The Negotiation and Assignment of The Promissory Note

Written by zanjani1 on Nov-18-08 8:08pm2008-11-18T20:08:29

From: loanaudit.wordpress.com

Below is a rather typical process wherein a promissory note is NEGOTIATED and the
mortgage(deed) ASSIGNED.

Step 0 - Delivery of the Promissory Note to Corresponding Institution

[This step may be OMITTED in the instance that a mortgage is originated by the primary
mortgage servicer actually funding the loan at the table]

The mortgage loan is closed in the name of a small correspondent mortgage lender making the
loan pursuant to a written commitment by the corresponding lender to purchase the loan
immediately after closing. The corresponding lender FUNDS the loan at the table, usually by
wiring the funds for the loan to the closing agent, typically a real estate attorney or a title company
(this practice varies across the country). The corresponding lender is funding the particular loan it
has agreed to purchase and the purchase price of the loan is set forth in the written commitment.

At the closing the borrower — the mortgagor — executes the promissory note and a mortgage or
deed of trust security instrument.

Immediately following the closing the deed (if a purchase) and mortgage or deed of trust are
RECORDED in the county records.

The promissory note is immediately ENDORSED over to the correspondent lender with an
endorsement by the closing lender “Pay To [Name of Corresponding Lender]” signed [person]
[Title] [Name of Closing Lender (Mortgagee)]. This endorsement is typically UNDATED.

The smaller lender also executes a mortgage assignment (UNLESS the mortgagee is MERS) and
this assignment is typically contemporaneously recorded together with the mortgage or deed of
trust.

The ENDORSED promissory note is delivered by overnight courier to the corresponding

institution.

NEGOTIATION of a Promissory Note under the UCC is by ENDORSEMENT and DELIVERY.

At the conclusion of step ZERO, the Corresponding Lender OWNS the loan and has custody of the
promissory note. The originating lender has fully disposed of all of its interest and has delivered
both the promissory note and a recorded mortgage or deed of trust and assignment of that
instrument.

Step 1 - Delivery of the Promissory Note to the Warehousing Lender

Where there is NOT a small originator making the loan and the mortgage servicer makes the loan
ITSELF, the process BEGINS HERE. In this instance, the borrower is the maker of a promissory
note and the grantor of a mortgage or deed of trust in favor of the originating servicer instead of
the smaller correspondent.

The Corresponding Lender typically funds these loans using a revolving “warehousing line of
credit” with a commercial bank. The corresponding lender gives the warehousing bank a security
interest in the loans it is funding. The warehousing bank therefor typically expects to HOLD the
promissory note as collateral for this warehousing loan.

Accordingly, the Corresponding Lender ENDORSES THE PROMISSORY NOTE IN BLANK

and forwards the actual promissory note to EITHER the warehousing bank OR forwards the
promissory note to an Institutional CUSTODIAN. In either case, the Corresponding Lender
remains the OWNER of the promissory note pending its sale to a mortgage investor and the
warehousing bank is the holder of the promissory note, which serves as collateral for its loan to the
Corresponding Lender.

Step 2 - Delivery of the Promissory Note to a Mortgage Investor

At this point in the process there are four rather distinct paths that the mortgage ownership may
take.

Variant A – Portfolio-ing the Loan

If the corresponding lender is a depository institution, particularly a thift institution, the
corresponding institution may elect to portfolio the loan. That is the lender may choose to hold the
closed loan as an investment. But this is VERY UNUSUAL in the case of fixed rate mortgages.
Usually, depository institutions are gathering liabilities — deposits — with fairly SHORT
maturities (e.g. 6 month CDs, 1 Year CDs, 2 Year CDs). There exists a great deal of interest rate
pricing peril in funding long term maturities with short term deposits. It is BETTER to fund an
asset with liabilities which reprice at intervals similar to the interest rate repricing characteristics of
the asset.
As a consequence, ONLY adjustable rate mortgages tend to be portfolioed. Everything else is
SOLD. And many adjustable rate mortgages are sold, as well.

In a portfolio situation, the corresponding institution may very well be also funding its own loans
WITHOUT a warehousing lender. In this circumstance, the promissory notes MAY remain in the
vaults of the corresponding institution.

Variant B - Selling the Whole Loan ToAnother Depository Institution

A second variant is similar to the first, however, the corresponding lender may SELL the loan to
another depository entity that desires to portfolio this loan. The sale may be either servicing
retained or servicing released. When servicing is retained, there will be a servicing agreemetn
between the seller and the purchaser. With the sale, the corresponding lender would either deliver
the promissory note to the purchaser OR have the warehousing lender deliver the promissory note
to the purchaser OR have the institutional custodian EITHER deliver the promissory note to the
purchaser OR deliver a custodial receipt to the purchaser and continue to act as custodian for the
new entity.

A mortgage assignment would also need to be executed. At one time, ALL such assignments
would have been recorded, but this no longer seems to be the case. When MERS is the nominee,
this somewhat obviates the need to RECORD the assignment, but it does NOT absolve the seller of
the need to timely execute an assignment.

Variant C - Sale or Exchange of the Mortgage for MBS with a GSE

A third variant is the sale or exchange of the mortgage for mortgage backed securities to a GSE
(FNMA or FHLMC). In this instance, the promissory note is delivered either by the corresponding
lender, the warehousing lender or the institutional cusdian directly to either FNMA or FHLMC or
their designated custodian. Again, the institutional custodian holding the promissory note for either
the corresponding lender OR the warehousing lender may effect delivery by simply delivering a
custodial receipt to the GSE and then continue to hold the promissory note as custodian for the
GSE.

Again, this transaction requires a written mortgage assignment. This assignment is typically NOT
recorded and the corresponding lender would usually continue to act as a servicer for FNMA or
FHLMC. Neither FNMA nor FHLMC services its own mortgages. All sales or excchanges with
either of these GSE involve servicing retained transactions. The seller has entered into a seller -
servicers agreement with FNMA and FHLMC.
With the SALE or exchange of the promissory note, either the GSE or a TRUST set up by the GSE
is the owner of the promissory note. Usually an institutional custodian (Master Document
Custodian) is the holder of the promissory note. The seller-servicer would almost NEVER be the
holder during the routine servicing of the mortgage loan.

Variant D - Sale or Exchange of the Mortgage To a Private Conduit

Each of the major Wall Street investment banking concerns operates its own “private conduit” to
purchase mortgage product for securitization. The larger mortgage companies therefore typically
sell some of their production directly to these private conduits.

The private conduits traditionally served as outlet for so-called non-conforming mortgage product.
These used to be mostly jumbo mortgages in excess of the FNMA and FHLMC loan limits OR
loans that otherwise did not meet FNMA and FHLMC underwriting standards.

The Subprime and Alt-A markets emerged as these Wall Street conduits developed a larger
appetite for non-conforming mortgage product. As various petroleum exporting countries and
national sovereign wealth funds accumulated dollars due to the balance of payments imbalance,
these funds needed a place to INVEST their dollars. Wall Street encouraged them to invest in
mortgage securities and mortgage derivatives. Wall Street also sold this paper to many commercial
banks and various other institutional investors.

A sale to the private conduits tends to be a little different than the sale to the GSEs. The private
conduits tended to work on an epic scale and therefore tended to only buy the production of larger
enterprises. These enterprises often gathered and aggregated mortgage debt through both
corresponding activities (Step 0) and whole loan purchases (Step 1, Variant B).

The larger entities typically SOLD their production to a bankruptcy remote corporate affiliate. For
example, New Century Mortgage sold its production to NC Capital Corporation (The “A” to “B”
transaction).

In turn, these aggregating affiliates would accumulate a vast pool of mortgage debt and then sell it
to a Wall Street aggregator. These aggregators tend to have names like “Morgan Stanley Mortgage
Capital, Inc.” (the “B” to “C” transaction).

The Wall Street investment banking concern would then prepare a registration statement for a
securitization. Most of the time, there was a preliminary registration statement and then a
supplemental registration statement that had the specific detailed quantative information about the
mortgages going into the pool.

Each of these trusts typically called for the Wall Street investment bank’s aggregator to act as the
“depositor” for a trust that was stood up as of the closing date set forth in the registration
statement. Upon that closing, the aggregator sold or exchanged the mortgages to the institutional
trustee for the trust being created (e.g. Deutsche Bank).

Upon closing, the Wall Street aggregator would deliver the promissory notes OR the custodial
receipts for these promissory notes to the institutional trustee (the “C” to “D” transaction). In turn,
the institutional trustee would issue trust certificates with characteristics and rights as set forth in
the trust indenture and the registration statement. The registration statement would also specify the
identity of the institutional custodian and the master servicer. The institutional custodian would
then hold the promissory notes and the master servicer would handle the borrower interactions,
servicing these loans.

Note that in this variant, the ownership of the promissory notes shifts from A to B to C to D.
Negotiation of a promissory note is by endorsement and delivery. Since ALL of the notes are
endorsed in BLANK, negotiation is by PHYSICAL DELIVERY. So the promissory notes OR
custodial receipts evidencing and entitling the holder to custody rights must be transferred from A
to B to C to D to effect this type of transaction.

Also, under the statutes of frauds of most states, a written assignment from A to B to C to D is also
required.

The Location of the Promissory Note Under Routine Servicing

The vast bulk of new mortgage originations are handled using variants C (GSE) and D (private
conduits). Note that in EITHER instance, the promissory note is NOT typically in the hands of the
servicer. Neither is it in the hands of either the GSE or the institutional trustee. The promissory
note is in the hands of the institutional custodian.

Because the promissory note is endorsed IN BLANK, it is a negotiable bearer intrument. It is like
holding a BLANK CHECK (which is also a negotiable bearer instrument).

Accordingly, the institutional investors and the custodians GET NERVOUS about having these
outside of their vaults.
When a Default and Foreclosure Take Place
When a mortgage goes into default (or when a servicer PRECIPITATES a default by fraud), the
servicer typically orchestrates the foreclosure. But very often the servicer does this by engaging the
servicers of national “foreclosure specialists”, such as Fidelity, FANDO, and or NDex. These
institutional “foreclosure specialists” take charge and call the shots.

There is also some indication that some foreclosure specialists and/or servicers begin fabricating
documents in support of the foreclosure.

Bear in mind that the Servicer is SELDOM the owner of the mortgage debt except in variant “A”
or “B” where whole loan ARMs are held by depository institutions. (The portfolio loans are mostly
Treasury Indexed or Cost of Funds Indexed. The LIBOR indexed ARMs are mostly for
securitization and sale to foreign investors.)

As explained above, the servicer is also not typically the HOLDER of the promissory note.

But servicers are in a hurry to initiate foreclosure and rely upon the fact that most borrowers do
NOT defend against the foreclosure suit. So the servicer never bothers to obtain the promissory
note before initiating foreclosure.

Instead, they simply rely upon fabricated documents and false and perjured affidavits as evidence
in their premature foreclosures.

Federal standing rules require that a plaintiff have a pecuniary interest in the subject matter of the
suit.

The Promissory Note as Evidence

One of the problems presented by this process is that even when a plaintiff appears in court with a
promissory note, the promissory does NOT actually show WHEN a particular entity came into
ownership OR custody of the promissory note.

As explained above, ENDORSEMENT — like your endorsement on a check — is UNDATED.

And there is NO INDICATION on the promissory note as to the date of DELIVERY or of any
negotiation or exchange of the promissory note by DELIVERY of the promisrry note endorsed in
BLANK.
Once upon a time, many whole loan assignments were RECORDED. Moreover, the GSEs were
pretty good about INSISTING that mortgages sold to the GSEs were assigned in favor of the
GSEs, even if this assignment was never recorded.

But in the rush to securitization, the subprime lenders and the Wall Street investment banking
concerns GOT GREEDY and cut a few corners. One of the corners they often cut was the creation
of contemporaneous A to B, B to C and C to D assignments.

While the ENDORSEMENTS were UNDATED, the assignments traditionally were not only
DATED, but also NOTARIZED to assure that the assignment was eligible for recording in the
public land records for a county. So the assignment has often been the BEST EVIDENCE as to the
date that a transaction took place.

But when the assignment was NOT properly executed, the mortgage investor is WITHOUT good
evidence as to the DATE each transaction took place.

To overcome this problem, some mortgage servicers, “foreclosure specialists” and/or their law
firms have been engaging in fabrication of assignments to use in support of their foreclosure suits.
These fabrications can be readily identified and PROVEN by those experienced in mortgage
practice.

Aggressive discovery is a big help in detecting and PROVING evidence fabrication.

Who Owns the Promissory Note and Who Owns the Securities?
The question as to WHO owns the promissory note is one that actually doesn’t necessarily have to
be answered, though you need to aggressively press for an answer in discovery. It is the
PLAINTIFF’s burden of proof to demonstrate standing and authority to institute the foreclosure
suit.

You need to learn the identity of the holder primarily to DEFEAT the allegations and assertions of
the plaintiff.

The ownership of the underlying mortgage securities is COMPLETELY irrelevant. Owners of the
mortgage securities issued by a trust do NOT have the authority to foreclose. The institutional
trustee acts on behalf of the holders of the trust certificates. That is how a trust works. But the trust
cannot act without proving that it is either the owner or the holder of the promissory note.
Bear in mind that the institutional custodian typically has the promissory note. The servicer is
orchestrating the foreclosure, usually through a foreclosure specialist. The institutional trustee
acting on behalf of the mortgage trust is very passive in this process EXCEPT as regards
interactions with the certificate holders. The institutional trustee is usually the owner. The
custodian is the holder. The sevicer is neither the owner nor the holder.

In a contested foreclosure case, the servicer will usually ultimately locate and obtain the
promissory note. But this usually doesn’t happen until AFTER the institution of the suit. The
servicer will then seek to use fabricated evidence or perjured affidavits to PROVE that it was the
holder at the institution of the suit.

Similarly, the servicer often causes the creation of a fabricated assignment.

Aggressive discovery can often PROVE that allegations made in the servicer’s pleadings are false,
that affidavits contain false and perjured statements and that evidence presented to the court has
been fabricated.

COMMENT BY THIS SCRIBD POSTER: one should also focus whether or not multiple
entities are claiming to own the loan. In some instances of subprime-securitization, the FBI
has identified double and triple selling of the mortgage loans by the originators (all
concurrently and for full amount of the loan). It is believed that the scanning of the notes &
deeds into electronic format may have been sufficient for the double and triple selling of the
mortgage loans. Discovery should include this area.

Also, poster has made some typographical corrections and inserted ‘Master Document
Custodian’.