Real Estate Law Article

Lost Mortgage Docs

By: Clark, Campbell, Lancaster & Munson, P.A.

 Q: What happens if the lender trying to foreclose cannot produce the original loan documents?

A: In February, the appeals court governing our region of the state ruled against a mortgage company trying to “reestablish” a lost promissory note.* Because debt is often sold several times, national banks have cumbersome files, or otherwise, lenders lose with surprising frequency the original promissory note that creates evidence of the mortgage debt. The loss of that note creates a hurdle to the lender proving it is owed anything, but the greater concern is that the current owner of the note is the only one who can enforce it. So, if a transfer of the note occurred, the original owner of the note does not have the right to collect. If the note is “endorsed in blank”, even without a formal transfer, whoever is in possession of the note may be able to enforce and collect upon it. Courts do not want to enter, and homeowners do not want to endure, a foreclosure judgment only to find someone else holds the note and claims that the full amount of the note is still due.

To avoid such a scenario, but to prevent banks from losing out on repayment of the loan, the Florida legislature has created a process that allows the bank to “reestablish” a lost note. Not surprisingly, the bank must prove the existence and right to enforce the debt. A bank might try to comply with a combination of the mortgage, other closing documents, and repayment history. A bank also has to provide a lost note affidavit, which, among other things, swears to the fact that the note has not been transferred.

The subject of the court case mentioned above, however, was adequate protection. The court must evaluate what reasonable means will avoid or protect the homeowner in the scenario where someone else pops up claiming a right to sue under the promissory note. The statute does not provide specific guidance on what is reasonable or adequate, and in fact it appears from the case law that a court could make the finding that no protection is needed under the circumstances. The problem in the recent appeal was that the court did not address the issue at all. A court might require a written indemnification agreement in the final judgment, a posted bond, a letter of credit, or some other security.

These issues should be considered and addressed if you face a lawsuit where the foreclosing lender has failed to produce the original loan documents.

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 * The recent case discussed above is Blitch v. Freedom Mortgage Corporation, with an opinion filed by the Second District Court of Appeal on February 5, 2016. The case was remanded for the trial court to address the issue of adequate protection.

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