When a bank forecloses on a mortgage loan instrument through its agent (foreclosure mill attorneys), the foreclosing party does so under the presumption that they are a “secured creditor” with a “perfected security interest” in the property. Let’s keep in mind that a complete “mortgage loan instrument” consists of two instruments, the negotiable instrument (note) together with the security instrument (mortgage/deed of trust). For this presumption of a secured creditor MUST “perfect” his security interest and there is only one way to perfect a security interest in real property.
First let’s ask if a creditor has a legal obligation to perfect a security interest. To answer this question we need to go to the original contract, the mortgage/deed of trust. In most conventional mortgages, covenant 16 is what we are looking for. In some security instruments this obligation will be found in covenant 14 or 15, but which ever the case the covenant you would be looking for is titled “Governing Law and Severability”. For this illustration we will focus on the governing law in where it will state as follows,
“This Security Instrument shall be governed by Federal law and the law of the jurisdiction in which the property is located.”
This covenant imposes a duty on all parties to strictly adhere to all applicable federal statute and state statutes.
All 50 states have recording requirements for the transfer or assignment of any interest in real property. For example, in Texas the statute that imposes such an obligation is found on the Texas Local Government Code §§ 192.001; 192.007 in where it states as follows, (note: the word “shall” imposes a duty)
§ 192.001. GENERAL ITEMS. The county clerk shall record each deed, mortgage, or other instrument that is required or permitted by law to be recorded.
§192.007 RECORDS OF RELEASES AND OTHER ACTIONS. (a) To release, transfer, assign, or take another action relating to an instrument that is filed, registered, or recorded in the office of the county clerk, a person must file, register, or record another instrument relating to the action in the same manner as the original instrument was required to be filed, registered, or recorded.
(b) An entry, including a marginal entry, may not be made on a previously made record or index to indicate the new action.
See your own state’s code for similar statutes.
Now let’s take a look at the Uniform Commercial Code (UCC) keeping in mind that all 50 states have adopted the federal UCC into their own statutes, so if one has a suit in a state court we would rely on the state version as where in the federal venue we would rely on the federal UCC. To be more specific, UCC 9-312 which provides a creditor a 20 day “temporary perfection” of a security interest in which time the creditor must perfect his security interest pursuant to state law. Lets take a look at subsections (e)-(h) which provide as follows,
(e) [Temporary perfection: new value.]
A security interest in certificated securities, negotiable documents, or instruments is perfected without filing or the taking of possession or control for a period of 20 days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement.
(f) [Temporary perfection: goods or documents made available to debtor.]
A perfected security interest in a negotiable document or goods in possession of a bailee, other than one that has issued a negotiable document for the goods, remains perfected for 20 days without filing if the secured party makes available to the debtor the goods or documents representing the goods for the purpose of:
(1) ultimate sale or exchange; or
(2) loading, unloading, storing, shipping, transshipping, manufacturing, processing, or otherwise dealing with them in a manner preliminary to their sale or exchange.
(g) [Temporary perfection: delivery of security certificate or instrument to debtor.]
A perfected security interest in a certificated security or instrument remains perfected for 20 days without filing if the secured party delivers the security certificate or instrument to the debtor for the purpose of:
(1) ultimate sale or exchange; or
(2) presentation, collection, enforcement, renewal, or registration of transfer.
(h) [Expiration of temporary perfection.]
After the 20-day period specified in subsection (e), (f), or (g) expires, perfection depends upon compliance with this article.
It is important to point out that the statutes mentioned above DO NOT necessarily impose a duty for an entity to perfect a security interest in real property, but failure to do so creates a fatal flaw for a foreclosing party when it come time to foreclose.
So now let’s go back over what we have learned from the above.
- The “Governing Law” covenant in the mortgage/deed or trust (contractual obligation) imposes a duty upon all parties to strictly adhere to federal and state law i.e. state recording requirements for instruments affecting the transfer or assignment of a secured interest in real property.
- State law requirements to show proof through the recordation in the public records of a security interest.
- The result of a failure to perfect a security interest in real property within the 20 temporary perfection of a security interest pursuant to Article 9 of the UCC.
If a party comes to court purporting a right to foreclose under a security interest however said party has in fact failed to perfect such an interest, said party has forfeited its rights to enforce the power of sale clause in the mortgage/deed of trust because said party DOES NOT have a “perfected security interest” in the property.
The looming questions to a foreclosing party then would be; 1. Who are you? And, 2. How do you purport to have a security interest in my property? In other words, what “right” does a foreclosing party have to invoke a security interest when such an interest has not been perfected in strict accord to a contractual and statutory obligation to do so?