The Eaton Foreclosure Case: Addressing A Problem That Doesn’t Exist

The case of Eaton v. Federal National Mortgage Association, which is currently pending before the SJC, addresses the issue of whether a mortgage foreclosure is invalid because the foreclosing mortgagee did not possess the promissory note at the time of foreclosure.  The Superior Court judge in this case ruled the foreclosure invalid for this very reason.  While conceding that Massachusetts common law has recognized that the note and mortgage can be separately assigned, the judge concluded that the two instruments must be reunited to effectively foreclose the mortgage.

The only argument for demanding unity of the note and mortgage is the theoretical possibility that a mortgage holder can foreclose on a debtor’s property and the actual note holder can subsequently make an independent claim for the same debt evidenced by the note.  Proponents of the unity theory overlook the fact that no such claim has arisen or occurred in Massachusetts.  And in today’s modern lending market, it is inconceivable that a foreclosing mortgagee is not acting at the direction of the note holder or the note holder’s servicing agent.

In the Eaton case, the actual holder of the note was FNMA, but the foreclosing mortgagee was Green Tree Servicing, LLC, which was acting as servicer for FNMA.  Why any court would be concerned that FNMA would seek to enforce the debt owed by Eaton independently of the foreclosure by its servicer defies comprehension.

However, if the SJC upholds the lower court’s ruling and concludes that its holding applies retroactively, every real estate title in Massachusetts that has a foreclosure in its back title will become unmarketable because there is no way for anyone examining record title to determine if a foreclosing mortgagee possessed the note at the time of foreclosure.

Massachusetts law does require that assignments of mortgages be recorded, but there is no such requirement regarding the transfer of notes.  In fact, in a lending environment with a secondary mortgage market, securitized loans, and the Mortgage Electronics Registration System (“MERS”), it is almost impossible to determine from an examination of title to a specific property who holds the note secured by a recorded mortgage.

And so the real estate industry nervously anticipates the SJC decision: Will the Superior Court ruling be upheld on a retroactive basis, bringing chaos and paralysis to the industry (not only in Massachusetts but across the country)?  Will the Court overrule the lower court decision and reject the proposition of unity of the note and mortgage?  Or will the Court adopt the proposition but only apply it prospectively?

The real estate industry awaits an outcome that is beyond its control – all because the courts have decided to address a problem that doesn’t exist and that doesn’t need fixing.