Paper Weight: Problems in the Documentation and Enforcement of Transferred Mortgage Loans, and a Proposal for an Electronic Solution

A recent surge in challenges to the enforcement of mortgage loans has revealed widespread documentation problems in the mortgage industry. Many of these problems relate to the documentation of secondary market transfers, especially the transfers involved in the securitization of mortgage loans. This article examines the legal and practical issues in documenting these transfers and enforcing the transferred loans. It includes analysis of the complex interaction of Article 3 and Article 9 of the Uniform Commercial Code in this area and the relationship between these statutes and the common law. It also includes an in-depth examination of the general rule that the "mortgage follows the note" even without a formal assignment of the mortgage. This article argues that the details of this rule are remarkably vague and that Article 9's "codification" of the common-law rule adds to the ambiguity. The rule, however, is widely applied, and its effect makes the note rather than the mortgage the key in a loan transfer. Reform proposals in this area nevertheless focus on improving the records of mortgage transfers. This article, instead, focuses on the underlying debt obligation. Recognizing that the debt obligation is, increasingly, likely to be an electronic "note" (known in the relevant laws as a "transferable record"), this article proposes a public registry of transferable records. The law of transferable records already contemplates the use of private third-party registries, so creating a public registry involves a relatively minor step. Making the registry public, however, would enhance its transparency and credibility, reducing uncertainty and legal challenges regarding the holder of transferable records. The article also proposes that the public registry control both ownership and entitlement to enforce transferable records. Expanding the scope of the public registry in this manner would remove potential ambiguity about the effect of the mortgage-follows-the-note rule. With the rule clearly applying, the registry would be able to serve, effectively, as a substitute for the recording or registering of assignments of the mortgages securing the registered transferable records.