Gone are the days that mortgage loans stayed with their originating lender. Many, if not most, are now transferred, packaged, and resold several times. But when transferred properly, mortgage loans remain enforceable and resistant to serious challenge. Yet even a minute irregularity, however legal, can give a desperate borrower an opening to challenge and delay an otherwise normal foreclosure.
Two documents usually compose a mortgage loan: a promissory note and the mortgage that secures it. To enforce a note in a foreclosure case, the creditor must hold it. That is, the creditor must “own” it or have the rights of an owner. That right is given to loan originators when the loan is made. Others can gain that right as well—particularly when the loan changes hands.
Lenders transfer mortgage loans mostly by assigning the promissory note to a new creditor—a process called negotiation. The mechanics usually involve signing (i.e., indorsing) the note over to the new holder. But there are different indorsements that when used can give rise to challenges from borrowers, however inapplicable those challenges may be.
Ohio recognizes two major types of indorsements: restrictive and non-restrictive. A restrictive indorsement limits who becomes the note’s new holder. The following, for example, is a restrictive indorsement: “Pay to the Order of New Bank, Inc., /s/ Old Bank, Inc. by John Doe, President.” In that example, only New Bank could enforce the assigned note. But when using a non-restrictive indorsement, the note turns into something else altogether.
A holder signs a note without restriction when it signs only its name. That indorsement—a blank indorsement—turns the note into bearer paper, which means whoever possesses it is the holder. In other words, a blank indorsement makes a note act like cash: anyone who has it can use it. That requires another layer of proof when enforcing bearer paper in a foreclosure case, which Ohio’s Eighth Appellate District recently addressed.
In JP Morgan Chase Bank, N.A. v. Loseke, a borrower obtained a mortgage loan from Merrill Lynch Credit, which was assigned to Cendant Mortgage Corporation—a company that became PHH Mortgage.[1] When assigning the loan to Cendant, Merrill Lynch used a blank indorsement, which meant that whoever held the loan’s note could enforce it.
Several years later, PHH assigned the loan to PNC Bank, which then assigned it to JP Morgan. After the loan defaulted, JP Morgan sued for foreclosure, which Loseke opposed. After the trial court sided with the bank, she appealed based on lack of standing among other theories. On appeal, the Eighth Appellate District considered whether standing existed, a prerequisite to foreclosure. In the end, the court reviewed the case and found that JP Morgan had shown that it possessed the note, which made it the bearer note’s holder. Although JP Morgan succeeded, it could’ve avoided a standing-based appeal if the note at issue used a restrictive indorsement. In that case, it wouldn’t have had to provide evidence of possession (an extra step) or subjected itself to a baseless appeal by a borrower. Thus, in the end, it’s generally advisable to use restrictive indorsements when transferring mortgage loans.
[1] JP Morgan Chase Bank, N.A. v. Loseke, 8th Dist. Cuyahoga No. 109562, 2021-Ohio-68.