If you are a homeowner facing foreclosure and there has not been a proper assignment of mortgage, you may be able to challenge the foreclosure. Read on to learn more about assignments, why they are important, and find out what to do if you suspect there wasn’t a valid assignment of mortgage in your case.
(To learn the ins and outs of the foreclosure process, and foreclosure procedures in your state, visit our Foreclosure Center.)
Understanding Loan Transactions
To fully understand the role of an assignment in a mortgage foreclosure, you must understand the basic terms, documents, and players involved in residential loan transfers.
Mortgages and Promissory Notes
When you took out your loan, you signed both a mortgage (or deed of trust) and a promissory note. (Learn more in our article What's the Difference Between a Mortgage and Deed of Trust? For purposes of this discussion, the terms mortgages and deeds of trust are used interchangeably.)
The mortgage is the document that pledges the property as security for the debt and permits a lender to foreclosure if you fail to make the monthly payments. The promissory note is the IOU that contains the promise to repay the loan. The purpose of the mortgage is to provide security for the loan that is evidenced by a promissory note.
Banks frequently sell and buy mortgages from each other. An “assignment” is the document that is the legal record of this transfer from one entity to another. Assignments typically contain the following information:
- the name of the assignor (the current owner of the loan) and assignee (the new owner)
- the names of the borrowers
- the date of the mortgage
- the original amount of the mortgage
- the original mortgage recording information, and
- the property’s legal description.
The assignment of mortgage serves as proof of the transfer of the loan from one party to another.
When one bank sells the debt to another bank, the following actions are generally done to complete the transaction.
- The promissory note is endorsed (signed over) to the new bank. (The owner of the promissory note is the only party that has the legal right to collect on the debt. Learn more in our article "Produce the Note" Defense in Foreclosure.)
- An assignment of mortgage to the new entity is recorded in the county records. (An assignment of mortgage is necessary to assign the original bank’s rights under the mortgage, including the right to foreclose if you don't make payments, to the new owner of the loan.)
Learn more in our article What's the difference between a mortgage assignment and an endorsement (transfer) of the note?
The Role of MERS in the Assignment Process
Mortgage Electronic Registration System, Inc. (MERS) is a company that was created by the mortgage banking industry to simply the assignment process.
In many mortgage transactions, the mortgage will designate MERS as a nominee for the lender. In other cases, the loan may be assigned to MERS (solely as a nominee for the lender) at some point later in its life cycle after the loan closes. MERS then acts as an agent for the owner of the loan, but it does not actually possess a beneficial interest in the note. Rather, MERS simply tracks the mortgage for its members as it is transferred from bank to bank. Once the loan has been assigned to MERS, the loan can be bought and sold any number of times later without recording an additional assignment.
Don't be surprised if you find out that your mortgage was assigned to MERS at some point. In most cases, there must be an assignment out of MERS’ name before the foreclosure can begin.
Learn more about MERS in our article What is MERS?
What Happens When There Isn’t An Assignment to the Foreclosing Party
Courts have dismissed foreclosure cases when the foreclosing party cannot produce a written assignment of mortgage. Some of these decisions are based in part on state law requirements that mortgage assignments be recorded.
In Wyoming, for example, the assignment must be recorded prior to the start of the foreclosure (Wyo. Stat. Ann. § 34-4-103). (Learn more about Wyoming foreclosures.) This means that, depending on state law, if the lender cannot produce a proper assignment or does not record it at the proper time, you may be able to challenge the foreclosure on the grounds that the foreclosing party does not have the right to foreclose.
In some cases though, the absence of a proper assignment of mortgage will not stop a foreclosure. If the foreclosing party is clearly entitled to enforce the promissory note secured by a mortgage, the court may allow a foreclosure to proceed even if there is no written assignment because of the general rule that “a mortgage follows the note.”
(To learn about the foreclosure laws in your state, check our State Foreclosure Laws topic area.)
Fighting the Foreclosure
How you challenge the foreclosure depends on whether your foreclosure is judicial or nonjudicial.
Judicial foreclosure. In a judicial foreclosure, the bank files a lawsuit in state court. You will receive a foreclosure complaint, petition, or similar document, along with a summons. In this type of foreclosure, you can bring up any assignment defects as part of that lawsuit. (To learn more, read our article How to Fight a Foreclosure in Court: Judicial Foreclosure.)
Nonjudicial foreclosure. With a nonjudicial foreclosure, the bank can foreclose without going to court. So, you'll need to file your own lawsuit to bring up this issue. (To learn more, read our article How to Fight a Foreclosure in Court: Nonjudicial Foreclosure.)
For more information about the difference between judicial and nonjudicial foreclosures, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?
When to Hire an Attorney
If you are facing foreclosure and think that there is a problem with the assignment of mortgage in your case, you should speak to a qualified attorney who can advise you about what to do in your circumstances.
Additionally, any given foreclosure or legal situation has many potential claims and defenses. It is recommended that you seek the advice of local counsel or a legal aid organization to explore all possible defenses that may be available in your particular situation.
To learn more about different foreclosure defenses, see our Fighting Foreclosure in Court area.