Foreclosure Defenses: Was There a Proper Assignment of the Mortgage?

If your mortgage has changed hands since you first took out the loan and the foreclosing bank doesn't have a valid assignment, you might be able to challenge the foreclosure.

By , Attorney (University of Denver Sturm College of Law)

Banks and mortgage companies frequently sell and buy home loans from each other. An "assignment" is the document that's the legal record of the mortgage transfer from one entity to another.

If you're a homeowner facing foreclosure and the lender sold your loan to a new owner but didn't complete a proper assignment of mortgage, you might be able to challenge the foreclosure in court.

What Are the Two Main Documents of a Mortgage Loan?

If you took out a loan to buy your home, you most likely signed a mortgage, deed of trust, or another security instrument and a promissory note. (This article uses the term "mortgage" to cover deeds of trust and other similar documents.)

  • Mortgage. The mortgage is the document that pledges the property as security (collateral) for the debt and permits the lender to foreclose if you fail to make the monthly payments.
  • Promissory note. The promissory note is the document that contains your promise to repay the loan.

The purpose of the mortgage is to provide collateral for the debt created by the promissory note.

How Do Mortgage Loan Transfers Work?

When a lender, bank, or mortgage company sells a home loan to another entity, the seller usually takes the following steps.

  • Endorsement. It endorses the promissory note (signs it over) to the new loan owner. The promissory note owner is the only party with the legal right (called "standing") to collect payment on the debt.
  • Assignment. The seller also prepares an assignment of mortgage to the new entity and, usually, records the assignment in the county records. An assignment of mortgage gives the loan seller's rights under the mortgage, including the right to foreclose if the borrower doesn't make payments, to the new owner of the loan.

What Information Is in an Assignment?

Assignments typically have the following information:

  • the name of the assignor (the current owner of the loan, like the original lender) and assignee (the new owner)
  • the borrowers' names
  • the mortgage date
  • the original amount of the loan
  • the original mortgage recording information, and
  • the property's legal description.

Was the Mortgage Properly Assigned?

An assignment of mortgage serves as proof of the loan's transfer from one party to another. Courts have dismissed some foreclosure cases when the foreclosing party couldn't produce an assignment.

Challenging a Foreclosure Based on a Faulty Assignment

Depending on state law, if the lender doesn't have an assignment or didn't record it properly, you might be able to challenge the foreclosure on the grounds that the foreclosing party doesn't have the right to foreclose or didn't follow proper procedures.

In Wyoming, for example, the assignment must be recorded prior to the start of the foreclosure. (Wyo. Stat. Ann. § 34-4-103).

Some States Don't Allow Borrowers to Challenge Assignments

However, some states don't allow borrowers to challenge the legality of assignments. For example, the West Virginia Supreme Court has said only the parties to assignments of mortgages have standing to challenge their validity. Borrowers don't have standing because they're not parties to the assignments or intended third-party beneficiaries. (See Pavone v. NPL Mortgage Acquisitions, LLC.)

Some States Say the Mortgage Follows the Note

Also, some states follow the general rule that "a mortgage follows the note." So, the absence of an assignment of mortgage won't necessarily stop a foreclosure. If the foreclosing party is clearly entitled to enforce the promissory note, the court may allow a foreclosure to proceed—even if a valid assignment doesn't exist.

State Law Determines If an Assignment Is Required

Whether a written, recorded assignment is needed depends on state law. Talk to a local foreclosure attorney to learn the laws and legal requirements regarding mortgage assignments in your state.

The Role of MERS in the Assignment Process

Mortgage Electronic Registration System, Inc. (MERS) is a company that the mortgage banking industry created to simplify the assignment process.

In many mortgage transactions, the mortgage will designate MERS as a nominee for the lender. In other cases, the loan might be assigned to MERS (solely as a nominee for the loan owner) at some point later in its life cycle after the loan closes.

MERS then acts as an agent for the loan owner but doesn't actually possess a beneficial interest in the note. Instead, MERS simply tracks the mortgage as it's transferred from owner to owner. Once a loan has been assigned to MERS, it can be bought and sold any number of times later without recording assignments.

Don't be surprised if you find out that your mortgage was assigned to MERS at some point. In most cases, the loan will have to be assigned out of MERS' name before a foreclosure can begin.

Read More Articles

Learn how to find out who owns your mortgage and who services it.

Get information on what happens if your mortgage is sold to a new owner or the servicer changes.

Find out if foreclosures are on the rise.

Hiring an Attorney

If you're facing a foreclosure and think the chain of assignments has a gap, speak to a qualified attorney who can advise you about what to do in your circumstances.

Keep in mind that any given foreclosure or legal situation has many potential claims and defenses. Talk to local counsel or a legal aid organization to explore all possible defenses that might be available in your particular circumstances.

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