"Produce the Note" Defense in Foreclosure

In the "produce the note" defense, the homeowner demands that the foreclosing bank demonstrate that it has the legal right to foreclose.

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

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

During the Great Recession and simultaneous foreclosure crisis, homeowners were regularly able to successfully raise a "produce the note" defense to fight their foreclosure. This kind of defense is based on the legal principle of "standing"—that is, the right to foreclose.

In the produce the note defense, the homeowner demands that the foreclosing party come up with the original promissory note, or prove in some other way that it is the note's rightful owner, to show it has the legal right to enforce the debt by foreclosing.

While the produce the note defense is no longer particularly useful in most foreclosures, your case might be the exception.

What Is a Promissory Note?

When you took out your loan, you likely signed a mortgage or deed of trust and a promissory note. Homebuyers sometimes think of the mortgage or deed of trust as the contract they signed with the bank to borrow money. But it's the promissory note that contains the promise to repay the amount borrowed.

When the loan is sold to a new owner, the promissory note is endorsed (signed over) to that entity. The note owner or its representative is the only party that has the legal right to collect the debt if the borrower doesn't make payments.

In some cases, the note is endorsed in blank, which makes it a bearer instrument under Article 3 of the Uniform Commercial Code (UCC). So, any party that possesses the note has the legal authority to enforce it.

On the other hand, assignments transfer the mortgage or deed of trust and are typically recorded in the land records.

What Is "Standing"?

"Standing" generally is the right of a party to file a lawsuit in court. During the foreclosure crisis that happened around 2007-2012, attorneys representing homeowners were sometimes successful in delaying or derailing foreclosures on the grounds that standing hadn't been satisfactorily established due to gaps in the chain of endorsements or assignments.

But in a foreclosure, the issue of standing is complicated, and the law varies between states. In some courts, the foreclosing party must establish that it holds the note or is acting as the note holder's authorized representative to have standing to foreclose.

When it comes to assignments of mortgages (or assignments of deeds of trust), many courts follow the general rule that "the mortgage follows the note." So, if the foreclosing party has the right to enforce the note, a recorded assignment of the mortgage might not be needed.

But other states require a valid assignment, or else the foreclosure can't go forward. Michigan law, for example, requires 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 (see below).

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

How the "Produce the Note" Defense Works

In the past, the produce the note defense frequently worked because coming up with the original note was usually difficult. Often, the debt had been sold many times. Or perhaps the loan was bundled along with thousands of other loans into a mortgage-backed security. The new loan owner sometimes didn't get the proper paperwork to show it owned the note and mortgage. Even in situations when the original note was available, the endorsements typically weren't in order.

These days, however, banks and investors are more careful about addressing any paperwork gaps before initiating a foreclosure. Also, courts all over the country have heard many cases on this issue and have decided against homeowners in multiple situations. Again, some courts allow a copy of the note or a lost note affidavit to suffice. It's now much more difficult to win your case based on a "produce the note" type of argument.

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.

Lost Note Affidavits

If the promissory note has been lost, destroyed, or is otherwise unavailable, the foreclosing party will frequently use a "lost note affidavit." A lost note affidavit is a sworn legal statement in which the bank states the note is lost or destroyed, or something similar, but that it is the true and rightful owner of the note and has the right to foreclose.

Using this type of document often circumvents the problem of not having the original note.

Whether a lost note affidavit will be acceptable in any given foreclosure depends on the situation, jurisdiction, and court. In many cases, the court will find a lost note affidavit sufficient and allow the foreclosure to proceed.

So, unfortunately, it's often an uphill battle for homeowners to use a "produce the note" defense.

Why Standing Is Important

If you have reason to believe that the party that's foreclosing on your home isn't the actual loan owner and doesn't have the right to foreclose, but you don't challenge it, the court won't examine this issue as part of a judicial foreclosure. The same goes for a nonjudicial foreclosure; the foreclosure will simply proceed.

How to raise a standing defense in a judicial foreclosure. In a judicial foreclosure, the bank files a lawsuit in state court. You'll receive a foreclosure complaint, petition, or similar document, along with a summons. In this type of foreclosure, you can raise the issue of standing as part of that lawsuit.

How to raise a standing defense in a nonjudicial foreclosure. With a nonjudicial foreclosure, the bank can foreclose without going to court. So, you'll need to file a lawsuit to bring up this issue.

Consider Talking to an Attorney

You'll most likely need an attorney to help you review your ability to raise a defense based on standing and argue it in court if you decide to go this route. These days, you will most likely be setting yourself up for frustration if you just demand that the foreclosing party "produce the note."

Also, any given foreclosure or legal situation has many potential claims and defenses. You might be missing other legal claims that you could bring as a defense to the foreclosure action if you decide to proceed without an attorney's assistance.

Consider talking to local counsel or a legal aid organization to explore all possible defenses that could be available in your particular situation.

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