By Daniel Edstrom
DTC Systems, Inc.
One of the main reasons many cases do not make it to daylight is because of the failure to allege lack of default. Despite many lawyers knowing that this is the case, and that there is no default, many still fail to make the allegation. On what basis can a lawyer allege lack of default for a homeowner facing foreclosure?
The Note and Security Instrument
The note is not the obligation but evidence of the obligation (for proof of this, in many cases the security instrument refers to the note as the evidence of the obligation). Lawyers usually describe the obligation arising when one party accepts money from another party. The note usually describes who the parties are that are obligated in the section titled OBLIGATIONS OF PERSONS UNDER THIS NOTE. This section of the note states:
If more than one person signs this Note, each person is fully and personally obligated to keep all of the promises made in this Note, including the promise to pay the full amount owed. Any person who is a guarantor, surety or endorser of this Note is also obligated to do these things. Any person who takes over these obligations, including the obligations of a guarantor, surety or endorser of this note, is also obligated to keep all of the promises made in this Note. The Note Holder may enforce its rights under this Note against each person individually or against all of us together. This means that any one of us may be required to pay all of the amounts owed under this Note.
So the note, which is bargained for by the “lender”, contains a contractual provision obligating others who are guarantors, sureties or endorsers.
What party would act as a guaranty or surety to your loan? Most notes and security instruments contain the language stating that they are “Fannie Mae/Freddie Mac UNIFORM INSTRUMENT”, or some derivation of one or the other entity. These are the most common. It may come as a surprise to many, but Fannie Mae and Freddie Mac provide a guarantee in their corporate capacity where they guarantee the payment of principal and interest on time to investors whether or not they receive the payment from the borrower. Many may also be surprised to learn that the fee for this guaranty comes out of the interest portion of the borrowers payment. Without the borrowers knowledge or consent. The guarantee goes far beyond this. In most public and private securitizations which are not Fannie Mae or Freddie Mac deals, the servicers and even the trustee is required to make payments of principal and interest when they do not receive them from the borrower. Thus there are many entities obligated by both contract and conduct.
Moving to the Security Instrument, in most cases it provides the following:
BORROWER COVENANTS that Borrower is lawfully seised of the estate hereby conveyed and has the right to grant and convey the Property and that the Property is unencumbered, except for encumbrances of record. Borrower warrants and will defend generally the title to the Property against all claims and demands, subject to any encumbrances of record.
Further, the Security Instrument usually goes on to say:
The notice shall further inform Borrower of the right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale.
While some courts have ruled that state statutory scheme does not allow for a lawsuit to stop a foreclosure, there is a contractual provision to file a pre-emptive lawsuit in many cases. Note that the Security Instrument referenced in this case is in a non-judicial state. Every state is different, especially judicial states. As always, consult qualified legal counsel FIRST, before relying on any other source.
Lawyers, if this provision is provided for in your clients documents, it may be wise to make use of it in your pleadings.
Examples of guarantors and sureties in securitization of mortgage-backed securities:
- Fannie Mae (guarantee backed by Fannie Mae in their corporate capacity)
- Freddie Mac (guarantee backed by Freddie Mac in their corporate capacity)
- Ginnie Mae (guarantee backed by the United States of America)
- World Savings Bank REMICs (i.e. World Savings REMIC 15, etc.)
- All or most other public and private securitizations.
Note that the payment of principal and interest even when not received from the borrower is standard in the industry, not only with mortgage-backed securities, but with securitizations involving cars, boats, RV’s, airplanes, student loans, etc.
What this means in a practical sense goes far beyond what is described here, as well as the documentation evidencing these guarantees. For instance the impact of this information on a bankruptcy filing should be thoroughly vetted out.