Explaining UCC §3-104 NEGOTIABLE INSTRUMENT Continued
- What steps must be taken for the owner of a mortgage note to transfer ownership of the note to another person or use the note as collateral for an obligation?
- In general terms, the mortgage follows the note but the note does not follow the mortgage. “The note and mortgage are inseparable; the former as essential, the latter as incident. An assignment of the note carries the mortgage with it, while assignment of the latter alone is a nullity. Carpenter v. Longan, 16 Wall 271, 83 U.S. 271, 274, 21 L.Ed. 313 (1872).
A note is owned by the payee to whom it was issued. If the payee seeks either to use the note as collateral or sell the note outright, Article 3 governs that transaction and determines whether the creditor or buyer has obtained a property right in the note. Article 9 governs transactions in which property is used as collateral for an obligation. UCC §9-109(a)(1).
Three criteria must be fulfilled in order for the owner of a mortgage note to effectively create a “security interest.”
1. Value must be given;
2. Debtor/seller must have rights in the note; and
3. Either the debtor must “authenticate” a “security agreement” that describes the note or the secured party must take possession of it pursuant to the debtor’s security agreement .
Satisfaction of these three criteria of § 9-203(b) results in the secured party obtaining a property right whether outright ownership or a security interest to secure an obligation in the note from the debtor, including a seller of the note.
The sale of a mortgage note not accompanied by a separate conveyance of the mortgage securing the note does not result in a separation of the mortgage from the note. §9-203 official comment. “Subsection (g) codifies the common-law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien.”
Each state has its own statutory requirements regarding enforcement of Negotiable Instrument but in general, they follow the dictates of the Uniform Commercial Code. Each state also codified requirements for the proper recordation of mortgages to be effective as notice of lien to subsequent purchasers of real property.
Securitization and Separation of Intangible Payment Obligation and the Tangible Promissory Note
In brief, these unsecured intangible payment streams were pooled and used as a Real Estate Mortgage Investment Conduit herein referred to as (REMIC). The lender would pool the asset, i.e. Intangible Payment Obligation, with other loans and sell fractional ownership as one would sell stock in a company. Although the REMIC was allegedly backed by a properly secured Mortgage Instrument, in reality the Security Instrument did not follow the Tangible Promissory note, as the tangible promissory note was no longer properly secured.
A copy of the of the homeowner Tangible Promissory Note and Security Instrument is created electronically, executed electronically, transferred electronically and stored electronically. This is known as an eNote and an eMortgage aka the paperless mortgage. A Transferable Record is not a Negotiable Instrument and pertains to Personal Property and not Real Property. It is the transfer of the Transferable Records and Servicing rights that are tracked within the Mortgage Electronic Systems Registry, Inc. herein referred to as (MERS). The failure to transfer the entire instrument opens a whole myriad of security violations under the Securities Act of 1933 and the Securities Exchange Act of 1934, most notably violation of Rule 10(b) and 10(b)(5).
The problem for the lender but a potential windfall for those who can exploit this separation of the note and the mortgage is that although the underlying obligation to pay the lender still exists, it is no longer secured by the real property originally encumbered by the mortgage.