Estate Finance Notes
The secondary mortgage market
The secondary mortgage market started mostly after World War II.† There was a big demand for residential mortgages.† There was a big public policy in favor of ownership of single-family homes.† Local banks loan money to individual mortgagees.† But at some point, they run out of money: itís all loaned out.† The federal government created Freddie Mac and Fannie Mae, which are federally chartered corporations.† These act as private companies, but they operate in the public interest.† The FHA serves as a clearinghouse.† When money goes to the borrower, you get a promissory note and mortgage from the borrower to the bank.† Then the banks turn around and sell the promissory note and mortgage to the FHA, which pays them for it.† Now, the bank has more money with which to make mortgage loans.† The FHA turns around and sells the notes and mortgages to investors, which could be banks, insurance companies, or wealthy individuals.† Mortgage notes are very safe investments.† In the event of a foreclosure, the process sort of unravels.
Transfers by the mortgagee
This is a more important issue currently than transfers by the mortgagor because due on sale clauses are now enforceable.† Will the transfer of the promissory note alone constitute a transfer of the mortgage?† Yeah, thatís the only thing that makes sense.† Will a transfer of the mortgage alone also transfer the note?† No, even though it leads to the same absurd situation.† But when the later happens, it was probably an accident.† Notes and mortgages are transferred in different ways.† With notes, it depends on what kind of note it is.† If the note transfers the mortgage, why bother having a separate assignment of the mortgage?† You do it just to have something that can be recorded.† Recordation isnít as important as you might think, but it is important.† The assignee wants the protection of recordation, and in order to have that, there must be some written instrument to record.
Why would you want to transfer a note with the mortgage that secures it?† One reason is that you might just want to sell it.† You might rather have cash than the note.† There are plenty of people out there who would rather have the promissory note as an investment than cash.† So thereís a market there.† Or maybe you want to use the promissory note and mortgage as security for some other debt.† The promissory note is an asset you have, and you can use it as collateral just like any other asset.
Here are the two big issues: (1) Is the collateral assignment perfected under UCC Article 9?† Article 9 has nothing to do with the mortgage itself, but it does apply to creating a security interest in the promissory note.† (2) Is the assignee a holder in due course?† That would mean that youíre exempt from certain defenses that the original obligor may have; itís a fairly desirable status.† We need to distinguish fraud, though.† There is garden-variety fraud, where you basically intentionally lie to get the promissory note.† Thatís a personal defense.† The real defense with respect to fraud is when you sign the promissory note thinking that itís something else.† Thatís called ďfraud in the executionĒ.† The requirements for a holder in due course are that the instrument must be negotiable, you must be the holder of the instrument, you must possess the instrument, and you must exhibit certain behavior.† UCC ß 3-104(1) deals with negotiability.† There is also other stuff.