Does the Bank Have a Legal Right to Foreclose?

Learn about making an argument that the bank doesn’t have a legal right to foreclose.

By , Attorney

Mortgage loans are often bought, sold, and securitized. As a result, confusion sometimes arises over who has the legal right to start a foreclosure.

So, one possible defense to a foreclosure is that the bank or other foreclosing entity doesn't have the legal right to foreclose. This defense is based on the legal principle of "standing."

It's typically difficult to win a challenge to a foreclosure based on standing, but not impossible.

Your Loan Documents: The Promissory Note and Mortgage

To understand the concept of standing in a foreclosure case, you must first learn about two important loan documents that you likely signed when you took out your home loan: the promissory note and the mortgage (or deed of trust).

Promissory Note: Like an IOU

The promissory note contains the borrower's promise to repay the money borrowed. This document identifies the principal amount of the loan, as well as the repayment terms, like the interest rate and monthly payment amount.

Under the Uniform Commercial Code (UCC), a note is a negotiable instrument, like a check, which may be transferred by:

  • an endorsement to a specific entity or
  • by physically delivering a note that is endorsed in blank to a new party, who then becomes the holder of the note.

Mortgage or Deed of Trust: The Security Instrument

The mortgage or deed of trust, on the other hand, is the document that gives the bank a security interest in the property. If a bank has a security interest in a property and the borrower defaults, the bank may sell the property to satisfy the debt.

When a home loan is transferred from one bank to another, an assignment of mortgage (or assignment of deed of trust) is usually recorded in the land records.

Standing: The Foreclosing Party Must Prove It Has the Right to Foreclose

During the foreclosure crisis that happened around 2010, attorneys representing homeowners were sometimes successful in delaying or derailing foreclosures on the grounds that "standing" (that is, the right to foreclose) hadn't been satisfactorily established due to gaps in the chain of endorsements or assignments.

Homeowners sometimes think that in order to have standing, the foreclosing bank must have the note and an assignment showing that the loan was transferred to that bank. But when a promissory note transfers from one party to another, many courts have decided that the mortgage or deed of trust that secures the loan automatically follows the note. In this kind of situation, the foreclosing party doesn't have to provide an assignment to foreclose.

So, in many cases, as long as the foreclosing party has the right to enforce the note, it has standing to foreclose. But some states—like Michigan, for example—do require a valid assignment before a foreclosure may proceed. (Mich. Comp. Laws § 600.3204).

Foreclosure Procedures Sometimes Require the Original Loan Documents

State foreclosure laws typically require the foreclosing party to include a copy of the promissory note with the complaint in a judicial foreclosure. In addition, the foreclosing party might have to produce the original note (the one the borrower actually signed) as part of the foreclosure process. In some cases, though, the court might accept a lost note affidavit.

But because mortgages and deeds of trust are recorded in the land records (unlike promissory notes) and are part of the public record, the foreclosing party might not have to produce the original mortgage. A reference to that document, along with a copy, could be sufficient.

Making an Argument Based on Standing

In the past, homeowners were regularly able to stop or delay a foreclosure by arguing that the foreclosing bank lacked standing. But this argument is more of an uphill battle these days.

Now, foreclosing banks are much more careful about addressing any gaps in the paperwork before starting a foreclosure. Also, courts have heard this issue often and have decided against homeowners in many situations, making it harder to prevail on an argument based on standing.

Still, your case might be the exception. While arguing that the bank lacks standing is less likely to be successful than it once was, homeowners are occasionally able to use this defense to stop a foreclosure—even if only temporarily.

For example, in a foreclosure case in late 2017, the Florida District Court of Appeal, Fifth District, found that the foreclosing party did not demonstrate proper standing at the time it started the foreclosure and reversed a final foreclosure judgment, and remanded the case for entry of an involuntary dismissal.

Consider Talking to an Attorney

The requirements for standing in a foreclosure case vary from state to state. If you're facing a foreclosure and think the foreclosing party in your case doesn't have the legal right to do so, consider talking to an attorney who can give you information about the laws in your state, let you know whether an argument based on standing is likely to be successful in your case, and give you advice about what to do in your particular circumstances.

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