When you take out a loan to purchase a home, you are required to sign two documents: a promissory note and a mortgage (or deed of trust). Assignments and endorsements are the ways that these documents are transferred between banks.
If you're facing a foreclosure and the foreclosing bank doesn't have the proper endorsements and assignments, you might have a defense to the foreclosure. Read on to learn the difference between an assignment of mortgage (or deed of trust) and an endorsement of the note.
To fully understand the difference between an assignment of mortgage (or deed of trust) and endorsement of the note, you must understand the basic terms and documents involved in a residential mortgage transaction.
Mortgagee and mortgagor. In a mortgage, a “mortgagee” is the lender. The mortgagee gives the loan to the “mortgagor,” who is the homeowner/borrower.
Loan documents. The loan transaction consists of two main documents: the mortgage (or deed of trust) and a promissory note. The mortgage (or deed of trust) 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, whereas the promissory note is the IOU that contains the promise to repay the loan. The purpose of the mortgage (or deed of trust) is to provide security for the loan that is evidenced by a promissory note. (Learn about the difference between a mortgage and a deed of trust.)
Loan Transfers. Banks often sell and buy mortgages from each other. An “assignment” is the document that is the legal record of this transfer from one mortgagee to another. In a typical transaction, when the mortgagee sells the debt to another bank, an assignment is recorded and the promissory note is endorsed (signed over) to the new bank.
These documents are separate and each has its own distinct set of rules that govern how they are exchanged between banks.
An assignment transfers all of the interest the original mortgagee had under the mortgage (or deed of trust) to the new bank. Generally, the mortgage (or deed of trust) is recorded shortly after the mortgagors sign it and, if the mortgage is subsequently transferred, each assignment is to be recorded in the county land records.
When mortgages are transferred frequently, assignments are sometimes neglected. MERS (the Mortgage Electronic Registration System, Inc.), a company created by the mortgage banking industry, was developed to track ownership of mortgages. MERS eliminated the need for separate assignments when a loan is transferred multiple times because MERS tracks those transfers.
In some mortgage transactions, the mortgage will designate MERS as the mortgagee (solely as a nominee for the lender). These loans are referred to as MERS as Original Mortgagee (MOM) loans. 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 never owns the mortgage loan or services it. (For more information about MERS, read our article What is MERS?)
When a loan changes hands, the promissory note is endorsed (signed over) to the new owner of the loan. In some cases, the note is endorsed in blank which makes it a bearer instrument under Article 3 of the Uniform Commercial Code. This means that any party that possesses the note has the legal authority to enforce it.
Assignments and endorsements prove which party owns the debt and therefore may bring the foreclosure action. If the documentation was not proper, this can provide a defense to foreclosure in some cases. (To learn more, see Does the Bank Have a Legal Right to Foreclose?)
If you're facing a foreclosure and think the foreclosing party in your case doesn’t have the right documentation, consider talking to an attorney who can give you information about the laws in your state, let you know whether an argument based on the right to foreclose (called "standing") is likely to be successful in your case, and give you advice about what to do in your particular circumstances.