledgement document by seller
- mortgage modifications, if any