Real Estate Tip: Foreclosure Confusion

The financial crisis has taught us a great deal about the mortgage transfer business, secondary markets and loan securitization. In the Spring 2014 issue of the Real Property, Trust & Estate Law Journal, Prof. Dale A. Whitman chronicles all we have learned since 2007. The executive summary lists seven principles, one of which states that “mortgage assignments are irrelevant to the right to foreclose by judicial proceeding” because the mortgage “follows the note.” This statement of principle is followed by a footnote stating “The sole exception may be ME where the courts appear to require a recorded chain of assignments as a prerequisite to judicial foreclosure.”

Prof. Whitman’s article was published a few months before the ME Supreme Judicial Court’s decision last summer in Bank of America, N.A. v. Greenleaf 2014 ME 89, which made it very clear that in order to foreclose in ME, the foreclosing lender must own not only the note but must clearly own the mortgage at the time of foreclosure. The mortgage does not “follow the note.” As a consequence, a lender that owns the note but does not have a demonstrable assignment of the mortgage, or other proof of ownership, will not be able to give a discharge of that mortgage to a borrower who pays off the note. This can and already has created significant hardships for innocent borrowers and note holders.

Prof. Whitman might argue that we should not be surprised by the Greenleaf decision, but Pierce Atwood’s John Aromando argues forcefully in the Fall issue of the ME Bar Journal that ME’s highest court has not only departed from its own precedent, but also the law and practice in the rest of the country. ME is now unique, arguably in a commercially negative way, in how it deals with mortgage foreclosures.

Title insurers, often quick to rescue transactions stalled by difficult circumstances, have been less than enthusiastic about insuring the successful bidder at a Greenleaf-tainted foreclosure or insuring the buyer whose seller offers a Greenleaf-tainted mortgage discharge. Coverage might be available if the discharge was delivered or the foreclosure is completed before the date of the Greenleaf decision, (July 3, 2014) but coverage is likely not available if those actions occurred after that time. Borrowers and buyers may need many months and many thousands of dollars to obtain a valid deed or discharge in this situation. If you are looking for a way out of a Greenleaf trap, or are not sure if you are already in one, be certain to consult experienced title counsel to guide you.

Today’s real estate tip is brought to you by Rick Smith, a LEED Accredited Professional and member of Bernstein Shur’s Real Estate Practice Group and Green Building Team. Stay tuned for more useful tips for real estate professionals.

For more information, contact Rick at rsmith@bernsteinshur.com or 603 623-8700 ext. 8829 or 207 774-1200.