Historically, the practice of real property and foreclosure law was routine and noncontroversial. Bank lawyers had little difficulty complying with the relatively simple and clear rules established in Article 3 of the Uniform Commercial Code (“U.C.C.”) and state foreclosure law when proving their clients’ rights to foreclose upon mortgages securing promissory notes. This legal landscape significantly altered during the spectacular growth of securitization deals involving trillions of dollars of mortgage loans, a noteworthy percentage of which later tanked and triggered the foreclosure crisis.
The National Conference of Commissioners on Uniform State Laws (“NCCUSL”) was a driving force behind one of these changes. It adopted amendments to Article 9 of the Uniform Commercial Code in 1998, at least in part, to facilitate securitization. These modifications include extending coverage to the sale of (not merely to a security interest in) promissory notes, declaring that the sale of the note also constitutes a sale of the mortgage without the need for a written assignment of the mortgage, and providing for automatic perfection of interests in both the note and the accompanying mortgage without the need to file.
The behavior of the residential mortgage lending and securitization industries generated additional legal complications in several ways. First, they often mishandled the loan notes and mortgages, triggering serious concerns about who possesses the right to foreclose, an issue under scrutiny in courts throughout the nation. Second, in order to fix document problems, some foreclosing parties (usually the trustee identified in the securitization contract) or their agents resorted to forging indorsements or submitting fraudulent affidavits to courts. Third, in nonjudicial foreclosure states, where forced sales proceed without judicial oversight, trustees pressed on without the necessary documentation until faced with homeowner objections. When called upon to account for the note and mortgage, the refrain presented to the courts was: “Judge, you just don’t understand how things work,” equating industry practices with legal compliance. Finally, written arguments filed by some foreclosing parties obfuscated the rules found in the U.C.C. and foreclosure law.
Confusion about the roles of and intersections between Articles 3 and 9 of the U.C.C. and the right to foreclose under state real property law followed in the wake of these changes. These misunderstandings spawned volumes of judicial rulings, many of which appear to be at odds with each other. Absent a careful assessment of these cases, the path through the thicket of rulings is unclear. The possibility of unnecessarily inconsistent outcomes is real and harmful to the homeowners, litigants, and the integrity of the legal system.
In an effort to reduce the ensuing legal confusion about the intersections between the right to foreclose and the U.C.C., this Article provides a roadmap of the relevant rules in Articles 3 and 9 and the right to foreclose in state real property law. Further, it explores the tension developing over the last decade among Articles 3, 9, and the right-to-foreclose concept in state real property law. For the first time, this Article surveys all fifty states to identify the recent state appellate court decisions addressing the right to foreclose and groups the cases together into three categories by the type of analysis applied by those courts. The Article then highlights the decisions that fall into one category, those from Arizona, California, and Georgia, because these rulings dismiss the role of the U.C.C. outright. In addition, these states have experienced some of the worst foreclosure rates in the nation and permit foreclosures to proceed nonjudicially. Hence, the consequences of these opinions affect a broad swath of homeowners in danger of losing their homes. The Article then applies statutory construction principles to determine whether those courts ruled out the U.C.C. unnecessarily, concluding that foreclosure laws in those states could be harmonized with the U.C.C.
