Real Estate Finance Notes 10/22/04

This is the more important half of the equation: what happens when the mortgagee transfers its interest in the mortgage?

Negotiable instruments and holder in due course

Last time we talked about an alternative to holder in due course protection: get an estoppel certificate in favor of the assignee. This is the only alternative with a non-negotiable note. The holder in due course doctrine only protects against personal defenses and not real defenses. An estoppel statement is not effective if obtained by fraud, or against “latent” equities, that is, an equity in favor of someone other than the mortgagor. There are limits on the holder in due course doctrine.

There was the Peters case where there was a note and mortgage granted by Peters to Norwood, and then an assignment of the note and mortgage to Groover, who is also a holder in due course. Peters pays Norwood. Groover says that he should be paid! Does Peters have to pay Groover? Yes! Normally, if I have a contract with someone, the contract is seen as evidence of the obligation, not the obligation itself. The obligation is the mutual promises the parties have made. That’s the actual contract. But a negotiable note is a “symbolic” writing: any payment to a person who doesn’t possess the writing is null.

The UCC Article 3 says that transfer of an instrument happens when it is delivered with intent (for a purpose). Transfer vests in the transferee the right to enforce the instrument. The “symbolic writing” doctrine won’t be a problem when the original mortgagee has a “servicing contract”, is otherwise an agent, or when the assignee is estopped to deny the payment. So there are some protections from this problem. The best protection is to make sure the payee is solvent.

(I got distracted.)

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