II. Defenses and Counterclaims
A. Some Areas Where Defenses to Foreclosure Typically Arise
1. Is the Plaintiff the Right Party to Bring the Suit?
A mortgage can secure the performance of any obligation, but, overwhelmingly, the majority of mortgages secure the payment of a debt evidenced by a note. The foreclosing party must, of course, prove that the terms of the note and mortgage have not been complied with and that, as a result of this non-compliance, it is entitled to foreclose. A foreclosing plaintiff must prove the necessary elements of a cause of action for mortgage foreclosure.4 The plaintiff must prove that it owns the note and mortgage and that the borrower defaulted on that debt.5 If a plaintiff cannot meet this burden, the foreclosure action should be dismissed. An attorney should investigate whether the plaintiff received ownership of the mortgage before filing the lawsuit. If the plaintiff does not own the note and mortgage at the time the foreclosure action is brought, the claim for foreclosure must be dismissed, since the plaintiff lacks standing.6 Occasionally, the foreclosing party is mistaken about whether it owns a given loan; sometimes a prerequisite for foreclosure under the parties' agreement or applicable law has not been met prior to foreclosure.7
There are three ways that a foreclosure plaintiff typically may have the status of a party who can enforce the note and mortgage at issue: (1) having been the owner of the note and mortgage from their inception through the time the foreclosure action was brought, (2) having become their owner through transfer by assignment, and (3) having become the holder of the note.
Notes and mortgages may be transferred by assignment documents, which are, essentially, deeds of the mortgagee interest that also transfer ownership of the note. One should be careful to examine the language of the assignment document to see whether it transfers the mortgage only, without stating it transfers the note. "The assignment of the bond or note carries with it the mortgage, but the assignment of the mortgage as distinct from the debt which it secures is nugatory and confers no rights upon the assignee."8 Such a situation may arise where the mortgage is or has been in the Mortgage Electronic Registration Systems, Inc. (hereinafter "MERS") system, in which ownership of the note and ownership of the mortgage - things we usually think of as going hand-in-hand - are vested in different entities from the outset of the loan.9
MERS is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans. Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members' interests to MERS. MERS is listed as the grantee in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members.
Mortgage lenders hire MERS to act as their nominee for mortgages, which allows the lenders to trade the mortgage note and servicing rights on the market without recording subsequent trades with the various register of deeds throughout [the country].
To execute a MERS Mortgage, the borrower conveys the mortgage to MERS, who is acting as a contractual nominee. MERS becomes the recorded [mortgagee], however, the lender retains the note and servicing right. The lender can then sell that note and servicing rights on the market and MERS records each transaction electronically on its files.10
In MERS, ownership of the note and mortgage typically do not go together; they are split at the outset of the loan, with the mortgagee being one entity (MERS) and the noteholder being another. Accordingly, the ordinary assignment from MERS to another entity could not pass ownership of the note, which was something MERS never had.
If the plaintiff has become the holder of the note, this ordinarily transfers to it ownership of the mortgage as well. A "[h]older" is "the person in possession of a negotiable instrument that is payable either to bearer or an identified person that is the person in possession[.]"11
It is possible for a party to assert the equivalent of holder status successfully even if it does not possess the note, the burden it must meet is high.
(a) A person not in possession of an instrument is entitled to enforce the instrument if:
(1) the person seeking to enforce the instrument:(b) A person seeking enforcement of an instrument under Subsection (a) must prove the terms of the instrument and the person's right to enforce the instrument. If that proof is made, Section 36-3-308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.12
(A) was entitled to enforce the instrument when loss of possession occurred; or(2) the loss of possession was not the result of a transfer by the person or a lawful seizure; and
(B) has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;
(3) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.
In Bank of America v. Draper,13 the court of appeals stated that "[s]everal bankruptcy courts and federal district courts, including those in South Carolina, have recognized the servicer of a loan to be a real party in interest and able to initiate a foreclosure. We agree with this view."14 "[A] servicer is defined as the person responsible for servicing of a loan (including the person who makes or holds a loan if such person also services the loan)."15 To show servicer status, one would need to show that the owner or holder of the note and mortgage has made the party claiming that status responsible for the servicing of the loan at issue.
An interesting issue may arise should a foreclosure plaintiff attempt to invoke servicer standing rather than owner/holder standing. "An agent is one appointed by a principal as his representative and to whom the principal confides the management of some business to be transacted in the principal's name, or on his account, and who brings about or effects legal relationships between the principal and third parties."16 Not every servicer is an agent, as some mortgage loan accounts are serviced by the owner of the note and mortgage.17 In a typical third-party servicer situation, however, the servicer is an agent, one appointed by the owner of the note and mortgage to service the loan and to whom the owner has confided the management of the business of servicing the loan.18 Such a relationship is one of agency.19 It is well settled that "agency may not be established solely by the declarations and conduct of an alleged agent."20 The purported servicer's statements are not cognizable evidence of the agency relationship.21
Further, the Draper opinion puts into issue whether the servicer-standing proposition stated in it is holding or dicta. It appears that the court of appeals agreed with the appellants that there was an issue of fact in the record concerning whether the plaintiff actually was the owner of the note and mortgage at issue; otherwise, there would be no need to discuss the issue of the plaintiff's potential standing as a servicer of the mortgage loan. Later in the opinion, however, the court of appeals stated that, "[t]hrough a series of transfers and mergers, the Bank became the holder of the note" in the context of rejecting the appellants' argument that the court should not have accepted evidence that Bank of America had a copy of the note as evidence of ownership of the note.22 If the record indeed showed the absence of an issue of material fact about who owned the note and showed that Bank of America owned it, there was no need to address the servicer-standing issue as a matter dispositive of the appeal.
B. Issues Warranting Investigation with Regard
to Potential Defenses
Some items to investigate are:
1. Lost/Missing Payments
Sometimes, particularly when a loan or its servicing rights are sold, payments are not posted or applied to a buyer's account. To the extent the homeowner can obtain adequate records, these can be compared to the payment history produced by the lender or servicer.
2. Force-Placed Insurance
What is called "force-placed insurance" is insurance, usually more expensive than homeowner's coverage available on the open market, that a lender obtains when a borrower has failed to keep property insured per the terms of a mortgage. It usually provides coverage only for the lender and not for the borrower/owner of the property. This type of insurance is occasionally charged even when the homeowner has kept his own insurance in effect. Oftentimes the lender or servicer will advance the force-placed insurance premiums from escrow, which creates an escrow shortfall that eventually may lead to foreclosure.
3. Accepting Payments Following Foreclosure
If the lender accepts payments after filing foreclosure, and the mortgagor is not in bankruptcy, there may be a technical defense to the foreclosure.23
4. Failure to Accelerate the Note
Typically, a mortgage cannot be foreclosed until the underlying debt is...
