Benefits and Drawbacks of the "Produce the Note" Strategy to Fight Foreclosure

When a mortgage company begins foreclosing on a property, most homeowners just assume that the bank really owns their loan and is able to prove it and take their home away. But this is not always the case, as banks assign and sell loans all the time without proper documentation, giving borrowers another defense to foreclosure.

Many more homeowners today than just a few years ago are raising defenses to foreclosure lawsuits based on the issue of the real party in interest. Typically, this is the party that possesses the right it is seeking to enforce. If a lender is not assigned a loan and mortgage properly, the issue may be raised by the borrowers.

A mortgage is composed of two parts. The first is the promissory note, which is the borrowers' responsibility for paying back the debt it takes out through a bank or other lender. The second part of the mortgage is the security interest the lender takes in the homeowners' property, which is made up of the mortgage or deed of trust.

In terms of a foreclosure lawsuit, courts have typically held that the lender or institution that has been assigned the note and mortgage is the party in interest. The servicing company or trustee may not be counted as the real party in interest, and the lender that was assigned the note must prove that it has the legal standing to foreclose on the property.

In fact, the assignee must be assigned both the mortgage and the promissory note. The debt itself is the primary obligation to pay, while the mortgage contract represents only a security interest in the property. Neither can be transferred without the other, because, if the lender can not show is has an interest in the debt by having the note assigned to it, it has no standing to foreclose on the mortgage.

A number of foreclosure lawsuits state that the foreclosing lender has lost the original note or mortgage, or it has been destroyed or is otherwise unaccounted for. In such cases, the lawsuit may still go forward, as long as the amount of the debt can be established by extrinsic evidence. In Mitchell Bank v. Schanke, the court ruled that the lender can move ahead in foreclosure without producing the note, as long as it can prove the underlying debt that is secured by the mortgage documents.

Homeowners may be able to delay a foreclosure for a significant length of time by raising the issue of who is the real party in interest. With so many lenders going out of business or being absorbed by other companies, and the securitization of the mortgage industry over the past decade, it can be almost impossible to tell which company owns a mortgage.