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A proposal for a national mortgage registry: MERS done right.

3. Conclusion: The Sad State of the Law of Secondary Market Note Transfers

In summary, the American legal system handles secondary market trades of mortgage loans in an almost unbelievably inept manner. It is often difficult or impossible to tell what set of rules govern transactions, given the complexities of the definition of negotiability. (134) If the note is negotiable, the right of enforcement depends on keeping track of the original physical document, which may easily be lost, mislaid, or intentionally destroyed. (135) Market institutions and some state statutes may put reliance on mortgage assignments, but that reliance is generally misplaced, in the sense that assignments prove little or nothing about the right of enforcement. (136) In a number of non-judicial foreclosure states, the rules for foreclosure of security instruments and those for determining the right of enforcement of notes seem to operate on different planets, completely inconsistent with each other. (137) Litigation on all of these issues is rampant. On the whole, it is an appalling mess, completely unsuited for the large-scale secondary mortgage market that exists today.

D. The Cost of Following the Rules.

Assume for a moment that you are responsible for the operations of a secondary mortgage market participant, and you hold a package of loans that you wish to sell to another investor. Moreover, assume that you are determined to do things right; that is, notwithstanding the legal vagaries mentioned above, you are going to provide endorsed notes and recorded assignments for each loan to your purchaser--surely the most conservative position for both seller and purchaser. Consider the steps you need to take:

1. Determine to which of approximately 3,600 recording jurisdictions in the United States the assignment must be sent for recordation. (In several New England states the records are organized on a town, rather than a county basis.)

2. Determine the applicable document standards (margins, font, addresses, cover sheet, etc.) imposed by the recording office of the jurisdiction.

3. Prepare, execute, and acknowledge the assignment of the mortgage. Note that the assignment must be hand tailored to the specific mortgage, since the original parties, recording information, and land description must be recited. Do not forget the notarization!

4. Determine the jurisdiction's fee schedule and calculate the correct recording fee.

5. Write a check for the fee.

6. Transmit the assignment for recording, along with the fee.

7. Locate the original wet-ink signed promissory note, likely stored in an off-site vault.

8. Endorse the note to the transferee, including a hand-written signature. If there is insufficient space on the note, it will be necessary to attach an allonge to the note and write the endorsement on it.

9. Physically transmit the note to the transferee.

10. Ensure that the original assignment is forwarded to the transferee after recording. The recording office may perform this service.

The payment of fees to local recorders is a particular burden. Every jurisdiction has its own fee schedule. Fees are constantly being revised, and in all events are usually based on the number of pages to be recorded. The party submitting the document must count the pages, and the recorder's personnel will count them again. If the fee is incorrect, the document will be returned to the sender without recording and the whole procedure will begin again. Considered at a national scale, the system for payment of recording fees is, by itself, almost insanely inefficient.

The overall process is, to put it mildly, cumbersome. None of the steps are impossible or extremely difficult, but in the aggregate they represent a very substantial cost, and there are no "traffic cops" to insist that the steps are performed. The system may have been reasonably acceptable to the mortgage industry when volumes of secondary market transactions were relatively low. During the late 1990s and early 2000s, when volumes of secondary market trades increased greatly as a result of widespread securitization, players in the industry frequently simply quit playing by these rules. Promissory notes were retained by originators, and often lost or perhaps even shredded. Assignments were not prepared or executed. The system bogged down under its own weight. (138)

II. THE ADVENT AND FALLACIES OF MERS.

In 1993, the principal actors in the secondary mortgage market (139) came together to form the Mortgage Electronic Registration System (MERS). They were motivated by the increased volumes of secondary market trades and the likelihood that they would grow far greater in number as securitization of residential mortgages became more common.

MERS was designed to eliminate the need for successive recording of assignments as a mortgage loan was transferred from one owner to another in the secondary market. A loan is entered into the system either by making MERS the original mortgagee (as nominee for the note holder), or by recording an assignment of the original mortgage to MERS immediately after it is originated. Thereafter, no assignments are recorded to reflect further sales of the loan; instead, market participants simply report subsequent loan sales to MERS electronically, and MERS maintains a computer database of the reported information. When the mortgage is paid off, a person who is purportedly a MERS officer (but who is employed by the mortgage servicer) executes a release to the borrower. Under the original plan, if the mortgage needed to be foreclosed, MERS would execute and record an assignment to the note holder or its servicer, which in turn would conduct the foreclosure.

Initially, market participants were enthusiastic about MERS' services, and by 2000, the majority of residential mortgages originated in the United States were being registered with MERS. (140) The only significant objections came from local real estate recording officials, who were angered that MERS had eliminated the revenues they had previously collected for recording mortgage assignments. The Suffolk County, New York, Clerk of Court took the radical step of refusing to record mortgages or assignments to MERS, but was ultimately ordered to do so by the New York Court of Appeals. (141) Some commentators have continued to maintain that MERS should be held liable for the lost recording fees, (142) and several recorders have filed suits to recover lost fees, (143) but these claims seem both forlorn and absurd. (144) They disregard a fundamental premise of the American recording system--that no one has any obligation to record anything. (145)

In terms of market participation, MERS has been highly successful. At the same time, it has become bogged down in seemingly endless litigation, and is so widely castigated on internet blogs that one reading them would conclude MERS is at best illegal and a principal cause of the foreclosure crisis of the late 2000s, (146) and at worst a satanic threat to the American way of life. (147) What went wrong to cause these enormous legal and public relations problems for MERS? There are many answers, but the material below will outline six of the principal issues that have plagued MERS.

A. A Weak Legal Foundation

MERS was founded as an ordinary Delaware stock corporation, with no special statutory basis for its existence. (148) It has no preemptive authority over existing mortgage or commercial law, and instead was designed to operate within the framework of pre-existing law. The architects of MERS elected to characterize it as a "nominee" for the actual holders of the loans. The use of nominees in commercial transactions is not unusual; (149) for example, brokers often hold shares of stock in a "street name" as nominee for the actual investor. (150) Nevertheless, the concept was apparently generally unfamiliar and confusing to judges. This fact gave foreclosure defense lawyers an opening wedge. They filed a multitude of suits attacking MERS' operations, often arguing that as a nominee, MERS had no authority to execute assignments or appoint substitute trustees (151) on behalf of the beneficial owner. After several significant initial losses, (152) MERS began to win these cases quite consistently, (153) and the issue has now died down considerably.

B. Separation of Mortgage from Note

When MERS was created, a decision was made that MERS would hold only the mortgage, but not the associated promissory note. In light of the complexity and legal liability associated with storing and tracking many millions of notes, (154) this decision was entirely understandable; the administrative burdens of acting as custodians of the notes would have been huge. But this decision had the unfortunate result of giving rise to countless arguments about the apparent separation of the note from the mortgage, and about the extent to which a transfer of the mortgage would transfer the note, and vice versa. As with the suits based on MERS' supposed lack of authority to execute valid assignments, these cases have nearly all been ultimately resolved in MERS's favor, (155) but they have also imposed a huge litigation burden.

C. Use of Multiple "Corporate Officers "

It would have been literally impossible for MERS employees to execute and record all of the assignments and releases required by its enormous portfolio of registered loans. Instead, MERS adopted the practice of allowing its member lenders and servicers to appoint staff personnel as MERS corporate officers--typically vice presidents or assistant secretaries. By some reports, more than 20,000 such individuals were appointed at one time, (156) although the number has now dropped significantly. The result was, of course, to attach MERS' name to literally millions of legal acts performed by people whom MERS had no capacity to train or supervise. Anecdotal evidence suggests that many of these "officers" were careless and sloppy in executing, acknowledging, and recording documents. There is no particular reason to think that they would have been any more competent or careful if they had been acting formally for their own employers (which they were, as a practical matter), but at least their shoddy work would not have reflected on MERS.

D. Foreclosure in the Name of MERS.

Until July 2011, when the practice was discontinued, (157) MERS permitted foreclosures of mortgages in its own name through the use of the thousands of supposed "corporate officers" mentioned above with dubious authority. This practice was much litigated, (158) and at the same time dealt MERS a severe public relations blow, because homeowners concluded that, "MERS is taking my house!" The practice was evidently adopted in response to mortgage holders (and particularly Fannie Mae and Freddie Mac) preferring not to be named plaintiffs in foreclosure actions for reputational reasons. This practice spared mortgage holders some of the blame for foreclosures at the expense of MERS.

Related problems have arisen with MERS in its capacity as a nominal mortgagee for purposes of receiving notice of other legal proceedings affecting the real estate or the loan. MERS operates a "mail room" facility for the purpose of passing along such notices to the real holder of the promissory note. Unfortunately, several courts have held that, because it is a "mere nominee" and not the actual holder, it is not a real party in interest and has no right to be joined or notified of such proceedings. (159) The result has been to deny notice to parties who were obviously in need of it, thereby robbing them of their priority or the opportunity to put on a defense--a spectacularly unjust outcome.

E. Transparency

MERS has traditionally offered only limited transparency to debtors or the public. Its web site's query system was set up mainly to provide the identity of the servicers of its loans, and it strongly encourages borrowers with questions or concerns to contact their servicers. (160) Until July 2010, it was not possible for a mortgage debtor to discover the identity of the investor who held his or her mortgage (as distinct from the servicer) by a query to the MERS web site. (161) Information about investors has now been added, (162) and individual investors are no longer permitted to opt out of the database. (163)

MERS' traditional reluctance to help borrowers identify investors is understandable. For the most part, investors do not want to communicate with mortgage borrowers; rather, they want their servicers to perform this task. Many of them are banks serving as trustees of securitized mortgage trusts. They lack the staffs and resources to carry on such communications, and if they attempt it, they run the risk of making statements or taking actions that will run counter to their own servicers' decisions.

Borrowers are apt to view the situation quite differently. In many cases they have received abysmally poor assistance and communication from servicers, (164) and they understandably want satisfaction from those who employ those servicers. As a consequence of recent changes in MERS policy, they can now identify the relevant investors. The statement of MERS' former president that "the MERS process of tracking mortgages and holding title provides clarity, transparency and efficiency to the housing finance system," (165) once wildly optimistic, is now much closer to the truth.

F. Loan Tracking Accuracy

It is widely asserted that MERS' records of mortgage ownership, even when they are available, are often inaccurate. It is difficult to assess the truth of this claim with any precision, but it would hardly be surprising if it were so. MERS has no leverage to require its members to report loan transfers to it, and it is likely that large numbers of transfers go unreported. Until a mortgage needs to be foreclosed or released, MERS simply does not need information about who holds the loan. Hence, one cannot treat MERS as a source of correct information about the identity of mortgage loan investors, just as (and for the same reason that) local public real estate records often did not provide correct information identifying investors in the pre-MERS era. (166) This fact has clearly undermined MERS' credibility.

In summary, MERS labors under serious structural problems which make it a far cry from the sort of transparent, accurate, and reliable system of mortgage loan registration that many expected it to become when it was founded. While these problems have widely been attributed to bad faith or bad motives, those criticisms are largely unfair and unwarranted. Given the fact that MERS had no statutory foundation for its creation, its decisions may generally have seemed reasonable when they were made, even though many of them have worked out poorly. Conceivably a statutory revamping of MERS could be accomplished, but by now MERS' public reputation is so tarnished that such an effort seems likely to be frustrating and ultimately fruitless.

At the same time, it is more obvious than ever that some sort of MERSlike organization is needed to track the movements of the more than sixty million mortgages in the national secondary market. What is needed is a fresh approach--one that will take the lessons of MERS into account, and will create a nationwide mortgage registration system without the limitations and defects of MERS--in other words, MERS done right. That is the subject of the next section of this Article.

III. FEATURES OF A NATIONAL MORTGAGE LOAN REGISTRY

I propose to outline here the features of a national mortgage loan Registry (167) that would be efficient and transparent; that is, it would be simple and inexpensive to register and transfer mortgage loans in the system, and the system would quickly and conveniently provide information about loan ownership and servicing authority to those who need it. I have provided in an Appendix a draft of a statute that I believe would achieve these ends, and numerous footnotes in this section refer to the provisions of that statute.

A. Federal Preemption.

The system I envision must be enacted by Congress in order to preempt state law. (168) While in theory changes in state law could accomplish the goal of creating a national registry, there are at least four reasons why a stateoriented approach would likely be exasperatingly slow and uncertain in outcome, and why preemption is necessary.

First, state law is bogged down with the inherent ambiguities of the UCC Article 3's definition of negotiability, and the fact that only negotiable notes are governed by Article 3. (169) One of the primary tasks of a federal statute would be to eliminate this distinction so far as mortgage notes are concerned, and to treat all mortgage notes alike. The uncertainty concerning what state law governs their transfer would become irrelevant.

Second, a federal statute would eliminate the necessity for physical delivery of the original promissory note as a means of transferring the right of enforcement, as is now required by UCC Article 3 for negotiable notes. (170) The embodiment of the legal right in the physical instrument made sense in the era in which it was invented, but it is absurdly archaic in a time when records of virtually all property rights are maintained in electronic databases. The burdens and risks of transferring such huge volumes of paper are unnecessary and unacceptable. Again, federal preemption can readily eliminate the need for this practice.

Third, federal preemption can short-circuit the ongoing avalanche of litigation over precisely what proof is needed to foreclose a mortgage or bring a suit on a mortgage note. American law is a confused morass on this issue. In a single stroke, a federal statute can provide that an appropriate certificate issued by a national mortgage Registry is adequate proof of the right to foreclose in every jurisdiction in the country. (171)

Fourth, a federal statute could immediately eliminate the confusion that has arisen about the supposed separation of the note and mortgage under the MERS system. (172) A proper national registration system would not need to engage in the "nominee" sophistry on which MERS is based: it would track the right to enforce, but would not become the owner or an agent of the owner, of notes or mortgages. Moreover, the governing statute could declare unambiguously that the mortgage and note cannot be separated, and that holding one is always holding both. (173)

Is federal law really needed for these purposes? Could not modifications of state law accomplish the same things? In theory, the answer is yes, but only in part, and only if we are willing to wait a very long time. Work has already begun on some elements of the task outlined above. In January 2012, the National Conference of Commissioners on Uniform State Laws announced the formation of a drafting committee to work on a uniform act dealing with the proof that must be adduced to foreclose a mortgage. (174) Tentatively entitled the Residential Real Estate Mortgage Foreclosure Process and Protections Act, this effort will almost certainly take at least two years to complete. (175) It is not yet clear what form the act will take, and whether the result will gain traction with state legislatures is anyone's guess. State enactment is at best an incremental process requiring many years to complete. (176) National uniformity is highly desirable from the viewpoint of mortgage servicers, who otherwise must keep track of and qualify under multiple state law variations, as they do now. But some states may never adopt the act, leaving uniformity a chimerical goal. By comparison, congressional action can provide nationwide uniformity immediately.

What of the other state law changes mentioned above--those that depend on the operation of UCC article 3? Again, in theory the state law answer is simple: the Permanent Editorial Board of the Uniform Commercial Code could recommend, and a drafting committee could then adopt, appropriate changes to Article 3. One straightforward approach would be simply to declare that all promissory notes secured by real property are nonnegotiable. (177) I have previously recommended this step. (178) However, the Permanent Editorial Board has shown no disposition to recommend any action with respect to mortgage notes, and the matter appears to be in stasis. The reasons for this unwillingness to act are unclear, and it is uncertain whether any change in attitude is likely in the foreseeable future. (179) Even if it were to occur, the time required to make the changes applicable throughout the states would probably be lengthy.

Registering and tracking mortgage loans in the United States is a national issue that requires a nationwide solution. No existing federal agency has the authority to create such a solution, nor the power to preempt state law in the process of doing so. When mortgage loans were assets traded only at the local level, or not at all, state law may have been satisfactory. Today that era has passed. Only action by Congress can address the needs of the national market that now exists.

B. What is Being Registered--Ownership or the Right to Enforce?

It is important to be perfectly clear about what legal attributes are to be registered in a new registration system. We sometimes use the term "ownership" to describe the rights of mortgage investors, but it should be employed only in a colloquial sense. The Uniform Commercial Code distinguishes between ownership and the "entitlement to enforce" a note. (180) In essence, any third party who can identify the person "entitled to enforce" the note can deal safely with that person. Thus, the basic obligation under the note is to pay that person, and payment to him or her will discharge the note, while failure to pay that person when due will constitute dishonor--in effect, a default on the note. (181)

It is this quality that needs to be tracked in a mortgage Registry, so that all third parties can determine, by reviewing the Registry that they are dealing with the correct person for all purposes. Ownership, as the UCC understands the term, is a different matter; it determines who is entitled to the economic benefits of the note--the money received when the note is paid, for example. While this is usually the same as the "person entitled to enforce," it is not necessarily so. (182) But third parties who look up a loan in the national Registry have no particular interest in learning the identity of the "owner" of the note in this sense. They simply need to know that if they pay, or agree to a modification with, or are foreclosed by, the person identified in the Registry, they are dealing with (or being dealt with by) the person with the proper authority. Once the note is paid, for example, the person who has paid it simply does not care if the person receiving the payment has a duty to hold the funds for, or remit them to, someone else--an "owner" in UCC parlance, as distinct from a person entitled to enforce.

In the Draft Statute in Appendix A, I have chosen to use the term "holder" as a shorthand way of describing the person that UCC Article 3 would say is "entitled to enforce" the note. (183) This usage is similar to Article 3's use of the same term, and thus has the advantage of familiarity. (184) The Draft Statute, however, expands the grant of authority of the holder to include all forms of enforcement of the mortgage itself as well as the note, so as to make it completely clear that the same party can enforce both instruments, and that the two instruments are bound together as if they were one. The most obvious illustration of this expansion is the positive statement in the Draft Statute that the holder can foreclose the mortgage securing the note. (185) Likewise, the holder of the note and mortgage can agree to a modification of the obligation, or consent (under the authority of a due on sale clause) to a transfer of the real estate securing the note. The holder can also bring an action to enforce any covenant in the mortgage (as well as the note, of course), although admittedly such actions are not very common. Overall, the concept adopted in the Draft Statute is that the holder can safely be dealt with by the maker-mortgagor or any other person for any purpose related to the note or the mortgage. (186) Finally, only the holder can make a transfer of the mortgage loan to another holder. (187)

Thus, the Draft Statute is about registering holders. The Registry need not be concerned with relations between holders and owners (in the cases in which they are, indeed, different), for anyone who deals with the holder will be assured that the resulting bargain is binding on the owner as well. Indeed, the Draft Statute provides in effect that an owner who is not also a holder has no authority to deal with the maker or other parties. (188) UCC Article 9 governs the rights of owners as such, and provides, in substance, that one who buys the rights to a note may become an owner either by taking possession of the note or by a written agreement signed by the transferor. (189) This approach will continue to be entirely satisfactory if the Draft Statute is adopted, and there is no need for the Registry to preempt it or deal with it further.

The Registry must also accommodate "transferrable electronic records." This concept was developed to permit the use of electronic promissory notes in lieu of paper notes, primarily in real estate loan transactions. The distinguishing feature of a "transferrable electronic record" is that only one authoritative electronic copy can exist at a time. When such a note is transferred, the copy held by the transferee becomes authoritative, while any copy retained by the transferor becomes non-authoritative. The result is the practical equivalent of physical delivery of an original paper note, and satisfies the delivery requirement for negotiable notes under UCC Article 3. (190) The person to whom the note is issued or transferred is said to have "control" of the record, and only that person can authorize a further transfer or a modification of the record. Both the Uniform Electronic Transactions Act (UETA) (191) and the federal eSign (192) statute authorize transferrable electronic records in virtually identical language.

Because the use of electronic note is gradually growing, it is obviously desirable for the federal mortgage loan Registry to recognize and register promissory notes in electronic form. Under existing statutory definitions, the person having "control" of the record is the holder of the note for purposes of UCC Article 3. (193) Hence, the Registry must maintain a record of, and certify the identity of, that person. The Draft Statute defines "holder" to mean the person with control in the case of a transferrable electronic record, (194) so that a certificate from the Registry identifying the holder will ipso facto certify the identity of the person with control.

C. Registration or Recording?

There are two kinds of land records system in the United States, recording and registration. (195) This section will explain the conceptual differences between them, and will explain why the registration model is the one on which a national mortgage Registry should be based.

By far the more prevalent system for American land records is termed "recording." A recording system is much like a public library. Individuals (usually grantees or recipients of land interests) may enroll their documents in the system, and other individuals are free to consult the system and try to locate the documents that are relevant to their plans (usually to buy or take a security interest in a parcel of land). The officials who operate the system are responsible only for accepting documents and indexing them in an organized fashion so that they can be located later; they make no attempt to determine who holds ownership rights or other interests in any particular parcel of land, and they make no averment of such rights to persons searching or inquiring of the system. In effect, members of the public are invited to search the records and draw their own conclusions, an activity in which they typically get the assistance of attorneys or title insurers.

In a recording system, no one is legally obligated to record anything and documents are fully valid as between their parties without recording. However, persons receiving documents that transfer interests to them have a strong incentive to record those documents because if one fails to record, one's grantor may later make a conflicting conveyance of the same property to a different grantee who, if properly qualified, may prevail over the original (but unrecorded) recipient. (196)

A registration system is an entirely different creature. (197) The public officials who operate a registration system are responsible to track, not merely documents, but actual property interests. They issue certificates of title to persons acquiring interests in land, and those certificates are legally conclusive. Most of the developed world uses title registration systems, (198) but in the United States it is available in only nine states, and is little used in most of them. (199)

The Draft Statute would create a registration system, not a recording system. The principal advantage of registration is that the certificates of the Registry would be conclusive. (200) In effect, this means that they could not be legally incorrect. If the Registry's certificate states that a mortgage is held by a certain party, then that party is the holder. This is a powerful feature; it means that anyone relying on the Registry can do so with complete confidence.

At the same time, there are powerful disadvantages. Any system of title registration can make mistakes, either because of human error or because it has received fraudulent information. If such mistakes have the effect of vesting the holding of a mortgage loan in the hands of someone who is not entitled to it, someone else will have been wrongfully deprived of that mortgage loan. The deprived party will not be happy, and may come to the Registry and seek compensation. To be fair and just, the Registry must provide such compensation, and must have funds out of which compensation can be paid.

This is the feature that, probably more than any other, made the existing Torrens land title registration systems in the United States unsatisfactory. It was widely asserted that compensation funds were inadequate, and compensation was hard--sometimes bordering on impossible--to obtain, often requiring litigation. However, there are some aspects of a mortgage registration system, as compared with a land title registration system, that greatly ameliorate these problems. First, there is the fact that we are only talking about money. Land is different: people have personal, family, and social attachments to land, (202) and money may be a poor substitute for those attachments. But no one has a personal attachment to a mortgage loan, and money is always a perfectly acceptable substitute.

A second distinction between land title registration and mortgage registration is that it is entirely unnecessary for the mortgage loan Registry to be concerned about land titles or land descriptions. One of the most challenging aspects of administering a Torrens land registration system arises from the need to identify unambiguously the parcel or parcels of land affected by any transaction. This requires a great deal of training and skill, particularly when one considers all of the ways in which land parcels can be subdivided and combined. It is easy to make a mistake.

A mortgage loan, on the other hand, can easily be assigned a unique identifying number when the loan is originated or registered, and that number can be used to track it throughout its life. We have been doing this with the Vehicle Identification Numbers on motor vehicles for many decades. (203) MERS has used just such a system of mortgage identification numbers, and in that respect MERS seems to have worked exceptionally well. A further simplifying factor is that the holding of mortgage loans, unlike land, is never consolidated or subdivided. The mortgaged land's description or identification will be completely outside the scope of the Registry's operations. Investors in mortgage loans will continue to rely on title insurance, as at present, for land title security.

Other steps can be taken to minimize the risk of the Registry's issuing erroneous certificates. Fraudulent submissions to the Registry can be discouraged, if not entirely avoided, by the existence of heavy criminal penalties and civil liability. (204) Standardized data sets and electronic formats can help avoid errors; indeed, the Federal Housing Finance Agency has been working aggressively on developing just such data sets. (205) Moreover, if the Registry issues an erroneous certificate, it should have the power to revoke it if no person has relied upon it detrimentally and in good faith. (206)

No system is perfect, and doubtless errors will sometimes occur, requiring the payment of compensation. But it seems entirely plausible to assume that errors will be rare and manageable, and that the system can readily build their cost into its fee structure.

D. Initial Recording of Mortgages

The Draft Statute requires, as a condition of the registration of any mortgage loan in the Registry, that the mortgage itself first be recorded or registered in the land records under state law in order to establish its priority. (207) This is absolutely essential, for the Registry is not intended to determine the mortgage's validity or priority as against other interests under state law, or to be a substitute for local recording of the mortgage itself. The existing state recording system works well enough for that purpose, and attempting to supplant it with a federal system would vastly expand the Registry's role, and would create conflicts and complexities that are entirely unnecessary. In theory, it would be possible for the Draft Statute to treat an unrecorded mortgage as acceptable for registration in the federal Registry, but no one except a fool takes a mortgage on land without recording it, and there is no need for the Registry to serve fools.

E. Electronic Registration and Transfer and the Problem of Document Authenticity.

The Registry, as envisioned in the Draft Statute, will be a paperless operation. (208) Initial registrations and all transfers from one holder to another will be accomplished electronically. This means that the reliability and authenticity of the original registration process is critical. The Registry can identify an entity registering a mortgage loan, and verify the authenticity of the message containing the registration data, through the use of public key cryptography. There are a number of experienced, reliable providers of digital signatures based on this technology, and if their services are properly used, one can have extremely high confidence in the identity of the sender and the fact that message as received was exactly what was transmitted. The same procedure can be used when a holder wishes to transfer an already-registered loan. While the technical details of these operations are outside the scope of the present Article, they are readily available from other sources. (210)

This leaves the question of the authenticity of the original loan documents. The party submitting the mortgage loan for registration can and should be required to attach scans of the note and mortgage, including their signature pages. (211) But that does not prove that the documents are not forgeries. A mortgagee title insurance policy provides protection against forgery of the mortgage, at least in the hands of a transferee from the original mortgagee. But title insurance does not cover the note, (212) and a mortgage without an accompanying authentic note is worthless.

Of course, this problem is not unique to an electronic Registry. A paper document purporting to be an original promissory note might be also a forgery, and there have surely been instances of such false notes being sold on the secondary market. (213) Almost universally, under the purchase and sale agreement the seller of such a note is obligated to buy it back and reimburse the purchaser. (214) But this is cold comfort if the seller has been dissolved or is insolvent, as crooked sellers of mortgage loans tend to be.

Perhaps the best answer to this question is for the Registry not to assume liability for the legal authenticity of the underlying documents. This would leave the Registry to say, in effect, "We assure anyone relying on our records that the holder of this note and mortgage is indeed the person our records indicate. However, we do not provide assurance that the note and mortgage themselves are authentic documents signed by the maker and mortgagor." (215) This position should not produce any great shock in the market; after all, the traditional recording system provides no protection against forged or fraudulent documents, either. Indeed, for forged notes (as distinct from mortgages, for which title insurance is available) there is no protection to investors except to use caution in deciding with which originators or sellers they will do business.

F. Registration of Servicing

In most cases, it is not very useful for a mortgagor to know the identity of the investor who holds his or her loan. The reason is that the investor has usually delegated to a servicer the authority to deal with the mortgagor; indeed, the investor typically is not equipped to, and does not wish to, have direct contact with borrowers. (216) Hence, for a Registry to be helpful to borrowers, it must reveal the servicer's name and contact information as well as that of the holder of the loan.

This is not to suggest that anyone has been trying to hide this information. MERS, for example, proclaims itself keen to help mortgagors contact their servicers. (217) Federal law requires notification to the mortgagor of a "federally-related" mortgage loan each time servicing is transferred. (218) Servicers are usually eager to keep mortgagors up to date, because they want to avoid any excuse for late or missing payments.

The term "servicer" is not, however, self-defining. A servicer is an agent with specific authority, and it is desirable for the holder of the loan to spell out that authority in a way that is available and intelligible to the public. For this reason, the Draft Statute allows holders to designate servicers in the Registry's records (219) (as they have a strong self-interest in doing), but requires that those doing so must provide a brief description of the servicer's authority. (220) This could easily be accomplished with a "check the box" system for the usual powers, along with an opportunity to provide a textual explanation of any unusual authority. There would be no objection to a holder identifying multiple servicers, perhaps with different scopes of authority.

G. Capturing the Entire Loan File

To be truly useful to investors and servicers, the Registry should encourage registrants to submit the entire loan file to the Registry's custody. As mentioned above, full scanned images of the note and mortgage - the two documents that form the legal core of the loan transactions - should be held by the Registry. (221) Secondary market investors typically insist on receiving copies of a number of other documents from the loan file as well: the appraisal, credit report, lender's title insurance policy, mortgage insurance application and certificate, and any pre-registration assignments, modifications, or assumption agreements.

Standards have been developed or are currently in development by the Mortgage Industry Standards Maintenance Organization (MISMO) for the representation of all of these types of documents in digital form. (222) MISMO, established in 1999, was created "to coordinate the development and maintenance of Internet-based Extensible Markup Language (XML)" data sets for all of the usual documents employed in mortgage loan transactions. (223) Using MISMO's standards, it would be feasible for a national mortgage Registry to capture and preserve the essential elements of any loan file, residential or commercial, in a standardized, compact, and efficient form. (224) There would be no need for scanned images of these documents, as the XML data would contain all of the variable information from them.

Of course, inclusion of this additional data would be optional with the registrant, but there is reason to expect it to be extremely popular. Centralizing this data in a national Registry would mean that it would be unnecessary for one mortgage holder to transfer photocopies of the file documents to another when a loan was sold on the secondary market. A transfer of the loan in Registry would automatically make the full file available to the loan's new holder. There are huge efficiencies to be gained by such a procedure, and it might be one of the most attractive features of a national Registry to the mortgage industry.

H. Transparency

In the United States we have long been accustomed to the notion that the identity of a mortgage holder is a matter of public record. As discussed earlier, in recent decades this has been far from universally true, as mortgage investors have increasingly abandoned the practice of recording mortgage assignments on a current basis. (225) Of course, virtually all mortgages are recorded, and assignments sometimes continue to be recorded as well. This salutary practice should be carried over to a national mortgage Registry. Any member of the public should be able to inquire, via the internet, and determine the identity of any mortgage's holder and servicer, and to request copies of the basic mortgage and other mortgage-related documents, such as pre-registration assignments, modifications, assumption agreements, and the like --all of the documents which were traditionally recordable and recorded in the existing real estate records. (226)

Ready availability of information about servicer identity would be a particular boon to those who pay off mortgage loans. Most payoffs are done by "settlement agents," of course, title companies, escrow companies, and lawyers. In the present environment they are often uncertain of the identity of the loan servicer to whom payment should be made, and find themselves relying on information of dubious credibility. An accurate and transparent online source of this information would be a great advantage to them.

With respect to the other information held by the Registry, beyond the identity of the investor and servicer and the traditionally recorded documents, privacy concerns outweigh the public's need to know. For example, promissory notes are not ordinarily recorded under state law, and making them available to the public on the Registry would be open to serious criticism from both lenders and borrowers, who may often wish to keep the details of their loan agreement confidential. Hence, the note and the remainder of the information held on a particular loan should be accessible only to the registered holder of the loan, the servicer, the borrower, and any successor owner of the mortgaged real estate. (227)

I. Fees

A national Registry should be financially self-sustaining, and hence should be authorized to charge fees appropriate to pay its costs of operation, including a sufficient indemnity or insurance fund to cover payouts required by errors. (228) A fee structure similar to that currently charged by MERS might be appropriate. (229) 230 231 MERS charges an annual membership fee that varies from $150 to $7,500, depending on the volume of loans registered each year. (230) In addition, there is a charge of $ 11.95 for each registration or transfer. (231) It is likely that fees on this order could sustain a new Registry adequately. Of course, some federal appropriation of startup funds will be needed.

J. Notice of Registered Information

In order to protect the registered holder of a loan from a fraudulent release by the original mortgage, (232) and to ensure that the registered holder will get notice of litigation or other proceedings that may affect the loan, (233) it is essential that the registration provide notice of its contents. Perhaps, as an official public-accessible record, a federal registration would be construed to have that effect under existing state law, but the cases defining whether a particular record gives constructive notice are variable and unpredictable. (234) It is better to include in the governing federal statute a clear statement that the registration imparts notice; the Draft Statute does so. (235)

Of course, in a sense this provision complicates title searches, because now there is one additional place a searcher must look for relevant title information. Fortunately, this task could be completed quickly online, and will impose only a minor additional burden. Particularly for those who are about to commence foreclosures, the transparency and certainty provided by the Registry will be a highly advantageous.

When a prior lien is being foreclosed judicially, the date of the procedure's inception--and hence the date on which junior interests must be of record in order for their holders to be entitled to notice of the senior foreclosure --is usually obvious. (236) However, non-judicial foreclosures do not, by definition, involve a judicial filing, and they often require a combination of acts (mailed notice, posting on the real estate, publication, and/or recording) as prerequisites to the holding of a foreclosure sale. Hence, state non-judicial foreclosure statutes must state some specific date for ascertaining who is entitled to notice. If they require notice to holders of junior liens at all, (237) they usually provide that the person filing the foreclosure is required to notify only those whose junior liens are of record at the beginning of a specific time period, such as 30 to 120 days, prior to the announced date of the foreclosure sale. (238)

The language of the draft statute is intended to take these variations in state law into account by making the information in the Registry constructive notice as of the date the person instituting the non-judicial foreclosure of a prior mortgage is required to notify junior interest holders. (239) While this language was drafted with non-judicial foreclosure of senior mortgages in mind, it would apply to any sort of proceeding in which notice must be given to affected parties ascertained as of a date prior to the filing of the proceeding. Note that nothing in the draft statute changes state foreclosure law or redefines who is entitled to notice of a foreclosure proceeding. It merely allows the Registry to act just as state recording systems act to impart constructive notice of recorded documents and the facts they contain.

K. A Bureaucratic Home

One of the most challenging questions involved in creating a national mortgage Registry is deciding where it will be housed. At least three approaches to this problem may be envisioned. First, the Registry might be made a part of an existing federal government agency. The Draft Statute assumes that this method will be employed, but does not identify a particular agency. Obviously, an agency that already has some experience with the mortgage market makes most sense. Possible candidates include the Federal Reserve Board, (240) the Office of the Comptroller of the Currency, (241) the Department of Housing and Urban Development, (242) the Federal Housing Finance Agency, (243) and the new Consumer Financial Protection Bureau. (244)

There are clear advantages to placing the Registry within an existing agency: it will already have some level of expertise in dealing with the secondary mortgage market, and will have a degree of permanence and stability that market participants can rely upon. On the other hand, many federal agencies have reputations for timidity and sluggishness in decision-making, which might lead members of the mortgage industry to doubt whether the Registry will be responsive to their practical needs.

A second approach is to simply clothe MERS with the authority and responsibility of the new Registry. After all, MERS has nearly twenty years of experience as a mortgage registry, and in most ways has proven itself efficient in meeting the industry's needs. It has a technical staff that is probably better equipped than any federal agency to put in place the changes needed to operate a federal Registry of the type outlined in this Article. One might think of the new Registry as "MERS on steroids," and there are surely great efficiencies in allowing MERS to implement the needed alterations instead of starting from ground zero in some other agency.

At the same time, MERS has a dramatically negative public image, if largely for reasons beyond its control. (245) If it is given the task of operating the new Registry, a clear first order of business would be a name change. But this may not be enough to squelch the critics, who tend to equate MERS with the incompetence, carelessness, and cupidity that have characterized the secondary market during the past decade. Any nongovernmental entity like MERS, with a history of close connection to the mortgage finance industry, is likely to be the object of abiding distrust from consumer advocates.

If MERS is given the job, this might be accomplished by "federalizing" MERS--in effect, converting it from a private corporation into a federal agency or a quasi-federal government-sponsored enterprise. (246) Alternatively, MERS might remain a fully private corporation but enter into a contract with a federal agency to operate the registry for it, much in the manner that the American Association of Motor Vehicle Administrators operates the National Motor Vehicle Title Information System under contract with the Department of Justice. (247) While there may be concerns about delegating this much federal authority to a private entity, MERS is obviously in a unique position, with extremely broad industry (if not public) support and a long history of engagement in an essentially similar activity.

A third possibility is to delegate the federal authority described in the Draft Statute to one or more private companies that might elect to enter the field. For example, a company now in the business of maintaining records of secondary market sales of credit card accounts receivable might be given a contract to engage in the essentially similar activity of registering transfers of mortgage loans. (248) Conceivably more than one company could be granted identical federal authority and several could operate in the market simultaneously, as credit reporting companies do today. (249) However, the analogy is far from perfect; credit reporting companies operate under federal regulation (the Fair Credit Reporting Act (250), but they have no special grant of federal authority, as the mortgage loan Registry must have if it is to do its job properly. Whether Congress would be willing to make such grants to unproven private companies is questionable. Moreover, having more than one mortgage loan registry seems an obvious and unnecessary inefficiency.

Ultimately, the decision about where to house a federal mortgage loan Registry is political in nature, and there is little purpose in trying to predict its outcome here. Any of several possible models could work well.

L. The Holder in Due Course Doctrine

Where would this proposal for a national mortgage loan Registry leave the holder in due course doctrine? That doctrine, applicable only to

negotiable notes and embodied in Article 3 of the Uniform Commercial Code, (251) permits secondary market investors to take notes free of certain "personal" defenses that the maker of the note might raise. (252) In the context of mortgage notes, perhaps the most salient illustration is a note the execution of which was induced by fraudulent statements. A holder of due course of such a note can collect the note (and foreclose the accompanying mortgage) notwithstanding the maker's defense that he or she was defrauded into signing it.

The doctrine was designed to allow notes issued by moneylenders, banks, and other financial institutions to pass freely in commerce. Whether it should ever have been applied to notes issued by consumers is doubtful at best. (253) In 1975, it was effectively repealed by the Federal Trade Commission for most types of consumer debt, (254) but it remains the law for mortgage notes. There are real cases (although not very many of them, it seems) in which secondary market investors raise it to assist them in foreclosing mortgages that quite arguably should not, in terms of fairness and justice, be enforceable. (255) I, along with many other commentators, have argued that the doctrine should be repealed for mortgage notes, (256) but that has not occurred.

The Registry proposal presented here would have no formal impact, positive or negative, on the holder in due course doctrine. The doctrine has always required that the secondary market investor must be a "holder" in the Article 3 sense, which in turn means that the investor must have taken possession of the original promissory note. (257) The experience of the past decade suggests that the doctrine is not viewed as having much value for investors in notes (258) because there has been a widespread pattern of failure to ensure that the original note is delivered when a loan is sold.

Of course, under traditional commercial and mortgage law, there has been a much more important reason for an investor to insist on a delivery of the note: only by delivery can the entitlement to enforce a negotiable note be transferred. (259) Under the Registry proposal made here, that will no longer be true. A properly registered holder of a loan will have the right to enforce the note and foreclose the mortgage

whether possession of the original note has been delivered or not. Indeed, under this proposal, becoming a holder is due course would be the only remaining reason for an investor to bother taking possession of the note. This fact suggests that taking possession would be likely to happen very rarely indeed, and that the holder in due course status of mortgage investors as a class would probably wither and die like Marx's capitalist state. But there would be nothing in the Registry system that would prevent an investor from demanding possession of the note, if that should be the investor's desire.

M. Constitutionality

The creation of a federal loan Registry by act of Congress raises two constitutional questions, although neither is very difficult. First, is this action within the power of Congress under the Commerce Clause? Second, if existing mortgage loans can be registered, do the changes in legal expectations and contractual relationships that result violate the Due Process clause of the Fifth Amendment? The answers to these questions are reasonably clear: Congress is free to act in this area, and no allegation of a Due Process violation can be seriously raised.

It may be well to begin with a review of what the Draft Statute does and does not do. The primary activity that it authorizes is record-keeping, not regulation. It is intended to replace a dysfunctional state-law system of records with a functional federal system. It makes no substantive change in state law legal systems that assign priority to liens, create mortgage foreclosure processes, or release or modify mortgages and their corresponding debts. Participation in the Registry would be completely voluntary on the part of mortgage holders, who would be entirely free to continue to rely on the existing system of note delivery and recording of mortgage assignments, or for that matter on MERS if it continues to exist.

While participation would be optional, certain legal consequences would flow from the exercise of that option. Once a loan was registered, it could be transferred only by means of the Registry. The designation of a servicer would be ineffective until registered. Obligations would arise on the part of mortgage investors to provide information to the Registry concerning loan modifications, assumptions, and substitutions of parties, and concerning limitations on the modification powers of investors. Civil liability would attach for failure to provide this information, and both criminal and civil penalties would arise for providing knowingly false or fraudulent information or documents. Finally, the Draft Statute would preempt contrary state law to the extent necessary to ensure that the Registry's determinations identifying loan holders and servicers are accepted for state law purposes.

Ultimately, then, the purpose of the Registry and the legislation creating is to facilitate commerce, and to impose such regulations as are necessary to achieve this purpose. There can scarcely be any doubt about the "interstate" nature of the enterprise; while not every secondary market sale of a mortgage is across state lines, it is obvious that the vast majority are, and that the secondary mortgage market is one of "those activities that substantially affect interstate commerce." (260) Perhaps the most analogous U.S. Supreme Court case is Reno v. Condon, (261) upholding the constitutionality, under the Commerce Clause, of the federal Driver's Privacy Protection Act of 1994 (the DPPA), which restricts the states' ability to sell or share personal information from their automobile driver data bases without the driver's consent.

The majority opinion of Mr. Justice Rehnquist noted that,

   [T]he DPPA does not require the States in their sovereign capacity
   to regulate their own citizens. The DPPA regulates the States as
   the owners of databases. It does not require the South Carolina
   Legislature to enact any laws or regulations, and it does not
   require state officials to assist in the enforcement of federal
   statutes regulating private individuals. (262)


The similarities of the draft statute to the DPPA are obvious. Like the DPPA, the Draft Statute deals with an information database; if drivers' license information is an article in commerce, as the Court found, surely mortgage holding information is as well. The Draft Statute would initiate a narrow federal preemption of state law to accomplish a valid federal objective. It would impose no burdens at all on the states to spend money, enact regulations, or assist in the enforcement of the federal statute. Indeed, it would not order the states to take any action at all. (263) Thus, it seems well within the boundaries of federalism that the U.S. Supreme Court has defined.

Now let us turn to the Due Process issue. It is highly desirable that existing mortgages be registerable under the legislation proposed here; otherwise, a great deal more time will be required for the Registry to become truly useful. In a sense, then, the legislation would apply retroactively to preexisting contracts. Because registration would be optional with mortgage holders, they could hardly complain that their rights are being modified. From the borrower's viewpoint, however, registration by the mortgage holder would work one significant change. The borrower must now employ a different procedure to determine the identity of the holder and servicer of his or her mortgage. The procedure may well be easier, more convenient, and more accurate, but it is different. Nothing else would change: the mortgage obligation and the methods for foreclosing, modifying, or discharging the mortgage would be the same as before, still governed by the same state law.

Does this change create a Due Process issue? Surely the answer is no. As the Supreme Court noted in 1984,

   Provided that the retroactive application of a statute is supported
   by a legitimate legislative purpose furthered by rational means,
   judgments about the wisdom of such legislation remain within the
   exclusive province of the legislative and executive branches....
   [Retroactive legislation does have to meet a burden not faced by
   legislation that has only future effects.... But that burden is met
   simply by showing that the retroactive application of the
   legislation is itself justified by a rational legislative purpose.
   (264)


Here, the legislative purpose behind retroactive application of the law would be to bring to quicker fruition the benefits--transparency, ease of transfer, and certainty of rights--which the new Registry would provide. Surely this is enough to justify the registration of preexisting mortgages.

A useful point of reference is provided by Congress' enactment of the Multifamily Mortgage Foreclosure Act of 1991. (265) This legislation, applicable to mortgages held by the federal government on apartment projects, provided an alternative method of foreclosure that was quicker and cheaper than that available under state law in many jurisdictions. Because it completely supplanted state foreclosure proceedings, it was a far greater modification of borrower's rights and expectations than the national mortgage Registry proposed here. Moreover, it was available to the government retroactively in the sense that preexisting mortgages could be foreclosed under the new procedure.

In sustaining the foreclosure act against a Due Process challenge, the Federal District Court noted,

   Congressional legislation "adjusting the burdens and benefits of
   economic life" is presumed constitutional, and the burden is on the
   complaining party to establish that the legislation is arbitrary
   and irrational. This applies to the retroactive application of a
   statute as well as long as it is "supported by a legitimate
   legislative purpose furthered by a rational means." This is so even
   if the legislature's readjusting of rights and burdens "upsets
   otherwise settled expectations." (266)


Compared to the Multifamily Mortgage Foreclosure Act, the changes in borrowers' rights that would result from adoption of the federal Registry legislation described in this paper would be minimal. If anything, the changes would be beneficial to borrowers; anyone with internet access could now obtain full and immediate information about any loan. There would be a minor procedural modification, but no added burden. Finding a Due Process violation seems inconceivable on these facts.

In sum, the national Registry proposal made here will raise no serious constitutional issues under either the Commerce Clause or the Due Process clause. Congress has a long history of legislating in the mortgage market, and many of the existing statutes have a much stronger impact on the rights of borrowers and lenders than the Registry concept. (267)

IV. CONCLUSION

A national mortgage loan Registry structured along the lines outlined here would resolve all of the major legal problems that beset the secondary mortgage market today. To be specific, the following problems would be put to rest.

1. The lack of clarity in the distinction between negotiable and nonnegotiable notes that exists today would become irrelevant for purposes of loan transfer. Negotiable and nonnegotiable notes would be treated exactly alike and would be transferred in the same manner.

2. The need to physically deliver original notes in order to transfer the right of enforcement--an extremely burdensome and inconvenient requirement for negotiable notes in today's market--would be eliminated. Transfers would take place electronically with assurance that they would be recognized by local law in all jurisdictions.

3. The necessity of recording mortgage assignments in local recording offices would be eliminated. MERS was designed to remove the need for such assignments (except at the point when foreclosure was necessary), but the national Registry would accomplish this without the artificiality and confusion engendered by MERS' "nominee" status.

4. Borrowers would be protected against competing claims by purported mortgage holders because the Registry's records of loan holdings would be conclusive. Whether in cases of loan modification, payoff and discharge, approval of a short sale, or foreclosure, a borrower would know with certainty whether a purported holder's claim to the loan was authentic, and whether its purported servicer was authorized to act.

5. All foreclosures, both judicial and non-judicial, could be conducted with assurance that the correct party was foreclosing. The Registry's certificate could be recorded under state law and become a part of the chain of title of property passing through foreclosure, (268) thus permitting future title examiners to verify that the foreclosure was conducted by the person authorized to do so. Concerns of title insurers about the validity of titles coming through foreclosure, currently a major worry, (269) would be largely eliminated.

6. The current confusion and litigation about separation of notes from their mortgages, and about what proof is needed to foreclose a mortgage, would be brought to an end. The Registry's certificate would provide all of the documentary evidence necessary to foreclose.

7. The holder in due course doctrine, with its potential for unfair harm to borrowers, would probably disappear in the context of mortgage loans as secondary market participants abandoned the practice of physical delivery of mortgage notes.

The system for transferring mortgage loans with which we are saddled today is a shambles. The result has been enormous uncertainty and likely huge financial loss for investors, servicers, and title insurers. It is time for Congress to act to create a sensible, simple, and efficient alternative.

APPENDIX: DRAFT STATUTE

National Mortgage Loan Registry Act

An Act to provide for the establishment of a National Mortgage Loan Registry and to grant legal powers and duties to such Registry.

Preamble.

The Congress hereby finds that the existing systems for establishing, maintaining, and updating records of the holders of mortgage debt in the United States are cumbersome, inefficient, and often uninformative to borrowers. Confusion arising from this system has impaired the functioning of foreclosure proceedings and has made mortgage modifications more difficult to accomplish. It is therefore desirable to establish a single, unified national system of records of the holders of mortgage debt.

Section 101. Registry established.

There is established in the [Name of agency], a bureau to be known as the "National Mortgage Loan Registry," which shall accept and maintain records of the holders of debt secured by real property, and of information relating to such debt.

Section 102. Definitions

For purposes of this Title the following definitions shall apply:

(1) BORROWER.--The term "borrower" means the person or persons making or guaranteeing a note or granting a mortgage on real property, and any successor owners of the real property while the mortgage continues to encumber it.

(2) FEDERALLY RELATED MORTGAGE LOAN.--The term "federally related mortgage loan" shall have the meaning given in 12 U.S.C. section 2602(1).

(3) HOLDER.--The term "holder" means a person or legal entity that is entitled to enforce a note and the mortgage which secures the note, and in the case of a transferrable electronic record, means the person having control of the record.

(4) LOAN.--The term "loan" means the combination of a note and mortgage, as registered with the Registry in the name of the holder. The note and mortgage comprising a loan registered with the Registry may not be separated from one another.

(5) MORTGAGE.--The term "mortgage" means any instrument creating an interest in real property to secure performance of an obligation, including without limitation a mortgage, deed of trust, or security deed.

(6) NOTE.--The term "note" means any instrument creating an obligation to pay money, or reducible to monetary terms, and secured by a mortgage. It includes without limitation a promissory note, bond, or contract, and a transferrable electronic record that complies with 15 U.S.C. section7021 or equivalent state law.

(7) REGISTRY.--The term "Registry" means the National Mortgage Loan Registry, as created by this Title.

(8) SERVICER.--The term "servicer" means a person or entity that is authorized to provide some or all of the following services for the holder of a loan: maintenance of borrower payment records, remittance of borrower payments to the holder, maintenance of accounts for payment of taxes and insurance, collection of delinquent payments, modification of loan terms, approval of transfers of the real property subject to the mortgage, or foreclosure.

Section 103. Acceptance, transfer, and termination of registrations.

(a) The Registry is authorized to accept registrations of loans from holders. No loan may be registered unless its mortgage has first been recorded or registered under state law to establish the priority of the mortgage. Registrations may be accepted on paper or electronically. Transmittal of the note to the Registry is not necessary to register a loan.

(b) The holder of a loan that is registered with the Registry may transfer the loan to a new holder on the records of the Registry by submitting an application to transfer.

(c) The holder of a loan that is registered with the Registry may terminate the loan's registration by submitting an application to terminate registration.

(d) The Registry shall establish standards for loans accepted for registration and for applications to transfer and terminate registration. Such standards shall require adequate information security protection to ensure that electronic documents are accurate, authentic, adequately preserved, and resistant to tampering, and that applications to transfer and terminate registrations are authentic requests of the holder of the loan. All initial registrations, applications to transfer, and applications to terminate registration shall comply with the rules and procedures established by the Registry. Such rules and procedures shall be designed to facilitate efficient bulk registrations, transfers, and terminations of multiple loans.

(e) The Registry may enter into contracts with "trusted submitters" requiring them to employ specific security procedures, and thereafter permitting them to submit applications and subsequent documents to the Registry under rules less burdensome than are required of other submitters.

(f) The holder of a federally related mortgage loan shall not make a transfer of the loan to another holder or designate a servicer for the loan except by registration or transfer in the Registry.

(g) If the holder of a loan holds it as a trustee, a nominee, or in any other fiduciary or representative capacity, the name or description of the specific trust or other relationship shall be stated as part of the holder's identity in the records of the Registry. If such a holder is restricted by its governing documents from modifying a loan, a copy of the relevant restrictions shall be submitted to the Registry within ten days after the registration of the transfer to that holder.

Section 104. Outright and security transfers.

An application to transfer a loan on the records of the Registry may request either an outright transfer or a transfer for security or collateral purposes. The application, and the records of the Registry, shall clearly designate which form of transfer is intended. If the transfer is for security purposes, the application and the records of the Registry shall include a brief description of the obligation for which the transfer serves as security, and shall state whether the transferor or the transferee is authorized to exercise the rights listed in Section 109. The designation of a transfer as outright or for security purposes shall constitute evidence of the intent of the person making the registration, but shall not conclusively establish the purpose of the transfer.

Section 105. Notification of borrowers.

Each loan registration accepted by the Registry shall include a street address and an electronic mail address of each borrower, if available. The Registry shall also accept, and include in its record of each loan, the names, street addresses, and electronic mail addresses of any additional borrowers who submit such information to the Registry from time to time. When any loan is transferred or terminated on the records of the Registry, or when any servicer of the loan is added or terminated, the Registry shall send notification of the change to all persons shown on its records as borrowers with respect to that loan by electronic mail or, if no electronic mail address is available, by US Postal Service mail.

Section 106. Records of servicers.

(a) A current loan holder that designates one or more servicers to represent the holder in relationships with the borrower of a loan shall register with the Registry the identify of such servicers. With any such registration of a servicer, the holder shall describe, in summary form, the activities in which the servicer is authorized to engage on behalf of the holder.

(b) A current loan holder may, from time to time, terminate the authority of any previously designated servicer of the loan.

(c) No purported servicer of a registered loan shall have any authority to represent the holder in dealing with the borrower unless the servicer's identity and authority have been registered as provided in this section.

Section 107. Loan information.

(a) Each loan registered with the Registry shall be accompanied by copies of the note and the mortgage, together with copies of any mortgage assignments, note endorsements or allonges, and modification, substitution, or assumption agreements executed prior to registration of the loan with the Registry, if the registrant is a party to or possesses a copy of such documents.

(b) If the loan is modified, a party is substituted, or the loan is assumed by a new borrower after registration with the Registry, the loan holder shall transmit copies of the applicable documents to the Registry within ten days after completion of the modification, substitution, or assumption.

(c) At the option of the registrant, a loan may also be accompanied by copies of or information about other documents related to or associated with the loan, including but not limited to loan applications, appraisals, credit reports, closing statements, title insurance policies, and hazard insurance policies.

(d) Copies of all documents referred to in this section may be transmitted electronically, and all copies shall be maintained by the Registry in a loan file associated with the loan to which they relate.

Section 108. Access to Registry information.

(a) The Registry, shall issue, upon request, a certificate applicable to any registered loan, stating the identity of the loan holder and the identity of any servicers, and describing the authority of such servicers as stated by the loan holder in the records of the Registry. Any person may request such a certificate with respect to any loan. If the person so requests, the certificate shall be accompanied by:

(1) a statement of the identities of any successive holders that have held the loan since the time of its original registration in the Registry and prior to the present holder; and/or

(2) electronic copies of the mortgage and any mortgage assignments or modification, substitution, or assumption agreements held by the Registry relating to the loan.

(b) Copies of other documents in the loan file shall be made available by the Registry only to the current loan holder, any servicer of the loan, and the borrower, and to any court under subpoena or court order.

(c) Additional documents relating to a loan may be placed in the loan file, as provided in Section 107, only by the current loan holder, any servicer of the loan, and the borrower.

(d) The Registry shall certify that any copy of a document provided by the Registry to any person or court is an accurate and authentic copy of the document as originally submitted to the Registry.

Section 109. Rights of loan holder and servicer.

Only the current loan holder or any authorized servicer of the loan acting within the scope of its authority, as shown on the records of the Registry, may take the following actions with respect to a registered loan:

(a) foreclose the mortgage;

(b) pursue an action for recovery of any amount owing on the note;

(c) pursue an action for recovery of damages for breach of a covenant in the note or the mortgage;

(d) enter into a modification agreement with the borrower;

(e) release or discharge the note or the mortgage, whether for the balance due or for a lesser amount;

(f) approve or consent to the transfer of the mortgaged real property;

Section 110. Conclusiveness of Registry's certificates.

(a) Except as provided in subsection (c), a certificate issued by the Registry shall be conclusively be deemed correct with respect to:

(1) its statement of the identity of loan holder and any servicers;

(2) its statement that the authority of any servicers is as stated by the loan holder registering such servicers;

(3) its representation that the content of any document provided with the certificate is an accurate and authentic copy of the document as originally submitted to the Registry.

(b) A certificate issued by the Registry shall not guarantee the authenticity of any documents executed prior to registration of the loan.

(c) Any person who suffers actual damage as a consequence of deprivation of legal rights due to an error made by the Registry may maintain an action in Federal District Court for recovery of such damages.

(d) If a certificate is issued by the Registry erroneously, the Registry may revoke the certificate by notice to the person to whom it was furnished if no person has relied upon it in good faith to his detriment.

Section 111. Fees and charges.

The Registry may establish and collect fees and charges for initial registration of loans, acceptance of additional documents into loan files, terminations of registrations and servicer authority, and issuance of certificates. Fees and charges shall be established, and may be modified from time to time, so as to produce revenue that will approximate the Registry's expenses of operation, taking into account the need to provide reserve funds for the payment of damages as provided by Section 110(b).

Section 112. Preemption of State law.

(a) A certificate of loan holder identity, issued under Section 108, shall be conclusive proof under the law of all States that--

(1) the identified loan holder is the original mortgagee or recorded assignee of the mortgage, is entitled to enforce the note and the mortgage in any proceeding, judicial or non-judicial, and to engage in any other action authorized under Section 109; and

(2) the identified servicer, if any, is entitled to act on behalf of the loan holder in any proceeding, judicial or non-judicial, and any other action authorized under Section 109 that is within the scope of the authority granted to the servicer as stated in the certificate.

(b) A certificate issued by the Registry under Section 108 shall be entitled to be recorded or registered in the real property records under the laws of any State or subdivision of a State.

(c) all persons acquiring an interest in a registered mortgage loan or the mortgaged real property, and all persons instituting a judicial, administrative, or non-judicial proceeding affecting a registered mortgage loan or the mortgaged real property, are deemed to have notice of the information in a certificate that would be issued by the Registry under Section 108 as of the earlier of:

(1) the time of acquisition of such interest or the time such proceeding is instituted; or

(2) in the case of a proceeding, the date on which the person instituting the proceeding must notify holders of subordinate interests in order to bind them to the proceeding.

(d) Any contrary State constitution, law, or regulation is preempted to the extent necessary to establish the entitlements described in this Act.

Section 113. Criminal and civil penalties.

(a) Any person who shall knowingly submit to the Registry any false, forged, or fraudulent document or information:

(1) shall be fined not more than $10,000, or imprisoned for not more than one year, or both, for each violation; and

(2) shall be held civilly liable for any loss or damage caused to the Registry or any person by such document or information, and for the Registry's attorneys fees and costs in any civil action in which the Registry shall prevail.

(b) Any person who shall knowingly fail to submit to the Registry any document required to be submitted by Section 103(g) or Section 107(a) or (b) shall be held civilly liable for any loss or damage caused to the Registry or any person on account of failure to submit such document or information, and for the Registry's attorneys fees and costs in any civil action in which the Registry shall prevail.

(c) Any person who engages in a pattern or practice of violation of subsections (a) or (b) of this section may be barred by the Registry from the right to register additional mortgage loans. Such debarment may be for a limited time or may be permanent. Debarment may be ordered by the Registry only upon a finding of such pattern or practice in a hearing comporting with the federal Administrative Procedure Act.

(1.) BD. OF GOVERNORS OF THE FED. RESERVE SYS., THE U.S. HOUSING MARKET: CURRENT CONDITIONS AND POLICY CONSIDERATIONS 24-25 (2012). The Board further commented,

   The national lien registry could also record the
   name of the servicer. Currently, parties with a
   legitimate interest in contacting the servicer
   have little to go on from the land records because,
   among other reasons, many liens have
   been recorded only in the name of the trustee
   or of Mortgage Electronic Registration Systems
   (MERS). Registering the servicer, and
   updating the information when servicing is
   transferred, could help local governments and
   nonprofits, for example, who might be working
   to resolve the status of vacant or abandoned
   properties.


Id. at 25. Other commentators recommending creation of such a system include FED. HOUSING FIN. AGENCY, A STRATEGIC PLAN FOR ENTERPRISE CONSERVATORSHIPS: THE NEXT CHAPTER IN A STORY THAT NEEDS AN ENDING 13 (2012) ("A sound, efficient system for document custody and electronic registration of mortgages, notes, titles, and liens that respects local property laws but also enhances the liquidity of mortgages so that borrowers may benefit from a liquid secondary market for buying and selling mortgages."; Tanya Marsh, Foreclosures and the Failure of the American Land Title Recording System, 111 COLUM. L. REV. SIDEBAR 19, 25 (2011), available at http://www.columbialawreview.org/articles/foreclosures-and-the-failure-ofthe-american-land-title-recording-system (recommending the creation of such a system).

(2.) The distinction between bonds and notes is largely formalistic: bonds are traditionally issued in a series (rather than as a single document), are executed with a seal, and are nonnegotiable. Fredrick A. Cleveland, Funds and Their Uses 182 (Henry B. Hall ed., revised ed. 1922). In modern practice, bonds are almost never employed to evidence loans to individuals.

(3.) All references to Article 3 of the U.C.C. are to the 1990 version (the most recent broad-scale revision) unless otherwise noted. Under U.C.C. [section] 3-104(a)(3), a note is negotiable only if it "does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money." There are exceptions - that is, certain other promises that may be included, but the incorporation of the full terms of the typical mortgage into the note would almost certainly destroy its negotiability. See Dale A. Whitman, How Negotiability Has Fouled Up the Secondary Mortgage Market, and What to Do About It, 37 PEPP. L. Rev. 737, 747-48 (2010) [hereinafter Whitman, How Negotiability Has Fouled Up the Secondary Mortgage Market]. The historical development of the concept of negotiability and the rationale for keeping the note and mortgage separate are nicely summarized in Mark B. Greenlee & Thomas J. Fitzpatrick IV, Reconsidering the Application of the Holder in Due Course Rule to Home Mortgage Notes (Fed. Reserve Bank of Cleveland, Working Paper No. 08-08, 2008), available at http://www.clevelandfed.org/reserach/workpaper/2008/wp0808.pdf.

(4.) Keeping the note and mortgage separate has, at least theoretically, some additional advantages. A single mortgage can secure more than one note, and if several notes are employed, they can subsequently be sold to different investors or "participants," while continuing to be secured in the aggregate by a single lien on the real estate. But again, this is not a common modern practice. See GRANT S. NELSON & DALE A. WHITMAN, REAL ESTATE FINANCE LAW [section] 5.35 (5th ed. 2007) (discussing mortgage loan participations).

(5.) See CLEVELAND, supra note 2, at 165 (indicating that the practice of combining the two documents was not common in 1921).

(6.) RESTATEMENT (Third) of Property: Mortgages [section] 5.4 cmt. a (1997). The Comment suggests only one situation in which a mortgagee might wish to separate ownership of the note from the mortgage: a case in which the mortgagee wishes to bifurcate the obligation (or in which it is already bifurcated by virtue of being represented by two or more notes), and the mortgagee wishes to transfer part of the obligation while at the same time making it unsecured, while keeping the entire security for himself. See id. This is, of course, a very rare sort of transaction, and has nothing in common with ordinary residential mortgage finance. Id. It is also conceivable that in rare cases in which the land has become undesirable as security, as when it is contaminated with hazardous waste, the holder of the note and mortgage will intentionally release the mortgage but retain and enforce the note.

(7.) Id. [section] 5.4 reporters' note, intro, cmt. a (citing In re Atlantic Mortg. Corp., 69 B.R. 321 (Bankr. E.D. Mich. 1987); Swinton v. Cuffman, 213 S.W. 409 (Ark. 1919); Stribling v. Splint Coal Co., 5 S.E. 321 (W. Va. 1888)). The sort of separation discussed here is a legal, not a physical separation. Physical separation is common; for example, the note may be held by a custodian for a secondary market investor, while the mortgage and assignments of the mortgage may be held in the investor's files. No particular legal consequences arise from such a physical separation, and there is no requirement that the note and mortgage be kept physically together.

(8.) Id. [section] 5.4(c); see also Multicircuits, Inc. v. Grunsted, 809 N.W.2d 900 (Wis. Ct. App. 2012) (per curiam) (finding that when a mortgage was assigned without transfer of note, that mortgage became unenforceable).

(9.) RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES [section] 5.4(a).

(10.) See, e.g., CPT Asset Backed Certificates, Series 2004-EC1 v. Cin Kham, 278 P.3d586, 589 (Okla. 2012).

(11.) Horvath v. Bank of N.Y., 641 F.3d 617, 623 (4th Cir. 2011) ("a transfer of a secured debt carries with it the security without formal assignment or delivery"); Bryant v. HSBC Mortg. Servs., Inc. (In re Bryant), 452 B.R. 876, 880 (Bankr. S.D. Ga. 2011) (under South Carolina law "the assignment of a note secured by a mortgage carries with it an assignment of the mortgage" (citing Midfirst Bank, SSB v. C.W. Haynes & Co., Inc., 893 F. Supp. 1304, 1318 (D.S.C. 1994))); Unsecured Creditors' Comm. v. Shawmut Worcester Cnty. Bank (In re Ivy Properties, Inc.), 109 B.R. 10, 14 (Bankr. D. Mass. 1989); In re Union Packing Co., 62 B.R. 96, 100 (Bankr. D. Neb. 1986); First Nat'l Bank v. Farson (In re Kennedy Mortg. Co.), 17 B.R. 957, 965 (Bankr. D.N.J. 1982); Rodney v. Ariz. Bank, 836 P.2d 434, 436 (Ariz. Ct. App. 1992); Campbell v. Warren, 726 P.2d 623, 625 (Ariz. Ct. App. 1986) (holding an assignment of a portion of the payments from a promissory note automatically transfers a pro tanto interest in the mortgage that secures the note); Domarad v. Fisher & Burke, Inc., 76 Cal. Rptr. 529, 535-36 (Cal. Ct. App. 1969); Margiewicz v. Terco Props., 441 So. 2d 1124, 1125 (Fla. Dist. Ct. App. 1983); Moore v. Lewis, 366 N.E.2d 594, 599 (Ill. App. Ct. 1977); Jones v. Titus, 175 N.W. 257, 259 (Mich. 1919); Goetz v. Selsor, 628 S.W.2d 404, 405 (Mo. App. S.D. 1982); Deutsche Bank Trust Co. Ams. v. Codio, 943 N.Y.S.2d 545, 546 (N.Y. App. Div. 2012) ('"[A] written assignment of the underlying note ... is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident'" (quoting Bank of N.Y. v. Silverberg, 926 N.Y.S.2d 532, 538 (N.Y. App. Div. 2011))); Deutsche Bank Nat'l Trust Co. v. Pietranico, 928 N.Y.S.2d 818, 829 (N.Y. Sup. Ct. 2011) ("[A]s the note changes hands, the mortgage remains connected to it legally even though it is not physically attached."); Edgar v. Haines, 141 N.E. 837, 838 (Ohio 1923) ("[T]he mortgage security is an incident of the debt which it is given to secure, and, in the absence of a specific agreement to the contrary, passes to the assignee or transferee of such debt."); BAC Home Loans Servicing, L.P. v. White, 256 P.3d 1014, 1017 (Okla. Civ. App. 2010) ("[I]n Oklahoma it is not possible to bifurcate the security interest from the note. An assignment of the mortgage to one other than the holder of the note is of no effect."); Commonwealth Prop. Advocates, LLC v. Mortg. Elec. Registration Sys., Inc., 263 P.3d 397, 403 (Utah Ct. App. 2011); Bartlett Estate Co. v. Fairhaven Land Co., 94 P. 900, 902 (Wash. 1908). Several states have statutes expressing the same position. See Ala. Code [section]8-5-24 (West, Westlaw through 2012 Reg. Sess.) ("The transfer of a ... note given for the purchase money of lands ... passes to the transferee the lien of the vendor of the lands."); Ariz. Rev. Stat. Ann. [section] 33-817 (West, Westlaw through 2012) ("The transfer of any contract or contracts secured by a trust deed shall operate as a transfer of the security for such contract or contracts."); Cal. Civil Code [section] 2936 (West, Westlaw through 2012 Reg. Sess.) ("The assignment of a debt secured by [a] mortgage carries with it the security."); Conn. Gen. Stat. [section] 49-17 (West, Westlaw through 2012 Spec. Sess.), construed in Chase Home Fin., LLC v. Fequiere, 989 A.2d 606, 610-11 (Conn. App. Ct. 2010) ("The statute codifies the common-law principle of long standing that 'the mortgage follows the note'"); Utah Code Ann. [section] 57-1-35 (West, Westlaw through 2012 Spec. Sess.) ("The transfer of any debt secured by a trust deed shall operate as a transfer of the security therefor.").

(12.) See, e.g., Carpenter v. Longan, 83 U.S. 271, 274 (1872) ("The note and mortgage are inseparable.... An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity."); Hill v. Favour, 84 P.2d 575, 578 (Ariz. 1938) ("The mortgage, being a mere incident of the debt, cannot be assigned separately from it, so as to give any beneficial interest"). This position seems unnecessarily restrictive because there may be rare occasions in which the holder of the note and mortgage will, for legitimate reasons, wish to separate their ownership. See supra note 6.

(13.) See Morris v. Bacon, 123 Mass. 58 (Mass. 1877).

(14.) Pettus v. Gault, 71 A. 509 (Conn. 1908) (holding assignee of note permitted to foreclose mortgage, although it was never assigned or delivered to him); Rembert v. Ellis, 17 S.E.2d 165 (Ga. 1941) (holding noteholder permitted to foreclose as an equitable mortgage despite absence of assignment); Morris Canal & Banking Co. v. Fisher, 9 N.J. Eq. 667 (N.J. 1855) (holding assignment of bond acts as an assignment of mortgage). An alternative judicial explanation is that the mortgage interest is held in trust for the benefit of the noteholder. See Barrett v. Hinkley, 14 N.E. 863, 868 (111. 1888) ("Such [mortgagee's] title exists for the benefit of the holder of the mortgage indebtedness, and it can only be enforced by an action in furtherance of his interests"); Averill v. Cone, 149 A. 297, 299 (Me. 1930) ("The result in equity is that the legal title passed to the assignee but in naked trust for the owner of the mortgage debt"); U.S. Bank Nat'l Ass'n v. Ibanez, 941 N.E.2d 40, 54 (Mass. 2011) ("[T]he holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment."); Jackson v. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487, 497 (Minn. 2009) ("[A]n assignment of the promissory note operates as an equitable assignment of the underlying security instrument." (emphasis omitted)); Kinna v. Smith, 3 N.J. Eq. 14 (N.J. Ch. 1834) (heir who receives mortgage from decedent holds it in trust for personal representative to whom secured note passes); U.S. Bank Nat'1 Ass'n v. Marcino, 908 N.E.2d 1032, 1038 (Ohio Ct. App. 2009) ("[T]he negotiation of a note operates as an equitable assignment of the mortgage, even though the mortgage is not assigned or delivered."); see also 2 Garrard Glenn, Mortgages [section] 314 (1943); George Osborne, Mortgages [section] 224 (1951).

(15.) This conclusion follows from common law principles, and has been modified by statute in some jurisdictions. See infra notes 55-69 and accompanying text.

(16.) All of these principles are well documented and thoroughly discussed elsewhere. See, e.g., William B. Stoebuck & Dale A. Whitman, The Law of Property [section][section] 11.9-11.11 (3d ed. 2000) [hereinafter Stoebuck & Whitman, Property].

(17.) See supra notes 9-15 and accompanying text; see also MetLife Home Loans v. Hansen, 286 P.3d 1150 (Kan. Ct. App. 2012) ("MetLife did not need that assignment in order to vest it with a beneficial interest in the [m]ortgage. As a valid holder of the [n]ote, it already had such an interest sufficient to give it standing to initiate a foreclosure action."); Bank of Am., N.A. v. Kabba, 276 P.3d 1006, 1008-09 (Okla. 2012) ("An assignment of the mortgage, however, is of no consequence because under Oklahoma law, '[p]roof of ownership of the note carried with it ownership of the mortgage security.'" (quoting Engle v. Fed. Nat'l Mortg. Ass'n, 300 P.2d 997, 999 (Okla. 1956))).

(18.) The relevant cases are collected in Nelson & Whitman, supra note 4, [section] 5.33 nn. 18-27; see also Alaska Stat. Ann. [section] 34.20.010 (West, Westlaw through 2012 Spec. Sess.) (stating the principle by statute). Kansas is a notable exception; its courts have held that mortgagors are bound by constructive notice from a recorded assignment. See Walmer v. Redinger, 227 P. 329 (Kan. 1924); Verle R. Seed, Mortgage "Payment " Statutes in Kansas and New Mexico, 3 U. Kan. L. Rev. 87, 95-96 (1954).

(19.) Somewhat confusingly, Article 9 employs the terminology of security or collateral assignments to outright sales of notes as well; thus the transferor is termed the "debtor," the transferee is the "secured party," and the rights transferred constitute a "security interest" even when an outright sale occurs. See U.C.C. [section] 9-102(a)(28)(B) (2012) (defining "debtor"); [section] 9-102(a)(72)(D) (defining "secured party"). In the text above, I have "translated" the terminology to that ordinarily used in describing outright sales of notes.

(20.) U.C.C. [section] 9-102(a)(47) defines an "instrument" as "a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation ... and is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment." Nonnegotiable instruments are plainly covered by this language.

(21.) Permanent Editorial Bd. for the Unif. Commercial Code, Am. Law Inst., Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes 9-10 nn.33-40 (2011) [hereinafter PEB Report]. Footnotes attached to the quoted text below are those of the original PEB report. Note that the discussion in the text refers to "ownership" of the note, which is indeed the subject of U.C.C. Article 9. Under the U.C.C., however, ownership may be separated from the right to enforce the note; the right to enforce is the subject of U.C.C . Article 3 if the note is negotiable. See infra notes 85-95 and accompanying text.

(22.) See PEB Report, supra note 21, at 9, 9 n.33 ("U.C.C. [section] 9-203(b)(1). U.C.C. [section] 1-204 provides that giving 'value' for rights includes not only acquiring them for consideration but also acquiring them in return for a binding commitment to extend credit, as security for or in complete or partial satisfaction of a preexisting claim, or by accepting delivery of them under a preexisting contract for their purchase.").

(23.) Id. at 9, 9 n.34 ("U.C.C. [section] 9-203(b)(2). Limited rights that are short of full ownership are sufficient for this purpose. See Official Comment 6 to U.C.C. [section] 9-203.").

(24.) Id. at 9, 9 n.35 ("This term is defined to include signing and its electronic equivalent. See U.C.C. [section] 9-102(a)(7).").

(25.) Id. at 9, 9 n.36 ("A 'security agreement' is an agreement that creates or provides for a security interest (including the rights of a buyer arising upon the outright sale of a payment right). See U.C.C. [section] 9-102(a)(73).").

(26.) Id. at 9, 9 n.37 ("Article 9's criteria for descriptions of property in a security agreement are quite flexible. Generally speaking, any description suffices, whether or not specific, if it reasonably identifies the property. See U.C.C. [section] 9-108(a)-(b). A 'supergeneric' description consisting solely of words such as 'all of the debtor's assets' or 'all of the debtor's personal property' is not sufficient, however. U.C.C. [section] 9108(c). A narrower description, limiting the property to a particular category or type, such as 'all notes,' is sufficient. For example, a description that refers to 'all of the debtor's notes' is sufficient.").

(27.) Id. at 9, 9 n.38 ("See U.C.C. [section] 9-313.") (remainder of footnote omitted).

(28.) Id. at 9-10, 10 n.39 ("U.C.C.'[section] 9-203(b)(3)(A)-(B).").

(29.) Because of Article 9's use of the phrase "security interest" to encompass outright sales, as explained supra note 19, this line can more readily understood in the context of sales of mortgage notes by rewriting it to say, "the transfer of a promissory note secured by a mortgage on real property is also a transfer of the mortgage."

(30.) But it is not quite the same. The common law principle is that the mortgage will follow the right to enforce the note. In cases in which ownership of a note (Article 9's bailiwick) and the right to enforce it (Article 3's bailiwick) are separated, it is the right to enforce that carries with it the mortgage, because foreclosure of the mortgage is simply a means of enforcing the note. See infra notes 90-92 and accompanying text on the issue of separation. There is no reason to regard U.C.C. [section] 9-203(g) as supplanting the common law or exhausting the topic. For example, if the owner of the note delivers it to its servicer for the purpose of enforcing it, thus transferring the entitlement to enforce under Article 3, there is every reason to think the servicer will, under common law principles, be entitled to foreclose the mortgage as well, with or without a formal mortgage assignment. Nothing about [section] 9-203(g) bars this result.

(31.) This was the conclusion reached by the court under an earlier version of the U.C.C. in American Bank of the South v. Rothenberg, 598 So. 2d 289 (Fla. Dist. Ct. App. 1992). The statement in the text assumes that the owner and the person "entitled to enforce the note" are the same, as is usually the case. See RMS Residential Props., LLC v. Miller, 32 A.3d 307, 314 (Conn. 2011) ("[A] holder of a note is presumed to be the owner of the debt, and unless the presumption is rebutted, may foreclose the mortgage"). If the owner and the person entitled to enforce are different, only the latter or the agent of the latter will be able to foreclose the mortgage under common law principles. See Edelstein v. Bank of New York Mellon, 286 P.3d 249 (Nev. 2012) (making it clear that it is the right to enforce, and not ownership of the note, that confers the power to foreclose the mortgage).

(32.) See, e.g., Ameribanc Sav. Banks v. Resolution Trust Corp., 858 F. Supp. 576, 582 (E.D. Va. 1994); Tomsic v. Beaulac (In re Beaulac), 298 B.R. 31 (Bankr. D. Mass. 2003) (trustee in bankruptcy as BFP under strong-arm powers); Kan. City Mortg. Co. v. Crowell, 239 So. 2d 130, 131 (Fla. Dist. Ct. App. 1970); Fed. Nat'l Mortg. Ass'n v. Kuipers, 732 N.E.2d 723 (III. App. Ct. 2000); Brenner v. Neu, 170 N.E.2d 897 (III. App. Ct. 1960); Henniges v. Johnson, 84 N.W. 350 (N.D. 1900); Kalen v. Gelderman, 278 N.W. 165 (S.D. 1938); Fannin Inv. & Dev. Co. v. Neuhaus, 427 S.W.2d 82 (Tex. Civ. App. 1968); Marling v. Milwaukee Realty Co., 106 N.W. 844, 845 (Wis. 1906).

(33.) See, e.g., Huitink v. Thompson, 104 N.W. 237 (Minn. 1905); Bremen Bank & Trust Co. v. Muskopf, 817 S.W.2d 602 (Mo. App. E.D. 1991); Willamette Collection & Credit Serv. v. Gray, 70 P.2d 39 (Or. 1937).

(34.) See, e.g., Impac Warehouse Lending Grp. v. Credit Suisse First Boston LLC, 270 Fed. App'x 570 (9th Cir. 2008) (originating lender gave fraudulent loan documents to creditor providing line of credit, while selling original loan documents on the secondary mortgage market).

(35.) Moreover, recording an assignment does not inoculate the mortgage payoff process against other types of fraud. See America's Wholesale Lender, Fraud Insights, Feb. 2012, http://fraudinsights.fnf.com/vol07iss02/fullarticle.htm #article01a (describing a case in which a crook impersonated the holder of the loan and purported to approve a payoff of the loan to a false bank account).

(36.) 860 N.E.2d 785 (Ohio Ct. App. 2006).

(37.) Id. at 786.

(38.) Id.

(39.) 216 P.3d 158 (Kan. 2009); see also Lang v. Butler, 483 P.2d 994 (Colo. App. 1971) (finding that a foreclosing senior deed of trust holder had no obligation to give notice to the holder of an unrecorded junior deed of trust); Citimortgage, Inc. v. Barabas, 950 N.E.2d 12 (Ind. Ct. App. 2011) (same), vacated, 975 N.E.2d 805 (Ind. 2012); Mortg. Elec. Registration Sys., Inc. v. Sw. Homes of Ark., 301 S.W.3d 1 (Ark. 2009) (reaching a similar conclusion where MERS was the nominee of the senior deed of trust holder, and was held to have no right to notice of the foreclosure of the junior deed of trust, the holder of which apparently falsely alleged that it was senior; notice was given to the original holder of the senior deed of trust, but it no longer held the loan, although no assignment from it had been recorded).

(40.) Landmark Nat'l Bank, 216 P.3d at 162.

(41.) See id. at 167.

(42.) Id.

(43.) The federal government may maintain a "criminal forfeiture" action pursuant to 18 U.S.C. [section] 982 (2006) and 21 U.S.C. [section] 881 against property used in the commission in certain crimes. The title to real estate so forfeited "relates back" to the date of the first commission of illegal activity. See 21 U.S.C. [section] 881(h). Hence the effective date of vesting of title in the government could be earlier than the creation of a mortgage on the land. There is an exception for owners of secured mortgages unconnected to the illegal activity. See 21 U.S.C. [section] 853(n). However, such "innocent owners" must file a petition within 30 days of receipt of notice of the forfeiture, which they only will receive if their interest is properly recorded. Id.', see also United States v. Schecter, 251 F.3d 490, 497 (4th Cir. 2001).

(44.) See supra notes 9-15 and accompanying text.

(45.) Of course, the judge, in turn, might demand a recorded chain of mortgage assignments. See, e.g., In re Foreclosure Cases, Nos. 1:07CV2282, 07CV2532, 07CV2560, 07CV2602, 07CV2631, 07CV2638, 07CV2681, 07CV2695, 07CV2920, 07CV2930, 07CV2949, 07CV2950, 07CV3000, 07CV3029, 2007 WL 3232430, at *1-2 (N.D. Ohio Oct. 31, 2007) (requiring foreclosing parties to produce assignments). However, there appears to be no such requirement in Ohio law, and to this extent the judge's demand seems unwarranted. The critical issue for the court to determine is the right of the foreclosing party to enforce the note.

(46.) This is not to say that a collateral attack on a foreclosure judgment is impossible, particularly if the judgment was obtained despite the defendant's failure to appear. See, e.g., Ramagli Realty Co. v. Craver, 121 So. 2d 648, 654 (Fla. 1960) ("As between the parties any judgment or order procured from any court by the practice of fraud or deception may in appropriate proceedings be set aside at any time. A void judgment is a nullity, a brutum fulmen and is subject to collateral attack and may be stricken at any time."). But the presence or absence of a chain of assignments is likely to have very little relationship to the grounds--"fraud or deception"--for setting aside a judgment.

(47.) These presumptions vary in weight; some of them apply only to the notice given and the mechanics of the sale itself, and hence would have little value in establishing that the foreclosing party had the right to foreclose. See Alaska Stat. [section] 34.20.090 (West, Westlaw through 2012 Spec. Sess.); Cal. Civ. Code [section] 2924 (West, Westlaw through 2012 Reg. Sess.); Ga. Code Ann. [section] 44-14-162.4 (West, Westlaw through 2012 Reg. Sess.); N.C. Gen. Stat. Ann. [section] 45-21.17A (West, Westlaw through 2012 Reg. Sess.); W. Va. Code Ann. [section] 38-1-4 (West, Westlaw through 2012 Sess.). Others are stronger, apparently covering all aspects of the foreclosure. See Ariz. Rev. Stat. Ann. [section] 33-811 (West, Westlaw through 2012 Reg. Sess.), construed in U.S. Bank Nat'l Ass'n v. Myers, No. 1 CA-CV 10-0780, 2011 WL 6747428, at *2 (Ariz. Ct. App. Dec. 22, 2011); ARK. CODE ANN. [section] 18-50-111 (West, Westlaw through 2012 Fiscal Sess.); Haw. Rev. Stat. [section] 667-33 to -32 (West, Westlaw through 2012 Reg. Sess.); Idaho Code Ann. [section] 45-1510 (West, Westlaw through 2012 Reg. Sess.); Minn. Stat. Ann. [section] 580.19 (West, Westlaw through 2012 Spec. Sess.); Mont. Code Ann. [section] 71-1-318 (West, Westlaw through 2011 laws); Neb. Rev. Stat. Ann. [section] 76-1010 (West, Westlaw through 2012 Reg. Sess.); NEV. REV. STAT. ANN. [section] 107.030 (West, Westlaw through 2011 Reg. Sess.); N.M. STAT. ANN. [section] 48-10-14 (West, Westlaw through 2012 Reg. Sess.); OKLA. STAT. ANN. tit. 46, [section] 47 (West, Westlaw through 2012 Reg. Sess.); OR. REV. STAT. ANN. [section] 86.780 (West, Westlaw through 2012 Reg. Sess.); UTAH CODE ANN. [section] 57-1-28 (West, Westlaw through 2012 Spec. Sess.); WASH. REV. CODE ANN. [section] 61.24.040 (West, Westlaw through 2012 Legis. Measures). All of them are available only in favor of a bona fide purchaser. See generally Grant S. Nelson & Dale A. Whitman, Reforming Foreclosure: The Uniform Non-judicial Foreclosure Act, 53 DUKE L.J. 1399, 1503-06 (2004) [hereinafter Nelson & Whitman, Reforming Foreclosure].

(48.) The non-judicial foreclosure statutes are frequently obscure in indicating who is authorized to instruct the trustee of a deed of trust to foreclose. Indeed, perhaps because most of them were enacted when the secondary mortgage market was largely undeveloped, they often seem to have been drafted with no recognition that such a market exists. See, e.g., Va. Code Ann. [section] 55-59(7) (West, Westlaw through 2012 Spec. Sess.) (trustee may foreclose "at the request of any beneficiary[,]" but inferentially the trustee is expected to demand to see the note, because [section] 55-59.1(B) begins, "[i]f a note or other evidence of indebtedness secured by a deed of trust is lost or for any reason cannot be produced ..."). Arizona is likewise ambiguous in describing the nature of the proof of authority the trustee must show. See Hogan v. Washington Mut. Bank, 277 P.3d 781, 783 (Ariz. 2012) ("The only proof of authority the trustee's sales statutes require is a statement indicating the basis for the trustee's authority. See A.R.S. [section] 33-808(C)(5) (requiring the notice to set forth 'the basis for the trustee's qualification pursuant to [section] 33-803, subsection A')").

(49.) The California presumption statute covers only "the mailing of copies of notices or the publication of a copy of the notice of default or the personal delivery of the copy of the notice of default or the posting of copies of the notice of sale or the publication of a copy thereof].]" See CAL. CIV. CODE [section] 2924(c). Despite this relative weakness, the California courts have sometimes seemed to impose a much stronger presumption of compliance with the foreclosure process:

   If the trustee's deed recites that all statutory
   notice requirements and procedures required
   by law for the conduct of the foreclosure have
   been satisfied, a rebuttable presumption arises
   that the sale has been conducted regularly and
   properly; this presumption is conclusive as to a
   bona fide purchaser.... Thus, as a general
   rule, a trustor has no right to set aside a trustee's
   deed as against a bona fide purchaser for
   value by attacking the validity of the sale.


Moeller v. Lien, 30 Cal. Rptr. 2d 777, 783 (Cal. Ct. App. 1994).

(50.) See ALA. CODE [section][section] 35-10-1 to 35-10-10 (West, Westlaw through 2012 Spec. Sess.); GA. CODE ANN. [section][section] 23-2-114, 44-14-162 to 44-14-162.4 (West, Westlaw through 2012 Reg. Sess.); ME. REV. STAT. tit. 14 [section][section] 6203-A, 6203-B (2011) (applicable only to nonresidential property); MASS. GEN. LAWS ANN. ch. 183, [section] 21 (West, Westlaw through 2012 2d. Ann. Sess.); MINN. STAT. ANN. [section][section] 580.01 to 580.20 (West, Westlaw through 2012 Spec. Sess.); MISS. CODE. ANN. [section][section] 89-1-53 to 89-1-57 (West, Westlaw through 2012 Reg. Sess.); N.H. REV. STAT. ANN. [section][section] 479:25 to 479:27-a (West, Westlaw through 2012 Reg. Sess.); R.I. GEN. LAWS ANN. [section] 34-11-22 (West, Westlaw through 2012 Reg. Sess.); WYO. STAT. ANN. [section][section] 34-4-101 to 34-4-113 (West, Westlaw through 2012 Budget Sess.).

(51.) The title insurance industry's trade association has argued that the mortgage assignment is the critical and sole document needed to complete the chain of title in this setting. See ALTA Files Brief in Massachusetts Foreclosure Case, Title News, Mar. 2012, at 7, 8, http://www.alta.org/publications/titlenews/12Wolume91_Issue03.pdf.

(52.) The Minnesota Supreme Court was convinced that benefitting future title examiners was the purpose of the Minnesota statutory requirement for recording mortgage assignments. See Jackson v. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487, 498 (Minn. 2009) ("[T]he record, without the aid of extraneous evidence, 'put[s] the title of the assignee of a mortgage beyond doubt.'" (quoting Soufal v. Griffith, 198 N.W. 807, 809 (Minn. 1924))). Arguably the need for a chain of assignments is lessened if the foreclosure is confirmed by a judicial decree, as is true in some circumstances in a few non-judicial foreclosure states. See GA. CODE ANN. [section] 44-14-161 (requiring judicial confirmation of sale if secured party seeks a deficiency judgment; court is to consider "the legality of the notice, advertisement, and regularity of the sale"); N.C. GEN. STAT. ANN. [section] 45-21.27 (West, Westlaw through 2012 Reg. Sess.) (requiring confirmation by clerk of court if an upset bid is filed following foreclosure sale).

(53.) Virginia makes provision for the optional recording of a "Certificate of Transfer" which memorializes the transfer of the indebtedness. See VA. CODE ANN. [section] 55-66.01 (West, Westlaw through 2012 Spec. Sess.). However, there is no requirement that such a certificate or chain of certificates be recorded as a prerequisite to foreclosure. See Horvath v. Bank of New York, 641 F.3d 617, 626 (4th Cir. 2011) (Virginia law) ("[P]arties may elect to record the transfer in the land records, but their failure to do so does not undermine the transaction in any way.").

(54.) See infra notes 88-95 and accompanying text.

(55.) In addition to the states listed, Mississippi's statute seems to require recordation of assignments, but apparently the only sanction for failure to record is that a payment made by the mortgagor to the original mortgagee is binding despite the assignment, unless the mortgagor has actual notice of the assignment. See Miss. Code Ann. [section] 89-5-17. Hence, recording of assignments does not appear to be a condition to foreclosure, although there is no case law construing the point. Similarly, an Indiana statute seems to require recordation of assignments; see Ind. Code Ann. [section] 32-291-8(c) (West, Westlaw through 2013) ("an assignment of mortgage must be recorded on a separate written instrument from the mortgage"). However, the provision has been construed as only for the protection of subsequent purchasers from the mortgagee, and not as a requirement for foreclosure. Indiana follows the common law doctrine that the mortgage follows the note without a written assignment. See Perry v. Fisher, 65 N.E. 935 (Ind. Ct. App. 1903).

A few states require a chain of recorded assignments as a matter of court-made law for judicial foreclosure. See, e.g., In re Foreclosure Cases, Nos. F07CV2282, 07CV2532, 07CV2560, 07CV2602, 07CV2631, 07CV2638, 07CV2681, 07CV2695, 07CV2920, 07CV2930, 07CV2949, 07CV2950, 07CV3000, 07CV3029, 2007 WL 3232430, at *1-2 (N.D. Ohio Oct. 31, 2007); Gee v. U.S. Bank Nat'l Ass'n, 72 So. 3d 211, 213 (Fla. Dist. Ct. App. 2011). Such decisions appear to disregard the common-law principle that the mortgage follows the note automatically. Florida law on this point is in doubt. See Musselman v. Deutsche Trust Co. Ams. (In re Balderrama) 451 B.R. 185, 190 (Bankr. M.D. Fla. 2011) ("[P]roof of ownership of the debt underlying a mortgage is sufficient under Florida law to equitably convey the mortgage to the debt holder.").

(56.) CAL. CIV. CODE [section] 2932.5 (West, Westlaw through 2012 Reg. Sess.). Case law has held that this statute is applicable only to mortgages and not to deeds of trust. See Haynes v. EMC Mortg. Corp., 140 Cal. Rptr. 3d 32, 34 (Cal. Ct. App. 2012); Calvo v. HSBC Bank, 130 Cal. Rptr. 3d 815, 818 (Cal. Ct. App. 2011). But see Cruz v. Aurora Loan Servs. LLC (In re Cruz), 457 B.R. 806, 818 (Bankr. S.D. Cal. 2011) (disagreeing with Calvo and holding Cal. Civ. Code [section] 2932.5 applicable to deeds of trust); In re Salazar, 448 B.R. 814, 821 (Bankr. S.D. Cal. 2011) (same), rev'd and remanded, 470 B.R. 557 (S.D. Cal. 2012); Roger Bernhardt, Midcourse Corrections: The Uncertain Requirements for Recording Assignments of Deeds of Trust, RogerBernhardt.COM (Nov. 9, 2011) http://www.rogerbemhardt.com/index.php/ceb-columns/318-recording-dot-assignments-calvo-v-hsbc (suggesting that the recording requirement is largely useless in any event).

(57.) GA. CODE ANN. [section] 44-14-162(b) (West, Westlaw through 2012 Reg. Sess.) ("The security instrument or assignment thereof vesting the secured creditor with title to the security instrument shall be filed prior to the time of sale in the office of the clerk of the superior court of the county in which the real property is located."); Duke Galish LLC v. SouthCrest Bank, 726 S.E.2d 54, 56 (Ga. Ct. App. 2012) (holding failure to record was cured by recording and reforeclosure).

(58.) IDAHO CODE ANN. [section] 45-1505(1) (West, Westlaw through 2012 Reg. Sess.).

(59.) ME. REV. STAT. ANN. tit. 14, [section] 6321 (West, Westlaw through 2011 Reg. Sess.) ("The mortgagee shall ... produce evidence of the mortgage note, mortgage and all assignments and endorsements of the mortgage note and mortgage."); id. [section] 6203-A (providing a statutory form of foreclosure notice requiring a recitation of the foreclosing party's mortgage recording information and states, "if by assignment ... give reference.").

(60.) MASS. GEN. LAWS ANN. ch.183, [section] 21 (West, Westlaw through 2012 2d Ann. Sess.) (mortgage may be foreclosed by power of sale by "the mortgagee or his executors, administrators, successors or assigns"), construed in U.S. Bank Nat'l Ass'n v. Ibanez, 941 N.E.2d 40, 53 (Mass. 2011) (requiring a written assignment or chain of assignments, but not necessarily recorded).

(61.) Mich. Comp. L. Ann. [section] 600.3204(c) (West, Westlaw through 2012 Reg. Sess.); see Arnold v. DMR Fin. Servs., Inc., 532 N.W.2d 852, 855-56 (Mich. 1995) (holding foreclosure by holder of note who lacked a recorded chain of assignments was voidable, not void, and would be upheld if the mortgagor was not harmed).

(62.) Minn. Stat. Ann. [section] 580.02(3) (West, Westlaw through 2012 Spec. Sess.). But see Jackson v. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487 (Minn. 2009) (holding that MERS could foreclose by advertisement on behalf of member lenders for whom it was acting as nominee without recording assignments from MERS to the lenders).

(63.) NEV. REV. STAT. ANN. [section] 107.086(4) (West, Westlaw through 2011 Reg. Sess.) (requiring mediation for residential deeds of trust as a precondition to foreclosure and providing that the beneficiary of the deed of trust "shall bring to the mediation the original or a certified copy of the deed of trust, the mortgage note and each assignment of the deed of trust or mortgage note"). In what was probably a misconstruction of the statute, the Nevada Supreme Court held that this language mandated that the applicable assignment or assignments be produced at the mediation. Leyva v. Nat'l Default Servicing Corp., 255 P.3d 1275, 1279 (Nev. 2011).

(64.) OR. REV. STAT. [section] 86.735 (Westlaw through 2012 Reg. Sess.); see Barnett v. BAC Home Loan Servicing, L.P., 772 F. Supp. 2d 1328 (D. Or. 2011) (enjoining a non-judicial foreclosure sale because the foreclosing party lacked a recorded chain of assignments). The statute was construed to disallow assignments by MERS. McCoy v. BNC Mortg., Inc. (In re McCoy), 446 B.R. 453 (Bankr. D. Or. 2011); Niday v. GMAC Mortg., LLC, 284 P.3d 1157, 1168 (Or. Ct. App. 2012).

(65.) S.D. CODIFIED LAWS [section] 21-48-2 (Westlaw through 2012 Reg. Sess.).

(66.) WYO. STAT. ANN. [section] 34-4-103 (West, Westlaw through 2012 Budget Sess.); see Bitker v. First Nat'l Bank, 98 P.3d 853, 856-57 (Wyo. 2004) (treating actual notice of the assignment to the mortgagor as the equivalent of recording for this purpose).

(67.) If an assignment is required, it presumably must be completed before the foreclosure is commenced. See Jeff-Ray Corp. v. Jacobson, 566 So. 2d 885, 886 (Fla. Dist. Ct. App. 1990); U.S. Bank Nat'l Ass'n v. Ibanez, 941 N.E.2d 40, 54 (Mass. 2011). It could be argued that U.C.C. [section] 9-203(g) (2012), providing that "[t]he attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien[,]" should be held to override other state law requiring the existence or recording of mortgage assignments as a precondition of foreclosure. In fact, however, none of the jurisdictions with such statutory requirements has ever held (or even considered, so far as I can determine) that [section] 9-203(g) would have this effect.

(68.) See supra note 14 and accompanying text. In Massachusetts, for example, "the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment." Ibanez, 941 N.E.2d at 54.

(69.) See CONN. GEN. STAT. ANN. [section] 49-17 (West, Westlaw through 2012 Spec. Sess.), construed in Bankers Trust Co. v. Vaneck, 899 A.2d 41 (Conn. App. Ct. 2006); Harton v. Little, 57 So. 851 (Ala. 1911); Vasquez v. Saxon Mortg., Inc. (In re Vasquez), 266 P.3d 1053, 1055 (Ariz. 2011); see also In re Tucker, 441 B.R. 638, 644-45 (Bankr. W.D. Mo. 2010) (reaching the same conclusion under Missouri law).

(70.) 813 N.W.2d 778, 780-81 (Mich. Ct. App. 2012), appeal granted, 811 N.W.2d 498 (Mich. 2012). I am indebted to Robert Bozarth, National Agency Counsel at Fidelity National Title Group, for calling this case to my attention.

(71.) Id. at 779-80.

(72.) Id. at 783.

(73.) See supra notes 32-35 and accompanying text.

(74.) See supra notes 36-42 and accompanying text.

(75.) See supra notes 50-53 and accompanying text.

(76.) See supra notes 55-72 and accompanying text.

(77.) Charles L. Edson & Barry G. Jacobs, Secondary Mortgage Market Guide [section]9.03[1][c] (1986).

(78.) See Fannie Mae, Selling Guide: Fannie Mae Single Family 936 (2012), http://www.mooreeducation.com/wp-content/uploads/2011 /08/Fannie-Mae-SellingGuide.pdf ("Lenders must prepare an assignment of the mortgage to Fannie Mae for any mortgage that is not registered with MERS, although the assignment should not be recorded. If the mortgage seller is not going to service the mortgage, the unrecorded assignment to Fannie Mae must be executed by the servicer."); Freddie Mac eMortgage Guide, Freddie Mac, 22.14 (Oct. 1, 2009), http://www.freddiemac.com /sell/guide/ ("The Seller/Servicer is not required to prepare an assignment of the Security Instmment to the Federal Home Loan Mortgage Corporation (Freddie Mac). However, Freddie Mac may, at its sole discretion and at any time, require a Seller/Servicer, at the Seller/Servicer's expense, to prepare, execute and/or record assignments of the Security Instrument to Freddie Mac. If an assignment of the Security Instmment to Freddie Mac has been prepared, Seller/Servicer must not record it unless directed to do so by Freddie Mac.").

(79.) With securitized residential loans, there is a significant gap between what market participants say and what they do. The typical Pooling and Servicing Agreement, which governs the relationship between the securitized trustee and the depositors) that are providing the mortgages to the pool, requires recording of assignments of all of the mortgages. See, e.g., Long Beach Secs. Corp., Long Beach Mortg. Co. & Deutsche Bank Nat'l Trust Co., Pooling and Servicing Agreement: Long Beach Mortgage Loan Trust 2006-3 [section] 2.01(d) (2006) [hereinafter Pooling AND Servicing agreement], available at http://content.edgar-online.com/edgar_convj>df/2006/04/21/0001277277-06-000388 PSALONGBEACH 20063.PDF):

   The Depositor does hereby deliver to, and deposit
   with, the Trustee as custodian ... the following
   documents or instruments with respect
   to each Mortgage Loan so transferred and assigned:

   (d) the original recorded Assignment or Assignments
   showing a complete chain of assignment
   from the originator to the Person assigning
   the Mortgage to the Trustee or in blank


In fact, however, the practice of the depositors not recording assignments, and the securitized trustees not complaining about it, seems to have been widespread. See David R. Greenberg, Neglected Formalities in the Mortgage Assignment Process and the Resulting Effects on Residential Foreclosures, 83 Temp. L. Rev. 253, 253-54 (2010).

(80.) Moreover, Freddie Mac has all foreclosures performed in its servicers' names, so recording an assignment to the corporation would be wasteful and counterproductive, since it would simply necessitate another recording to the servicer in the event of foreclosure. Freddie Mac Single-Family Seller/Servicer Guide [section] 66.17 (2012), available at http://www.freddiemac.com/sell/guide/. Its normal procedure, in the event of foreclosure, is to record a single assignment from MERS to the servicer, or from the originator to the servicer for a non-MERS loan.

(81.) What is an Assignment of a Mortgaged, Stop FORECLOSURE Fraud, http://stopforeclosurefraud.com/what-is-an-assignment-of-mortgage/ (last visited Jan. 16,2013).

(82.) Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. ClN. L. Rev. 1359, 1403 (2010).

(83.) See supra notes 78-82 and accompanying text.

(84.) Tracey Read, Class Action Suit Filed for Mortgage Records, News-Herald, Oct. 14, 2011, http://www.news-herald.com articles/2011/10/14/news /doc4e985 23da23be992001503.txt?viewmode=default.

(85.) See Patrick Pulatie, Is the Current Recording Process Sufficient for Today's Complex Financial Instruments? Can MERS Resolve the Issues?, ML-ExPLODE.COM (Nov. 2002), http://ml-explode.com/2011/11/mers-and-recording-past-present-andfuture-pt-1/ (outlining other deficiencies in the public recording system).

(86.) See PEB Report, supra note 21. For a similar report, reaching virtually identical conclusions, see generally Am. Securitization Forum, Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market (2010).

(87.) Article 9 uses the term "instrument," defined by U.C.C. [section] 9-102(a)(47) (2012) as a document of a "type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment." This definition covers all promissory notes, irrespective of their negotiability.

(88.) See, e.g., Armacost v. HSBC Bank, No. 10-CV-274-EJL-LMB, 2011 WL 825151, at *12 (D. Idaho Feb. 9, 2011) (concluding that foreclosing party was required to establish its entitlement to enforce the note, irrespective of its holding of an assignment of the deed of tmst).

(89.) U.C.C. [section] 3-103(a).

(90.) PEB Report, supra note 21, at 4.

(91.) See supra notes 19-31 and accompanying text (discussing the requirements for ownership under Article 9).

(92.) Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 912 (B.A.P. 9th Cir. 2011).

(93.) See, e.g., JPMorgan Chase & Co., Inc. v. Casarano, No. 07 MISC 344419 (AHS), 2010 WL 3605427, at *6 (Mass. Land Ct. Sept. 16, 2010) (finding a note nonnegotiable, and hence governed by the common law, where the note had been lost and no one could remember whether it was a "demand note" or for a definite term), aff'd, 963 N.E.2d 108 (Mass. App. Ct. 2012).

(94.) See U.C.C. [section] 3-104(a). I have previously explored the complexities of the definition of negotiability, the uncertainty of the classification of many mortgage notes, and the tendency of courts to avoid the issue. See Whitman, How Negotiability Has Fouled Up the Secondary Mortgage Market, supra note 3. A good example of the complexity of the determination is Bankers Trust (Delaware) v. 236 Beltway Inv., 865 F. Supp. 1186 (E.D. Va. 1994), in which the court made an unusually prodigious effort but probably got it wrong. See also Ngo v. Park, 623 S.E.2d 369, 369 (N.C. Ct. App. 2006) (unpublished table decision) ("[BJecause separate documents have been made a part of the note by its express terms, the promise contained therein is conditional, and the note nonnegotiable").

(95.) Perhaps the closest opinion to this ideal is HSBC Bank USA v. Gouda, No. A-1983-09T2, 2010 WL 5128666, at *3 (N.J. Super. Ct. App. Div. Dec. 17, 2010), cert, denied, 132 S. Ct. 1019 (2012), apparently concluding that the clause obligating the mortgagor to notify the mortgagee of intent to prepay the loan did not render the note nonnegotiable. The opinion is slightly garbled, but at least the court tried. One federal district court, several bankruptcy courts, and the Alabama intermediate appellate court have agreed. See Picatinny Fed. Credit Union v. Fed. Nat'l Mortg. Ass'n, No. 09-1295 (GEB), 2011 WL 1337507 (D.N.J. Apr. 7, 2011); In re Walker, 466 B.R. 271, 283-84 (Bankr. E.D. Pa. 2012); Kain v. Bank of New York Mello (In re Kain), No. 10-80047-HB, 2012 WL 1098465, at *7-8 (Bankr. D.S.C. Mar. 30, 2012); Edwards v. Deutsche Bank Nat'l Trust Co. (In re Edwards), No. 11-23195, 2011 WL 6754073, at *5 (Bankr. E.D. Wis. Dec. 23, 2011); Thomas v. Wells Fargo Bank, No. 2101153, 2012 WL 3764729 (Ala. Civ. App. Aug. 31, 2012). See the discussion of this issue in Whitman, How Negotiability Has Fouled Up the Secondary Mortgage Market, supra note 3, at 749-50. Mesina v. Citibank, NA, No. 10-2304RTL, 2012 WL 2501123 (Bankr. D.N.J. June 27, 2012) agrees with this analysis, and also holds that negotiability was not destroyed by the Fannie Mae-Freddie Mac note's reference to the accompanying mortgage with respect to rights of acceleration and collateral. But see Bank of N.Y. v. Romero, 266 P.3d 638, 644-45 (N.M. Ct. App. 2011) (holding that the assignment of the mortgage also assigned the note, a result that would have been impossible if the note had been negotiable; but the court made no analysis of the negotiability issue), cert, granted, 289 P.3d 1254 (N.M. 2011).

(96.) This is, in a sense, a weakness of the PEB Report, supra note 21. It spells out very clearly the way Article 3 operates on negotiable notes, but it provides no help in determining whether Article 3 applies to any particular note, or exactly what rules will govern if Article 3 does not. The PEB did not consider clarifying these issues to be its responsibility. See id.

(97.) Id. at 5.

(98.) See In re Walker, 466 B.R. 271, 280-81 (Bankr. E.D. Pa. 2012) (finding note was endorsed in blank and delivered to securitized trustee, thus constituting it a "holder"); In re David A. Simpson, P.C., 711 S.E.2d 165, 173 (N.C. Ct. App. 2011) (holding securitized trustee attempting to foreclose was not a "holder," despite having possession of the note, where the note was not endorsed either to the trustee or in blank).

(99.) PEB Report, supra note 21, at 5.

(100.) See. e.g., Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 911-12 (B.A.P. 9th Cir. 2011) (recognizing "nonholder with the rights of a holder" status, but finding that it did not exist in the absence of possession of note); Aum Shree of Tampa v. HSBC Bank USA, Nat'l Ass'n (In re Aum Shree of Tampa, LLC), 449 B.R. 584, 593-94 (Bankr. M.D. Fla. 2011) (finding where foreclosing party proved possession of the note, it was at least a nonholder with the rights of a holder; it was not required to prove that it was a holder in due course); Bank of Am. v. Kabba, 276 P.3d 1006, 1009 (Okla. 2012) ("Delivery of the note would still have to occur even though there is no negotiation."); Anderson v. Burson, 35 A.3d 452, 464 (Md. 2011) (permitting enforcement, where possessor of unendorsed note did not prove each prior transfer, but makers conceded that such transfers had occurred); Leyva v. Nat'l Default Servicing Corp., 255 P.3d 1275, 1281 (Nev. 2011) (requiring the servicer to provide specific, affirmative proof that the note was delivered to it for the purpose of transferring the right of enforcement); Wells Fargo Bank v. Ford, 15 A.3d 327, 331 (N.J. Super. Ct. App. Div. 2011) (finding documents proving purpose for which note was delivered were not properly authenticated). But cf. In re Adams, 693 S.E.2d 705 (N.C. Ct. App. 2010) (refusing to allow foreclosure by the party in possession of the note, apparently because it was not endorsed).

(101.) See, e.g., Allen v. US Bank Nat'l Ass'n (In re Allen), 472 B.R. 559 (B.A.P. 9th Cir. 2012) (holding lost note affidavit sufficient to sustain noteholder's claim in bankruptcy); Bobby D. Assocs. v. DiMarcantonio, 751 A.2d 673, 675-76 (Pa. Super. Ct. 2000) (finding assignee of lost note may enforce it through lost note affidavit). If the original note is lost and no photocopies of it can be found, a lost note affidavit may be insufficient for purposes of enforcement, because it may be impossible to determine the terms of the original note. See JPMorgan Chase & Co. v. Casarano, 963 N.E.2d 108, 110-11 (Mass. App. Ct. 2012).

(102.) See, e.g., First Const. Co. v. Tri-S. Mortg. Investors, 308 N.W.2d 298, 299 (Minn. 1981).

(103.) See FANNIE Mae, REQUIREMENTS FOR DOCUMENT CUSTODIANS (2009); Freddie Mac, Document Custody Procedures Handbook (2012).

(104.) The need for such affidavits appears to be widespread, since in some areas of the nation original notes were routinely destroyed as a matter of policy. For example, a letter to the Florida Supreme Court from the Florida Bankers Association in 2009 observed, "[t]he reason 'many firms file lost note counts as a standard alternative pleading in the complaint' is because the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file." Yves Smith, FUBAR Mortgage Behavior: Florida Banks Destroyed Notes; Others Never Transferred Them, NAKED CAPITALISM (Sept. 27, 2010), http://www .nakedcapitalism.com/2010/09/more-evidence-of-bank-fubar-mortgage-behaviorflorida-banks-destroyed-notes-others-never-transferred-them.html. It is not clear to what extent notes were destroyed, but it seems obvious that in many cases the lost note affidavit process has been employed simply to avoid the trouble of looking for the note. One Florida legal aid attorney estimated that 80% of the foreclosure complaints in his locality were accompanied by lost note affidavits. Bob Ivry, Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish, BLOOMBERG (Feb. 22, 2008), www.bloomberg.com/apps/news?pid=newsarchive&sid=aejJZdqodTCM .

(105.) See, e.g., Dennis Joslin Co. v. Robinson Broad. Corp, 977 F. Supp. 491, 494-95 (D.D.C. 1997). The situation is well explained in Timothy R. Zinnecker, Extending Enforcement Rights to Assignees of Lost, Destroyed, or Stolen Negotiable Instruments Under U.C.C. Article 3: A Proposal for Reform, 50 U. Kan. L. Rev. Ill (2001).

(106.) U.C.C. [section] 3-309(a)(l)(B) (2012); see Feltus v. U.S. Bank Nat'l Ass'n, 80 So. 3d 375, 377 (Fla. Dist. Ct. App. 2012) (holding that even under 2002 amendment to U.C.C. [section] 3-309, complaint was insufficient because it failed to allege that alleged owner of note '"was entitled to enforce the instrument when loss of possession occurred, or has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred"' (quoting Fla. Stat. Ann. [section] 673.3091(a) (West, Westlaw through 2012 Reg. Sess.))).

(107.) Compare State St. Bank & Trust Co. v. Lord, 851 So. 2d 790, 791 (Fla. Dist. Ct. App. 2003) (holding under prior version of Article 3, mortgagee must prove it had possession of the note when it was lost or destroyed), with EquiCredit Corp. v. Provo, No. L-03-1217, 2006 WL 2192856 (Ohio Ct. App. Aug. 4, 2006) (finding mortgagee provided satisfactory proof that it was in possession of note at the time it was lost).

(108.) See, e.g., HSBC Bank v. Hernandez, 939 N.Y.S.2d 120, 122 (N.Y. App. Div. 2012) (denying foreclosure where foreclosing party did not prove it had possession of note).

(109.) See, e.g., Howard v. PNC Mortg., 269 P.3d 995, 997 (Utah Ct. App. 2012) (correctly accepting photocopy of note as proof of its possession, where mortgagor admitted note had been transferred and photocopy showed that it had been properly endorsed).

(110.) See, e.g., 5-Star Mgmt., Inc. v. Rogers, 940 F. Supp. 512, 520-21 (E.D.N.Y. 1996); In re Wilhelm, 407 B.R. 392 (Bankr. D. Idaho 2009) (having a mortgage assignment from MERS is no substitute for delivery of the note). Even if the note is nonnegotiable, a court may demand production of it as proof that it has been transferred to the party that filed the foreclosure action. This idea is an ancient one, not confined to negotiable notes. See, e.g., Sheehy v. Mandeville, 11 U.S. 208 (1812) (Marshall, J.) ("The practice of this country is to require that the note should be produced, or its absence accounted for, and the rule is a safe one.").

(111.) Some such procedure seems to be demanded by North Carolina law. N.C. Gen. Stat. [section] 45-21.16(c)(7)(d) (Westlaw through 2012 Reg. Sess.) (requiring that the clerk of court, prior to authorizing foreclosure of a deed of tmst, find from evidence submitted by the trustee, "the existence of: (i) valid debt of which the party seeking to foreclose is the holder"); see In re David A. Simpson, P.C., 711 S.E.2d 165 (N.C. Ct. App. 2011) (determining that the required showing was not made).

(112.) See, e.g., In re Lacey, 480 B.R. 13, 34 (Bankr. D. Mass. 2012) (holding that to foreclose under Massachusetts non-judicial procedure, party must either hold the note or be the agent of the note-holder); Bank of N.Y. v. Raftogianis, 13 A.3d 435, 438 (N.J. Super. Ct. Ch. Div. 2010) ("[A] party seeking to foreclose a mortgage must own or control the underlying debt"); U.S. Bank Nat'l Ass'n v. Baber, 280 P.3d 956, 959 (Okla. 2012) ("It is a fundamental precept of the law to expect a foreclosing party to actually be in possession of its claimed interest in the note"); U.S. Bank Nat'1 Ass'n v. Kimball, 27 A.3d 1087, 1094 (Vt. 2011) ("It is neither irrational nor wasteful to expect a foreclosing party to actually be in possession of its claimed interest in the note").

(113.) Pascual v. Aurora Loan Servs., LLC, No. 10-00759 JMS-KSC, 2012 WL 3583530, at *3 (D. Haw. Aug. 20, 2012); Palmerin v. Bank of N.Y. Trust Co., 2012 WL 393650, at *5 (E.D. Cal. Feb. 6, 2012) (citing additional cases); Meyer v. Bank of Am., No. 1:10-cv-00632-EJL, 2011 WL 4584514, at *5 (D. Idaho Aug. 29, 2011); In re Mortg. Elec. Registration Sys. (MERS) Litigation, No. 09-2119-JAT, 2011 WL 251453, at *5 (D. Ariz. Jan. 25, 2011) (applying Nevada law); Gallant v. Deutsche Bank Nat'1 Trust Co., 766 F. Supp. 2d 714, 720-21 (W.D. Va. 2011); Kan v. OneWest Bank, FSB, 823 F. Supp. 2d 464, 470 (W.D. Tex. 2011); Mansour v. Cal-Western Reconveyance Corp., 618 F. Supp. 2d 1178, 1181-82 (D. Ariz. 2009); Diessner v. Mortg. Elec. Registration Sys., 618 F. Supp. 2d 1184, 1187 (D. Ariz. 2009), aff'd, 384 F. App'x 609 (9th Cir. 2010); Urbina v. Homeview Lending Inc., 681 F. Supp. 2d 1254, 1257-58 (D. Nev. 2009); Wayne v. HomEq Servicing, Inc., No. 2:08-cv-00781RCJ-LRL, 2008 WL 4642595, at *3-4 (D. Nev. Oct. 16, 2008); Neal v. Juarez, No. 06CV0055 J(JMA), 2007 WL 2140640, at *8 (S.D. Cal. July 23, 2007) ("[T]he allegation that the trustee did not have the original note or had not received it is insufficient to render the foreclosure proceeding invalid."), aff'd, 301 F. App'x 683 (9th Cir. 2008). Minnesota apparently agrees under its "foreclosure by advertisement" procedure. See Jackson v. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487, 501 (Minn. 2009); Stein v. Chase Home Fin., LLC, 662 F.3d 976, 980 (8th Cir. 2011) ("[T]he right to enforce a mortgage through foreclosure by advertisement lies with the legal, rather than equitable, holder of the mortgage. The assignment of the promissory note to another 'operates as an equitable assignment of the underlying [mortgage],' but the right to enforce the mortgage remains with the legal holder of the mortgage." (emphasis omitted) (internal citations omitted) (quoting Jackson, 770 N.W.2d at 497)); cf. Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 917-18 (B.A.P. 9th Cir. 2011) (holding a mortgage lender seeking stay relief in bankruptcy must establish its standing by proof that it holds the note).

(114.) Armacost v. HSBC Bank USA, No.10-CV-274-EJL-LMB, 2011 WL 825151, at *10 (D. Idaho Feb. 9, 2011).

(115.) 805 N.W.2d 183, 184 (Mich. 2011).

(116.) Id at 183.

(117.) See Hargrow v. Wells Fargo Bank, No. 11-1806, 2012 WL 2552805, at *3 (6th Cir. July 3, 2012) (adopting this understanding of Saurman).

(118.) 277 P.3d 781 (Ariz. 2012).

(119.) Id. at 783.

(120.) Id

(121.) Id.

(122.) Would such an allegation, based on nothing more than suspicion, be improper or sanctionable in Arizona? Arizona's version of the Federal Rules of Civil Procedure, Rule 11, is violated "by the filing of a pleading when the party or counsel knew, or should have known by such investigation of fact and law as was reasonable and feasible under all the circumstances that the claim or defense was insubstantial, groundless, frivolous or otherwise unjustified." Gilbert v. Bd. of Med. Exam'rs, 745 P.2d 617, 631 (Ariz. Ct. App. 1987) (internal emphasis omitted), superseded by statute on other grounds, as stated in Pierce v. Laydon Leasing, Inc., No. 1 CA-CV 100250, 2011 WL 1631931 (Ariz. Ct. App. Apr. 28, 2011). But what sort of investigation can the plaintiff or his counsel make? Is simply asking the foreclosing party whether it has the original note likely to do any good? It seems probable that such a request would be ignored.

(123.) 275 P.3d 857 (Idaho 2012).

(124.) Id. at 861.

(125.) Id. at 862.

(126.) Idaho Code Ann. [section][section] 45-1505, 45-1506 (West, Westlaw through 2012 Reg. Sess.).

(127.) Trotter, 275 P.3d at 862.

(128.) 138 Cal. Rptr. 3d 830 (Cal. Ct. App. 2012).

(129.) Id. at 835 (quoting Moeller v. Lien, 30 Cal. Rptr. 2d 111, 781 (Cal. Ct. App. 1994)).

(130.) Id. at 835-36.

(131.) Id. at 836.

(132.) See In re Allen, 472 B.R. 559, 569 (B.A.P. 9th Cir. 2012) (construing the Washington non-judicial foreclosure statute to require possession of the note by noting that "an assignment of the DOT is not relevant because under Washington law, the security for an obligation follows the debt. RCW 61.24.005(2) ('Beneficiary' means the holder of the instrument or document evidencing the obligations secured by the deed of trust ...)"); Ball v. Bank of New York, No. 4:12-CV-00144-NKL, 2012 WL 6645695 (W.D. Mo. 2012) (under Missouri law, foreclosing party must possess the note); Anderson v. Burson, 35 A.3d 452, 460 (Md. 2011) (holding Maryland law requires possession of the note for use of statutory foreclosure procedure); Eaton v. Fed. Nat'l Mortg. Ass'n, 969 N.E.2d 1118, 1129 (Mass. 2012) ("[W]e construe the term 'mortgagee' in [the non-judicial foreclosure statute] to mean a mortgagee who also holds the underlying mortgage note."); In re David A. Simpson, P.C., 711 S.E.2d 165 (N.C. Ct. App. 2011) (denying statutory foreclosure, where foreclosing party did not prove it was holder of the note).

(133.) Virginia is an exception. Under VA. CODE ANN. [section] 55-59.1(B) (West, Westlaw through 2012 Spec. Sess.) the trustee of the deed of trust must obtain the lost note affidavit from the lender as a prerequisite to foreclosure (if the lender cannot exhibit the note), and must notify the borrower, advising the borrower that she or he may petition the circuit court for an order requiring a bond or other protection. The statute implies, but does not explicitly state, that the trustee should begin this process by demanding to see the note. See id. Ironically, a Virginia federal court construed this language in exactly the opposite way--as evidence that, because the note might not be available, the foreclosing beneficiary has no duty to show possession of the note. See Gallant v. Deutsche Bank Nat'l Trust Co., 766 F. Supp. 2d 714, 721 (W.D. Va. 2011).

(134.) See supra notes 96-97 and accompanying text.

(135.) See supra notes 103-09 and accompanying text.

(136.) See supra notes 57-71 and accompanying text.

(137.) See supra notes 114-35 and accompanying text.

(138.) See, e.g., Gretchen Morgenson, Audit Uncovers Extensive Flaws in Foreclosures, N.Y. Times, Feb. 15, 2012, http://www.nytimes.com/2012/02/16/business/ califomia-audit-finds-broad-irregularities-in-foreclosures.html?_r=1&nl=todayshead-lines&emc=tha2 (reporting an audit of 400 recent foreclosures in San Francisco, and disclosing multiple errors with mortgage assignments); Gretchen Morgenson, Flawed Paperwork Aggravates a Foreclosure Crisis, N.Y. Times, Oct. 3, 2010, http://www.nytimes.com/2010/10/04/business/04mortgage.html?pagewanted=all.

(139.) Founders included Fannie Mae, Freddie Mac, the Government National Mortgage Association, the Mortgage Bankers Association, and a variety of other industry participants.

(140.) See Carson Mullen, MERS: Tracking Loans Electronically, Mortgage Banking, May 2000, available at http://www.thefreelibrary.com/MERS%3A+Tracking+Loans+Electronically.-a063975145. MERS currently estimates that 60% of U.S. mortgages are registered with it. See Michael Powell & Gretchen Morgenson, MERS? It May Have Swallowed Your Loan, N.Y. TIMES, Mar. 5, 2011, http://www.nytimes.com/2011/03/06/business06mers.html?ref=mortgagcclectronicrcgistrationsystemsinc.

(141.) MERSCORP v. Romaine, 861 N.E.2d 81, 82-83 (N.Y. 2006).

(142.) See Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory, 53 Wm. & Mary L. REV. 111, 143-55 (2011).

(143.) See David Dayen, Dallas County Sues MERS for Unpaid Recording Fees, Fire Dog Lake (Sept. 23, 2011), http://news.firedoglake.com/2011/09/23/dallascounty-sues-mers-for-unpaid-recording-fees/; Bexar County Will Sue MERS over Unpaid Fees, Tex. Foreclosure Defense Network (Oct. 26, 2011), http://www.texasforeclosuredefensenetwork.com/san-antonio/2011/10/26/bexarcounty-will-sue-mers-over-unpaid-fees/; Broke Counties Go After Banks and MERS for Filing Fees, Sandhills N.C., http://www.sandhillsnc.com/broke-counties-goafter-banks-and-mers-for-filing-fees.html (last visited Jan. 17, 2013).

(144.) See Brown v. Mortg. Elec. Registration Sys., Inc., No. 6:1 l-CV-06070, 2012 WL 5416922 (W.D. Ark. Sept. 17, 2012) (holding that county clerks had no standing to claim loss of revenue due to absence of recordings under MERS system or to require recordings of mortgage assignments); Christian Cnty. Clerk ex rel. Kem v. Mortg. Elec. Registration Sys., Inc., No. 5:11CV-00072-M, 2012 WL 566807 (W.D. Ky. Feb. 21,2012) (same).

(145.) Unrecorded conveyances are entirely valid as between the parties. The incentive for a grantee to record a conveyance arises from the possibility that, absent recording, the grantor will later make a conflicting conveyance to a bona fide purchaser, who will prevail over the first grantee. See Cervantes v. Countrywide Home Loans, Inc., No. CV 09-517-PHXJATLEAD, 2009 WL 3157160, at *11 (D. Ariz. Sept. 24, 2009) ("Any lack of notice in the public records, however, to future buyers of Plaintiffs' mortgages does not alter Plaintiffs' obligations under the mortgages"), aff'd, 656 F.3d 1034 (9th Cir. 2011); STOEBUCK & WHITMAN, PROPERTY, supra note 16, [section] 11.9.

(146.) In late 2011 and early 2012 the Attorneys General of New York, Massachusetts, and Delaware sued several large banks and MERS, asserting that the MERS record-keeping system is illegal and fraudulent. See Gretchen Morgenson, Massachusetts Sues 5 Major Banks over Foreclosure Practices, N.Y Times, Dec. 1, 2011, http://www.nytimes.com/2011/12/02/business/major-banks-face-new-foreclosuresuit.html; New York Sues 3 Big Banks over Mortgage Database, N.Y. Times, Feb. 3, 2012, http://www.nytimes.com/2012/02/04/business/new-york-suing-3-banks-overmortgage-database.html; Complaint, Delaware v. Merscorp Inc. Go Go Beau!, Deadly Clear Blog (Oct. 28, 2011), http://deadlyclear.wordpress.com/2011/10/28/complaint-state-of-delaware-v-merscorp-inc-go-go-beau/. The principal academic critic of MERS has been Professor Christopher Peterson. See Peterson, supra note 82; see also Ariana Eunjung Cha, Banks' Legal Right to Foreclose Is Questioned in Testimony Before House Panel, WASH. POST, Dec. 2, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/12/02/AR2010120205224.htmls.

(147.) See, e.g., Bombshell MERS Ruling: Process Illegal, Daily Kos (Feb. 14, 2011, 1:50 PM), http://www.dailykos.com/story/2011/02/14/944523/-Bombshell MERS-Ruling:Process-Illegal; Ellen Brown, Homeowners' Rebellion: Could 62 Million Homes Be Foreclosure-Proof?, Yes! Magazine, Aug. 18, 2010, http://www.yesmagazine.org/new-economy/homeowners-rebellion-could-62-millionhomes-be-foreclosure-proof; Yasha Levine, How an Obscure Outfit Called MERS Is Subverting our Entire System of Property Rights, AlterNet (Dec. 15, 2010), http://www.alta.org/news/news.cfm?newsID= 16630; Scott J. Paltrow, Life on MERS: Archive Is at Center of Mortgage Mess, 4closure Fraud (July 19, 2011), http://4closurefraud.org/2011/07/19/life-on-mers-archive-is-at-center-of-mortgagemess/; L. Randall Wray, Anatomy of Mortgage Fraud, Part I: MERS's Smoking Gun, Huffpost Business Blog (Dec. 9, 2010), http://www.huffmgtonpost.com/1-randallwray/merss-smoking-gun-part-1-_b_794713 .html.

(148.) MERS' principal owners are the Mortgage Bankers Association, Fannie Mae, Freddie Mac, Bank of America, JPMorgan Chase Bank, HSBC Bank, CitiMortgage, GMAC Bank, the American Land Title Association, and Wells Fargo Bank.

(149.) See, e.g., Fontenot v. Wells Fargo Bank, 129 Cal. Rptr. 3d 467, 479 (Cal. Ct. App. 2011) ("A 'nominee' is a person or entity designated to act for another in a limited role--in effect, an agent.").

(150.) See, e.g., Smith v. Kisorin USA, Inc., 254 P.3d 636, 638 (Nev. 2011) ("[T]he beneficial holder of stock holds equitable title to the stock that is registered under the holder in street name.").

(151.) See, e.g., Groseth v. Madison (In re Madison), No. 2:09BK-22225-PHX, 2010 WL 3941858 (Bankr. D. Ariz. Oct. 4, 2010).

(152.) In re Agard, 444 B.R. 231 (Bankr. E.D.N.Y. 2011), vacated in part sub nom. Agard v. Select Portfolio Servicing, Inc., No. BR 8-10-77338 REG, 2012 WL 1043690 (E.D.N.Y. Mar. 28, 2012); Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619 (Mo. App. E.D. 2009); Bank of N.Y. v. Alderazi, 900 N.Y.S.2d 821 (N.Y. Sup. Ct. 2010).

(153.) See In re Mortg. Elec. Registration Sys. (MERS) Litigation, No. MDL 092119-JAT, 2011 WL 4550189 (D. Ariz. Oct. 3, 2011); Velasco v. Sec. Nat'l Mortg. Co., 823 F. Supp. 2d 1061 (D. Haw. 2011); Smith v. Cmty. Lending, Inc., 773 F. Supp. 2d 941 (D. Nev. 2011); In re Lozez, 446 B.R. 12 (Bankr. E.D. Mass. 2011); Rogan v. Citimortgage (In re Jessup), 72 U.C.C. Rep. Serv. 2d 876 (Bankr. E.D. Ky. 2010); Cram v. LaSalle Bank, 55 So. 3d 266 (Ala. Civ. App. 2009); Peace v. Mortg. Elec. Registration Sys., Inc., No. 4:09CV00966 SWW, 2010 WL 2384263 (E.D. Ark. 2010); US Bank v. Flynn, 897 N.Y.S.2d 855 (N.Y. Sup. Ct. 2010); Deutsche Bank Nat'l Trust Co. v. Traxler, No. 09CA009739, 2010 WL 3294292 (Ohio Ct. App. Aug. 23,2010).

(154.) The total number of mortgages current registered with MERS is usually estimated at more than 60 million. See Powell & Morgenson, supra note 140.

(155.) Cases rejecting arguments based on separation of the mortgage and note include King v. Am. Mortg. Network, Inc., No. L09CV162 DAK, 2010 WL 3516475 (D. Utah Sept. 2, 2010); Nicholson v. OneWest Bank, No. L10-CV-0795-JEC/AJB, 2010 WL 2732325 (N.D. Ga. Apr. 20, 2010); Bank of N.Y. v. Raftogianis, 13 A.3d 435 (N.J. Super. Ct. Ch. Div. 2010); Deutsche Bank Nat'l Trust Co. v. Pietranico, 928 N.Y.S.2d 818 (N.Y. Sup. Ct. 2011).

(156.) See MERSCORP CEO "There are 20,000 (Robosigners) of Those Nation Wide", Stop Foreclosure Fraud (Nov. 2010), http://stopforeclosurefraud.eom/2010/l l/20/video-merscorp-ceo-there-are-20000robo-signers-of-those-nationwide/.

(157.) MERS Policy Bulletin 2011-5, July 21,2011.

(158.) Cases upholding MERS' right to foreclose in its own name: Velasco v. Sec. Nat'l Mortg. Co., 823 F. Supp. 2d 1061 (D. Haw. 2011); Crafted Homes, Inc. v. Burnett (In re Burnett), 450 B.R. 589 (Bankr. W.D. Va. 2011); Ferguson v. Avelo Mortg., LLC, 126 Cal. Rptr. 3d 586 (Cal. Ct. App. 2011), cert, denied, 132 S. Ct. 2772 (2012); Residential Funding Co., LLC v. Saurman, 805 N.W.2d 183 (Mich. 2011). Contra Mortg. Elec. Registration Sys., Inc. v. Graham, 247 P.3d 223 (Kan. Ct. App. 2010) (rejecting MERS' right to foreclose on the ground that it had suffered no injury from the default); Mortg. Elec. Registration Sys., Inc. v. Saunders, 2 A.3d 289 (Me. 2010) (same); Weingartner v. Chase Home Fin., LLC, 702 F. Supp. 2d 1276 (D. Nev. 2010) ("MERS' 'beneficial interest' is nonexistent unless MERS holds the underlying debt, and it does not.").

(159.) Landmark Nat'l Bank v. Kesler, 216 P.3d 158 (Kan. 2009).

(160.) See FAQ: Why Do I Need to Know the Identity of my Servicer?, MERS, http://www.mersinc.org/information-for-homeowners/faq-information-forhomeowners#howcanifindout (last visited Jan. 17, 2013) ("If you are unable to make the payments on your mortgage and wish to negotiate the terms of your loan, you may only do so with your Servicer. Contrary to popular belief, it is your servicer and not the investor that can negotiate the terms of the loan with you").

(161.) See Ralph Roberts, Who Owns My Mortgage?, Realty Times (Apr. 27, 2009), http://realtytimes.com/rtpages/20090427_ownmortgage.htm ("MERS makes the name and contact information of the servicer available, but not the name and contact of the investor. That information is for the servicer or investor to disclose, not MERS"). Note that this statement is no longer entirely correct. See infra note 162.

(162.) See Karmela Lejarde, Press Release, MERS, MERS Expands Website to Disclose Loan Investor Information, (July 16, 2010), available at http://www.mersinc.org/media-room/press-release/archives-2010/27-mediaroom/press-release-archives/2010-articles/263-mers-expands-website-to-disclose-loan-investor-information.

(163.) E-mail from Bill Beckman, President, MersCorp Holdings, Inc., to author (March 28, 2012) (on file with author) ("MERSCORP discloses 100% of servicers and over 98% of investors via our website or toll free line to borrowers (it's no longer an investor opt-in) ... a change made last year due to the groundswell of concern over 'transparency.'").

(164.) See Nelson D. Schwartz, Some Doubt a Settlement Will End Mortgage Ills, N.Y. Times, Feb. 20, 2012, http://www.nytimes.com/2012/02/21/business/somedoubt-a-settlement-will-end-mortgage-ills.html?_r=l(recounting difficulties of borrowers in communicating with mortgage servicers).

(165.) See Karmela Lejarde, Press Release, MERS, Statement by R.K. Arnold, President and CEO of MERSCORP, Inc. (Oct. 9, 2010), available at http://www.mersinc.org/media-room/press-release/archives-2010/27-mediaroom/press-release-archives/2010-articles/261-statement-by-r-k-amold-president-andceo-of-merscorp-inc.

(166.) See supra notes 77-80 and accompanying text.

(167.) I have capitalized the term "Registry" throughout this section when using it to refer to the registry that would be created by the Draft Statute, and to distinguish it from MERS and other possible registration systems.

(168.) Draft Statute [section] 112.

(169.) See supra notes 89-96 and accompanying text.

(170.) See supra notes 98-112 and accompanying text.

(171.) Draft Statute [section] 112(a).

(172.) See supra notes 154-55 and accompanying text.

(173.) Draft Statute [section] 102(4).

(174.) See Mortgage Foreclosure: Resolution to Create Drafting Committee and Issues List, UNIFORM L. COMMISSION (Jan. 20, 2012), http://www.uniformlaws.org/shared/docs/mortgage%20foreclosure/2012may _RREMFPP_Resolution%20and%20Issues%20List.pdf.

(175.) Each uniform act must be considered at no less than two annual meetings before adoption by the Conference. ULC Drafting Process, Uniform L. Commission, http://www.uniformlaws.org/Narrative. aspx?title=ULC%20Drafting %20Process (last visited Jan. 17, 2013). Many acts have required more than two years to complete. See id.

(176.) This is well illustrated by the "progress," such as it is, of the 2002 amendments to U.C.C. Article 3, which among other things broaden the basis upon which a "lost note affidavit" under U.C.C. [section] 3-309(g) may be employed by a party enforcing a negotiable note. See supra notes 101-07 and accompanying text. Ten years after adoption by the Permanent Editorial Board, this amendment has been enacted in only ten states.

(177.) This step would eliminate the need to characterize individual mortgage notes as negotiable or not, and also eliminate the necessity for physical delivery of the note as a means of transferring the right of enforcement.

(178.) See Whitman, How Negotiability Has Fouled Up the Secondary Mortgage Market, supra note 3, at 770.

(179.) On May 9, 2011, a "stakeholder's meeting" was held in Washington, D.C., sponsored jointly by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. The meeting was attended by representatives of most of the major federal agencies and trade organizations that deal with the mortgage market. Its purpose was to discuss proposals for resolving some of the uncertainties that have generated litigation surrounding the secondary market and foreclosures. At that meeting, several other speakers and I recommended that the Permanent Editorial Board review the status of mortgage notes under UCC Article 3 with a view to clarifying the ambiguities and inefficiencies mentioned in the text. Following the meeting, the Commissioners on Uniform Laws created a study committee that led, some eight months later, to the formation of the drafting committee mentioned previously. See supra note 174 and accompanying text. However, the American Law Institute did not elect to take any specific action in response to these comments, and without ALI direction, it appeared unlikely that the PEB would take action.

(180.) See supra notes 91-93 and accompanying text.

(181.) See PEB Report, supra note 21, at 4.

(182.) See supra notes 90-92 and accompanying text.

(183.) Draft Statute [section] 102(3).

(184.) This is not to say that the Draft Statute's requirements for becoming a holder are identical to U.C.C. Article 3's requirements. See U.C.C. [section] 3-301 (2012). Under the Draft Statute, unlike U.C.C. Article 3, a person need not have taken physical delivery of the note in order to be a holder, and there is no provision for (and no need for) a "lost note affidavit" procedure if the original note cannot be produced.

(185.) Draft Statute [section] 109(1). U.C.C. Article 3 seems to imply this, but never states it directly, and as we have seen, a cluster of cases appears to deny that it is so. See supra notes 112-31 and accompanying text.

(186.) Draft Statute [section] 109.

(187.) Draft Statute [section] 103(b), (c).

(188.) Draft Statute [section] 109.

(189.) See U.C.C [section] 9-203; PEB Report, supra note 21, at 9-10.

(190.) See supra notes 97-100 and accompanying text.

(191.) Unif. Electronic Transactions Act [section] 16 (2012). UETA has been adopted in all states except Illinois, New York, and Washington, which have locally-tailored legislation that is roughly equivalent. Uniform Electronic Transactions Act, Nat'l Conf. St. Legislatures, http://www.ncsl.org/issues-research/telecom /uniform-electronic-transactions-acts.aspx (last visited Nov. 26, 2012).

(192.) 15U.S.C. [section] 7021 (2006).

(193.) Id. [section] 7021(d); Unif. Electronic Transactions Act [section] 16(d).

(194.) Draft Statute [section] 103(c), (f).

(195.) See generally Stoebuck & Whitman, Property, supra note 16, [section] 11.9.

(196.) Id.

(197.) See generally id. [section] 11.15.

(198.) See Tim Hanstad, Designing Land Registration Systems for Developing Countries, 13 Am. U. Int'l L. Rev. 647, 649 (1998).

(199.) Stoebuck & Whitman, Property, supra note 16, [section] 11.15.

(200.) Draft Statute [section] 110.

(201.) See Barlow Burke, Real Estate Transactions: Examples and Explanations 221 (4th ed. 2006); Comment, The Torrens System of Title Registration: A New Proposal for Effective Implementation, 29 UCLA L. Rev. 661, 680-81 n.95 (1982); Report 76--Torrens Title: Compensation for Loss, New S. WALES L. Ref. Commission (1996), http://www.lawlink.nsw.gov.au/lrc.nsf/pages/r76toc.

(202.) See, e.g., Lobato v. Taylor, 71 P.3d 938, 942-43 (Colo. 2002) (holding that a 77,000 acre parcel in southern Colorado held by way of Torrens title was subject to easement rights of several thousand descendants of the original Mexican settlers).

(203.) Motor vehicle title histories are maintained and tracked by the National Motor Vehicle Title Information System, established by the Anti Car Theft Act of 1992, and operated under the authority of the U.S. Department of Justice by the American Association of Motor Vehicle Administrators. See 49 U.S.C. [section][section] 30502, 30503 (2006). The functions of the agency are nicely explained in the preamble to 28 C.F.R. [section] 25.51 (2010).

(204.) Draft Statute [section] 113.

(205.) The Federal Housing Finance Agency has described its efforts to develop mortgage information standards as follows:

   The Uniform Mortgage Data Program will improve
   the consistency, quality, and uniformity
   of data collected at the beginning of the lending
   process. Developing standard terms, definitions,
   and industry standard data reporting
   protocols will decrease costs for originators
   and appraisers and reduce repurchase risk. It
   will allow new entrants to use industry standards
   rather than having to develop their own
   proprietary data systems to compete with other
   systems already in the market. Common data
   definitions, electronic data capture, and standardized
   data protocols will improve efficiency,
   lower costs and enhance risk monitoring.
   Standardizing data will be a key building
   block of housing finance reform.


News Release, Fed. Housing Fin. Agency, FHFA Sends Congress Strategic Plan for Fannie Mae and Freddie Mac Conservatorships 10 (Feb. 21, 2012), available at http://www.fhfa.gov/webfiles/23344/StrategicPlanConservatorshipsFINAL.pdf.

(206.) Draft Statute [section] 110(c).

(207.) Draft Statute [section] 103(a).

(208.) The Draft Statute permits paper registrations, but it is expected that they will be rare. Id.

(209.) Draft Statute [section] 103(d).

(210.) See, e.g., R.J. Robertson, Jr., Electronic Commerce on the Internet and the Statute of Frauds, 49 S.C. L. Rev. 787, 820-21 nn. 197-209 (1998); Dale A. Whitman, Are We There Yet? The Case for a Uniform Electronic Recording Act, 24 W. NEW ENG. L. REV. 245, 258-59 nn. 60-63 (2002).

(211.) Draft Statute [section] 107. Other essential documents in the preregistration "chain of title" of the loan, such as mortgage assignments, note endorsements or allonges, and any modification, substitution, or assumptions agreements should also be submitted with registration. Id. [section] 107(a).

(212.) See First Am. Title Ins. Co. v. XWarehouse Lending Corp., 98 Cal. Rptr. 3d 801 (Cal. Ct. App. 2009) (finding title insurance policy provided no compensation to holder of forged promissory note); see also Reyes v. Stewart Title of Cal., No. B224192, 2011 WL 3305974, at *3 (Cal. Ct. App. Aug. 3, 2011) (unpublished) (absolving an escrow company of liability in a scheme by which a mortgage broker obtained a borrower's forged or fraudulent signature on a promissory note).

(213.) See, e.g., Maddox v. Summit Mortg. Corp., No. 09-00-771 CV, 2001 WL 1805883 (Tex. Ct. App. Mar. 7, 2002).

(214.) See, e.g., POOLING AND SERVICING AGREEMENT, supra note 79, [section] 2.03:

   Upon discovery or receipt of notice of any
   materially defective document ... the Trus
   tee shall promptly notify ... the Seller ...
   and request that the Seller ... cure such defect
   or breach [and upon its failure to do so]
   ... the Trustee[] shall enforce the obligations
   of the Seller under the Mortgage Loan
   Purchase Agreement to repurchase such
   Mortgage Loan.


See also, e.g., Lehman Bros. Holdings, Inc. v. 1st New England Mortg. Corp., No. 0911082-GAO, 2012 WL 3984413 (D. Mass. Sept. 12, 2012) (upholding a loan originator's repurchase obligation where the loan was based on a fraudulent loan application).

(215.) See Draft Statute [section] 110(a).

(216.) See supra notes 160-65 and accompanying text.

(217.) See the MERS ServicerID, MERS, https://www.mers-servicerid.org/sis/ (last visited Jan. 18, 2013).

(218.) The Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. [section] 2605 (2006), requires the existing servicer to notify the borrower no less than 15 days before the transfer, and the new servicer to notify the borrower within 15 days after the transfer. Under 2009 amendments to the Truth in Lending Act, 15 U.S.C. [section] 1641(g)(1) (Supp. Ill 2009), consumer borrowers are also entitled to mailed notice of the identity of the new creditor (investor) within 30 days after a transfer of the loan itself.

(219.) Draft Statute [section] 106.

(220.) Id. For example, does the servicer have authority to modify the loan? To subordinate it to other liens? To approve a sale of the real estate under the mortgage's due-on-sale clause? To issue a satisfaction when the loan is paid? To foreclose? This information should assist borrowers in being certain that they are seeking answers from the right entity.

(221.) Draft Statute [section] 107.

(222.) For example, the MISMO standard data sets for the common documents in residential mortgage transactions may be seen online. See Residential Specifications, MISMO, http://www.mismo.org/Specifications/ResidentialSpecifications.htm (last visited Jan. 18, 2013).

(223.) FAQ, What is MISMO?, MISMO, http://www.mismo.org/GettingStarted/FAQs.htm (last visited Jan. 18, 2013).

(224.) Draft Statute [section] 107.

(225.) See supra notes 76-79 and accompanying text.

(226.) Draft Statute [section] 108(a).

(227.) Draft Statute [section] 108(b).

(228.) Draft Statute [section]111.

(229.) Fee Schedule, MERS, http://www.mersinc.org/mersproducts/pricing.aspx?mpid=1 (last visited Jan. 18,2013).

(230.) Id.

(231.) Id.

(232.) See supra notes 32-35 and accompanying text.

(233.) See supra notes 36-43 and accompanying text.

(234.) See, e.g., Hahn v. Alaska Title Guar. Co., 557 P.2d 143 (Alaska 1976) (holding public land order filed with the federal registrar in Washington, D.C. imparted constructive notice); New England Fed. Credit Union v. Stewart Title Guar. Co., 765 A.2d 450 (Vt. 2000) (holding the failure to obtain a subdivision permit in violation of state public health regulations was a matter of public record, imparting constructive notice). But see City of Lakewood v. Mavromatis, 817 P.2d 90 (Colo. 1991) (holding delivery of road petition to county clerk gave no constructive notice); Ioannou v. Southold Town Planning Bd. (In re Ioannou), 758 N.Y.S.2d 358 (N.Y. App. Div. 2003) (holding covenants filed with town planning board gave no constructive notice); First Am. Title Ins. Co. v. J.B. Ranch, Inc., 966 P.2d 834 (Utah 1998) (holding road maps filed with county clerk's office gave no constructive notice).

(235.) Draft Statute [section] 112(c).

(236.) See, e.g., Citicorp Mortg., Inc. v. Pessin, 570 A.2d 481 (N.J. Super. Ct. App. Div. 1990). The foreclosing lender prepared its complaint on October thirteenth, but did not file it until October nineteenth. Id. at 482. Meanwhile, an assignment of a junior mortgage to Pessin was recorded on October sixteenth. Id. The court held that Pessin was not bound by the foreclosure decree. Id. at 485. The effect of the ruling is to require the foreclosing party to search down to the very moment the foreclosure complaint is filed. Parties whose junior interests go on record after the date of filing of the senior proceeding are bound by the doctrine of lis pendens, and no personal service or notice need be given to them. Id. at 482.

(237.) Only a little more than half of the non-judicial foreclosure statutes provide for personal notice to holders of junior interests, and even those vary considerably with respect to the types of junior interest holders entitled to notice. See Nelson & Whitman, Reforming Foreclosure, supra note 47, at 1431 n.124.

(238.) See, e.g., Idaho Code Ann. [section] 45-1506 (West, Westlaw through 2012 Reg. Sess.) (requiring 120 days prior to date of sale); Okla. Stat. Ann. tit. 46 [section] 45 (West, Westlaw through 2012 Reg. Sess.) (requiring 30 days prior to date of sale); Va. Code Ann. [section] 55-59.1 (West, Westlaw through 2012 Spec. Sess.) (requiring 30 days prior to date of sale).

(239.) Draft Statute [section] 112(c)(2).

(240.) The "Fed" supervises state-chartered banks that are members of the Federal Reserve System, among many other responsibilities. See 12 C.F.R. [section] 208 (2012).

(241.) The OCC, housed within the Department of the Treasury, is the primary supervisor of national banks and federal savings associations. See 12 C.F.R. [section] 1-1.

(242.) HUD is the home of the Federal Housing Administration and the Government National Mortgage Association, which issues guarantees of mortgage-backed securities, as well as many other mortgage-related programs. See 24 C.F.R. [section][section] 200.1, 300.3.

(243.) FHFA supervises Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. See 12 C.F.R. [section] 1282.1.

(244.) The CFPB, created by the Dodd-Frank Act, Public Law 111-203, has inherited a number of mortgage-related regulatory responsibilities from other federal agencies, including the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act. See 12 C.F.R. [section] 1082.1. A complete list is found at Regulations, Consumer Fin. Protection Bureau, http://www.consumerfmance.gov/regulations/ (last visited Jan. 2, 2013).

(245.) See supra notes 141-47 and accompanying text.

(246.) The appetite of Congress for creating government-sponsored entities (GSEs) has surely been greatly dampened, if not destroyed, by the necessity of placing Fannie Mae and Freddie Mac, by far the two largest GSEs, into federal conservatorship because of their insolvency. See Zachary A. Goldfarb et al., Treasury to Rescue Fannie and Freddie, WASH. POST, Sept. 7, 2008, http://www.washingtonpost.com/wpdyn/content/article/2008/09/06/AR2008090602540.html?hpid=topnews. The political atmosphere has been rife with rancorous attacks on the fundamental concept of GSEs. See, e.g., Paul Krugman, Op-Ed., Fannie, Freddie and You, N.Y. Times, July 14, 2008, http://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=2&oref=slogin&oref=slogin; Edward Pinto, Cleaning House: The Financial Crisis and the GSEs, The AMERICAN, Dec. 20, 2011, http://www.american.com/archive/2011/december/cleaning-house-the-financial-crisis-and-the-gses.

(247.) See 74 Fed. Reg. 5740 (Jan. 30, 2009) (discussing the system and the role of the American Association of Motor Vehicle Administrators in operating it).

(248.) One such company, Global Debt Registry, has an expressed interest to the author in getting into the mortgage loan registry business; conversation of the author with Mark Parsells, C.E.O. of Global Debt Registry, Feb. 29, 2012. It currently maintains account-level chains of title for secondary market sales of credit card and other consumer and commercial debt. See Debt Buying, Register Debt, Mortgage Ownership-Mission, Global Debt Registry, http://www.globaldebtregistry.com/mission (last visited Jan. 2, 2013).

(249.) There are three principal national credit reporting companies: Transunion, Experian, and Equifax. See Credit Report Companies, CREDIT SOURCE ONLINE, http://www.creditsourceonline.com/credit-report-companies.html (last visited Jan. 2, 2013).

(250.) 15 U.S.C. [section] 1681 (2006).

(251.) U.C.C. [section] 3-302 (2012).

(252.) The "personal" defenses usually identified by commentators (because they are not listed in the Code itself) are failure or lack of consideration, breach of warranty, unconscionability, and fraud in the inducement. See James J. White & Robert S. Summers, Uniform Commercial Code [section]15-1 (6th ed. 2010).

(253.) See Kurt Eggert, Held Up in Due Course: Codification and the Victory of Form over Intent in Negotiable Instrument Law, 35 CREIGHTON L. REV. 363, 414-15 (2002).

(254.) Preservation of Consumers' Claims and Defenses, 16 C.F.R. [section] 433 (2011); Michael M. Greenfield & Nina L. Ross, Limits on a Consumer's Ability to Assert Claims and Defenses Under the FTC's Holder in Due Course Rule, 46 Bus. Law. 1135, 1136(1991).

(255.) See, e.g., Dupuis v. Fed. Home Loan Mortg. Corp., 879 F. Supp. 139, 146-47 (D. Me. 1995) (holding borrowers could not raise defense based on failure to disburse full loan proceeds against FHLMC, which was a holder in due course); Hunt v. NationsCredit Fin. Servs. Corp., 902 So. 2d 75, 86 (Ala. Civ. App. 2004) (holding borrowers could not raise defenses of failure of consideration and lack of mutual assent against note buyer who was holder in due course); Gonzales v. Am. Title Co., 104 S.W.3d 588, 594-95 (Tex. Ct. App. 2003) (holding borrowers could not raise defense of fraud in the inducement against note buyer who was holder in due course); White v. Gilliam, 419 S.E.2d 247 (Va. 1992) (similar).

(256.) Whitman, How Negotiability Has Fouled Up the Secondary Mortgage Market, supra note 3, at 766-69; Siddhartha Venkatesan, Note, Abrogating the Holder in Due Course Doctrine in Subprime Mortgage Transactions to More Effectively Police Predatory Lending, 1 N.Y.U. J. LEGIS. & PUB. POL'Y 177, 216, 216 n.223 (2003). Several other similar comments are cited in Greenlee & Fitzpatrick IV, supra note 3, at 47 n.194.

(257.) U.C.C. [section] 3-203 (2012); PEB Report, supra note 21, at 5-6.

(258.) This suggestion was first made more than 15 years ago by Ronald J. Mann. See Ronald J. Mann, Searching for Negotiability in Payment and Credit Systems, 44 UCLA L. Rev. 951,970-71 (1997).

(259.) See supra notes 99-100 and accompanying text.

(260.) This is the standard under current Commerce Clause jurisprudence. See United States v. Lopez, 514 U.S. 549, 558-59 (1995); see generally Grant S. Nelson, A Commerce Clause Standard for the New Millennium: "Yes" to Broad Congressional Control over Commercial Transactions; "No " to Federal Legislation on Social and Cultural Issues, 55 Ark. L. Rev. 1213, 1248 (2003).

(261.) 528 U.S. 141 (2000).

(262.) Id. at 151.

(263.) This fact distinguishes the Draft Statute from New York v. United States, 505 U.S. 144 (1992), in which the Court struck down a federal statute mandating that the states either regulate the storage and disposal of radioactive waste, or alternatively, take possession and title to the waste. Likewise, the Draft Statute is distinct from Printz v. United States. See 521 U.S. 898 (1997) (involving a Congressional enactment that imposed on state law enforcement officials a duty to make background checks on firearms purchasers).

(264.) Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 729-30 (1984).

(265.) 12U.S.C. [section] 3701 (2006).

(266.) Lisbon Square v. United States, 856 F. Supp. 482, 490 (E.D. Wis. 1994) (internal citations omitted). See the excellent discussion in Grant S. Nelson, Confronting the Mortgage Meltdown: A Brief for the Federalization of State Mortgage Foreclosure Law, 37 PEPP. L. REV. 583, 629-30 (2010).

(267.) Illustrations include the Garn-St.Germain Depository Institutions Act of 1982, [section] 341 (preempting state law governing the enforcement of due-on-sale clauses); The Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C.A. [section] 3801 (permitting state-chartered financial institutions to make alternative mortgage loans under the same regulations governing federally-chartered institutions); and the Depository Institutions Deregulation and Monetary Control Act of 1980, [section][section] 308, 324, 12 U.S.C.A. [section] 1735f-7 (preempting state usury ceilings).

(268.) Draft Statute [section] 112(b).

(269.) See, e.g., Ron Lieber, After Foreclosure, a Focus on Title Insurance, N.Y. Times, Oct. 8, 2010, http://www.nytimes.com/2010/10/09/your-money/mortgages/09money.html?pagewanted=all; Stephanie Armour, Lack of Title Insurance Could Slow Sales of Foreclosed Homes, USA Today, Oct. 3, 2010, http://www.usatoday.com/money/economy/housing/2010-10-01-boa-delays-foreclosures_N.htm.

Dale A. Whitman, Professor of Law Emeritus, University of Missouri-Columbia. This Article was prepared while I was Visiting Professor of Law, University of Georgia. I express appreciation for their review of earlier drafts of this paper to Wilson Freyermuth, Grant Nelson, Thomas A. Cox, Bill Beckmann, Barry Nekritz, John Valdivielso, James Newell, and Joyce Palomar. Any errors are mine alone, of course.
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Title Annotation:I. The Traditional Mortgage Transfer Process C. Transfer of the Note 3. Conclusion: The Sad State of the Law of Secondary Market Note Transfers through IV. Conclusion, with appendix and footnotes, p. 37-75; Mortgage Electronic Registration System
Author:Whitman, Dale A.
Publication:Missouri Law Review
Date:Jan 1, 2013
Words:28841
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