A person is the person entitled to enforce the note if any of the following is true:
- The person is the "holder" of the note,
- The person is in possession of the note, which was "transferred" to that person, but the person is not a "holder" of the note, and
- The note has been lost or destroyed (or is unavailable for other reasons) and the person who had been in possession was a person entitled to enforce the note
These alternatives for becoming the person entitled to enforce the mortgage note are satisfied (or not) as follows:
- The first alternative is satisfied only if the person (or its agent) has possession of the mortgage note and the mortgage note is payable or endorsed to that person or endorsed in blank.
- The second approach also requires that the person (or its agent) has possession of the mortgage note. If the mortgage note is not payable to the person in possession or to bearer, then the person is not a "holder." However, if the mortgage note was "delivered" to the person in possession "for the purpose of giving" that person the right to enforce the instrument, the second alternative applies.
- The third alternative requires proof of the elements noted above, along with the terms of the mortgage note.
Transfer of Ownership
Unlike Article 3, Article 9 applies to interests in both negotiable and non-negotiable instruments. UCC § 9-102(a)(47). Article 9 applies to both a security interest in a mortgage note to secure an obligation and to the rights of a buyer of a mortgage note. UCC § 9-109(a)(1) and (3). Article 9 thus determines the requirements for an "effective" transfer of rights in those two situations. UCC § 9-203.
The requirements for an effective transfer of ownership (in the case of a sale) or a security interest to secure an obligation (in the case of a loan secured by the mortgage note) are straightforward:
- Value must be given--this is typically satisfied by the payment of the purchase price in the case of a sale of a mortgage note and the promise to make a loan or the advance of the loan amount in the case of a security interest to secure an obligation. UCC § 1-204.
- The seller or person creating the security interest to secure an obligation must have "rights" in the mortgage note--this too is usually easy to satisfy.
- Generally, the seller or person creating a security interest to secure an obligation must "authenticate" a security agreement describing the mortgage note. UCC § 9-203(b)(3)(A). Whether the agreement covers the sale of the mortgage note or a security interest to secure an obligation, the agreement sufficiently describes the mortgage note if the agreement "reasonably identifies" the mortgage note. UCC § 9-108(a). For example, a description of mortgage notes by "category" or "type" is sufficient. UCC § 9-108(b)(2) and (3). (An oral (or other unauthenticated) security agreement is also possible in some circumstances. UCC § 9-203(b)(3)(B)).
If these requirements are satisfied, the buyer or lender with a security interest in a mortgage note to secure an obligation obtains a property interest in the note as owner or holder of the security interest to secure an obligation.
The Mortgage Follows the Note
The law in the United States has long followed the Mary's Little Lamb rule--wherever the mortgage note goes the related mortgage is sure to follow. Restatement (Third) of Property (Mortgages) § 5.4. UCC § 9-203(g) codifies this rule for both sales of a mortgage note and a security interest in a mortgage note to secure an obligation. Further, perfection of a security interest in the mortgage note (whether in favor of a buyer or a lender with a security interest to secure an obligation) also perfects the security interest in the buyer's or lender's security interest in the seller's or borrower's rights in the mortgage. References to a "mortgage" in UCC § 9-203(g) include other types of consensual rights in real property to secure an obligation, such as a deed of trust. UCC § 9-102(a)(55).
Getting the Mortgage in the Secured Party's Name
To save effort and money for all concerned, often a buyer of a mortgage note or a lender with a security interest in the mortgage note to secure an obligation will not record an assignment of the mortgage in the real estate records. As Article 9 makes clear, recording an assignment is not necessary for the buyer or lender to perfect its rights in the seller's or borrower's rights in the mortgage.
However, if the buyer or lender wants to foreclose, it may not have and may not be able to obtain the documents necessary to record the assignment in the real estate records, which may be necessary under local real estate law. Article 9 provides a procedure for the buyer or lender to record a document in the real estate records to reflect that assignment. UCC § 9-607(b).
The PEB Report describes the application of selected provisions of UCC Articles 3 and 9 to several key issues that may come up in connection with mortgage notes. There may well be additional UCC issues or issues arising under other law that also must be resolved, but the Report should help both practitioners and courts understand many of the issues that the UCC addresses in this area.