The Uniform Commercial Code and the Transfer of Mortgage Notes

The Permanent Editorial Board for the U.C.C. recently issued a report explaining the Code provisions relevant to the transfer and enforcement of mortgage notes. This report highlights the particular provisions of Articles 3 and 9 that pertain to who can enforce promissory notes in real property transactions and to how those notes can be used as collateral in secondary transactions. In this Analysis, Margit Livingston discusses the U.C.C. and mortgage note transfers. She writes:

     The secondary mortgage market has grown considerably over the last decade, and with the recent economic downturn, more and more holders of mortgage debt have found themselves resorting to foreclosure on the real property securing the mortgage. Although many issues related to mortgage foreclosures are governed by local real property laws, questions regarding the transfer of notes and their accompanying mortgages in the secondary market are covered by the Uniform Commercial Code. The Permanent Editorial Board for the U.C.C. recently issued a report explaining the Code provisions relevant to the transfer and enforcement of mortgage notes. P.E.B. Report on Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes (Nov. 14, 2011) ("P.E.B. Report"). This report highlights the particular provisions of Articles 3 and 9 that pertain to who can enforce promissory notes in real property transactions and to how those notes can be used as collateral in secondary transactions.

     The P.E.B. Report addresses the basic scenario in which Borrower borrows money from Lender to purchase a parcel of real estate. Borrower signs a promissory note reflecting the obligation to pay back the loan and also gives Lender a security interest in the real property, i.e., a mortgage, to secure that obligation. Lender then assigns the note and mortgage to Financer for immediate cash, and Financer takes possession of both the note and the mortgage. If Borrower subsequently defaults on his obligation, Financer will seek to enforce the note and to foreclosure on its mortgage interest in the land.

     The first question presented is who is entitled to enforce the mortgage note under these circumstances, and the P.E.B. Report states that U.C.C. Article 3 largely determines the obligations of parties to negotiable instruments, such as negotiable mortgage notes. In the above scenario, the ideal situation for Financer seeking to enforce Borrower's note is where Financer has possession of the note and Lender has indorsed the note either to Financer or in blank. In either case, Financer would be a "holder" of the note and entitled to enforce it against Borrower.

(citations omitted)

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