Foreclosure: The Bank Must Prove They Own The Note

The Court System is finally standing up for the little guy! Recently, the Southern District of New York ruled in favor of a borrower who was being foreclosed upon by their mortgage bank because the bank could not prove they owned the mortgage.


Years ago, lenders conspired to bypass the mortgage recording systems put in place by local municipalities, as well as avoid the fees associated with the recording of assignments of mortgages. In order to accomplish this task, lenders formed a company known as the Mortgage Electronic Recording System or MERS. Many mortgages state that the owner of the mortgage is MERS as nominee for the lender. The issue here is that MERS is not the actual lender or the note holder and one can only foreclose if they are in fact the party that has been defaulted. In the case of MERS, the investor is the owner of the note but MERS is the owner of the record of the mortgage.

What Does This Mean?

In short, this means that the note and mortgage are owned by separate entities and a foreclosing party must own both in order to foreclose. If a borrower fails to make payments, then the borrower has defaulted on the note and the owner of the note, therefore, has a cause of action for default on the note only and is not able to foreclose. The note holder may have the right to a judgment on the note and may be able to attempt collections on the note but cannot actually institute a foreclosure proceeding. The mortgage document, which allows for foreclosure, has not been violated since the borrower has only defaulted on the note and has not offended the owner of the mortgage. A mortgage holder may still be able to institute a foreclosure proceeding against the borrower for other violations of the mortgage such as transferring the property without consent, condemnation of the premises, etc.. but the mortgage holder may not institute foreclosure proceedings based on nonpayment of the note. This means that under the new rulings by a Kansas Court, MERS does not have the ability to foreclosure the mortgage and the investor may only recover under the terms of the note.

Proof Of Ownership

A foreclosing lender must prove that it is the owner of the defaulted mortgage and note, and not the owner of only one of those two documents. In keeping with the Kansas Court, the Bankruptcy Court for the Southern District of New York threw out the first mortgage of more than $400,000.00 in its ruling. The foreclosing servicer and underlying investor could not prove that they were the actual owners of the mortgage. The underlying investor, U.S. Bank, could not prove that it owned the mortgage that was being foreclosed upon by it servicer, PHH Mortgage. The lenders here used MERS which allowed them to assign the loan without filing actual assignments in the Municipality’s recording office. Since there was no assignment of record, U.S. Bank was unable to prove that they were the aggrieved party and therefore, had no standing to foreclose.


Although these rulings are being or will be appealed by the lenders, these rulings show a change in the way the Court System is looking at foreclosures. After years and years of deferment to creditors and a bending of the rules when it comes to proof of claims in foreclosure and collections matters, the Courts are now requiring lenders to prove that they are in fact the aggrieved party and to provide proof. If the lender is unable to prove that they are the aggrieved party, Courts seem much less likely to simply defer to the creditors. It seemed that the burden of proving the debt has finally been shifted back to where it belongs. Now the lender must prove that the debt is valid and owned by them before the Court will allow them to proceed.

What Does This Means For You?

About 60% of all mortgages that were given out during the lending and refinance boom are held by MERS as the nominee. There is a good chance that your mortgage is held in this fashion. If you can find your copy of the mortgage papers you signed all those years ago, look on the first page of the mortgage documents and see who is named as the lender or mortgagee. If it is MERS as a nominee, you may have a viable defense to foreclosure or may be able to have the debt completely relieved in bankruptcy.


The rulings cited in this blog post are cases of the first impression and the full ramifications of the rulings are not yet known. The ruling of the Kansas Court is not binding upon any other State and until the appeals process has been completed there is no way of knowing what the actual outcome may be. This article was written to show the trend of the Courts in moving away from a creditor bias and toward a more fairly viewed interpretation of the law and rules surrounding mortgages and foreclosure. This is not legal advice but rather a recitation of facts and an analysis of what appears to be happening around the Country with the hopes that some of our colleagues may be inspired to pursue these types of defenses to foreclosure proceedings and establish the rule of law more thoroughly and to give hope to those who are facing similar circumstances.

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