A New Source of Concern for Foreclosing Lenders?

A recent ruling in a New Jersey case could add credibility to the argument that, in order to commence a foreclosure, the lender must possess the underlying promissory note

Not long after the business phenomenon known as the “foreclosure crisis” began, I started hearing about a possible defense to a mortgage foreclosure under Arizona law: that the mortgagee had to demonstrate physical possession of the underlying promissory note to commence foreclosure.

In the beginning, I figured this was mostly coming from the tinfoil hat crowd, but the idea has started to gain traction in Arizona and other states. A recent ruling in a New Jersey case upheld this theory, and, while the underlying law in New Jersey is undoubtedly different than it is in Arizona, the ruling is – or should be – an issue of concern to foreclosing lenders (should I say, yet another issue of concern?).

The vast majority of home mortgage loans made in the past 20 or so years were sold or assigned, either in a particular one-off transaction or as part of a package that eventually found its way into a collateralized mortgage security. Little actual paperwork accompanied those transactions, and it is very unlikely that the holder, or servicer, of the collateralized mortgage security loan has in its file the original promissory note evidencing the loan. It is possible that this fact could be used as a tool in Arizona to delay or defeat mortgage foreclosures.

Unlike New Jersey, Arizona is, of course, a deed of trust state, and most mortgage “foreclosures” here are actually conducted via a non-judicial trustee’s sale, where there is no court involved to listen to or act upon this argument. Having said that, it is not too hard to anticipate circumstances in which the borrower finds a way to have a court deal with this argument, perhaps by filing for a temporary restraining order.

I am not aware of any reported Arizona cases so far on this issue.

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