REAL ESTATE FINANCE
Spring 2013
Transfer by the Mortgagee
Securitization of Mortgage Loans
Reading Assignment: Nelson/Whitman pp. 483-536

CORRECTION NOTE: In the Apponline case (page 492), there is a significant mistake in the court's recitation of the facts. On page 494, in the first paragraph in part IIIA of the opinion, the court says in the second sentence "Matrix subsequently sold the Amarante Loan to Island Mortgage in accordance with the Matrix Purchase Agreement." The court had it backwards — the court should have said "Island Mortgage subsequently sold the Amarante Loan to Matrix in accordance with the Matrix Purchase Agreement."

1. Suppose that last week, Horizon Mortgage Co. made a $150,000 mortgage loan to Mitchell. Horizon recorded the mortgage. Earlier today, Horizon sold the mortgage loan to Bull Stearns, an investment bank, which plans to securitize the mortgage.

a) If "the mortgage follows the note," why might Bull Stearns still insist upon a separate document assigning the mortgage?

b) If Bull Stearns obtains an assignment of the mortgage but does not record it, does that have any effect on the ability of Bull Stearns to foreclose the mortgage if Mitchell defaults?

c) Suppose that Horizon's mortgage identified MERS as the mortgagee, as a nominee for Horizon (the loan originator). Can you explain what role MERS is intended to play in the transfer of mortgage loans?

2. On September 1, 2011, Lynch purchased a promissory note from Crouch. The promissory note was dated August 1, 2011, and provided that on September 1, 2011, the maker of the note (Mitchell) would pay Crouch $1,500 plus accrued interest at 10%. Lynch paid Crouch $1,475 to purchase the note, and does not know whether Mitchell has any defense to payment. [In fact, Lynch doesn't even know Mitchell.] On September 1, 2011, Lynch presented the note to Mitchell for payment. If Mitchell refuses to pay, in which (if any) of the following situations can Lynch obtain a judgment against Mitchell, and why?

a) Mitchell successfully demonstrates that the note was forged by Crouch.

b) Mitchell successfully demonstrates that he executed the note as a prepayment for legal services that Crouch agreed to provide Mitchell, and that Crouch has never provided those services.

3. In the Apponline case (page 492), the court holds that Matrix (which bought the Amarante Loan) was a "holder in due course" (HIDC) that took the note free of any equitable claims of Broward (the closing agent who handled the closing of the Amarante Loan).

a) What's the practical lesson here? How should Broward have behaved differently?

b) If Matrix knew that Island Mortgage had bounced checks in previous closings, would Matrix still have been able to claim HIDC status?

c) What result would the court have reached if the Amarante Note had been nonnegotiable?

4. In October 2011, Uphoff signs a contract w/Quickie Aluminum Siding (Quickie) to install aluminum siding on his home. The contract price is $5,700. Uphoff signs a promissory note and a mortgage in favor of Quickie. Quickie then assigns the note and mortgage to Roosevelt Federal Savings Bank (Roosevelt) for a price of $5,500. Roosevelt notifies Uphoff of the assignment and directs Uphoff to begin making payments to Roosevelt. In January 2012, after making the first two monthly payments, Uphoff stops making payments when the siding begins falling off the house. Can Roosevelt enforce the note and foreclose on the mortgage? Why or why not? Consider the UCCC, the FTC Rule, and Mo. Rev. Stat. § 408.405, which provides as follows:

The rights of a holder or assignee of an instrument, account, contract, right, chattel paper or other writing other than a check or draft, which evidences the obligation of a natural person as buyer, lessee, or borrower in connection with the purchase or lease of consumer goods or services, are subject to all defenses and setoffs of the debtor arising from or out of such sale or lease, notwithstanding any agreement to the contrary, only as to amounts then owing and as a matter of defense to or setoff against a claim by the holder or assignee; provided, however, with respect to goods only, the rights of the debtor under this section may be asserted to the seller at the address at which he did business at the time of the sale and must be so asserted within ninety days after receipt of the goods.

5. On June 1, Mitchell borrows $100,000 from Bowman, secured by a mortgage on Mitchell's home. On September 1, Bowman sells the note to Uphoff (assume that Bowman indorses the note to Uphoff and delivers the note). On September 5, Mitchell wins the lottery and decides to pay off the mortgage. He tenders $100,000 to Bowman, who accepts the payment without telling Mitchell that he sold the note to Uphoff. Bowman disappears with the money. When Uphoff doesn't receive a payment from Mitchell on October 1, he inquires of Mitchell who says "I paid off the note last month." Uphoff responds, "No, you didn't. I have the note, and I expect payment." Can Uphoff enforce the note and foreclose the mortgage, or was Mitchell's obligation on the note discharged? Why or why not?

6. Read the Kang Jin Hwang case (p. 522). Why should the court allow Indy Mac to enforce the note by a foreclosure proceeding, if Indy Mac has admitted that it no longer owns the note?