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Is your mortgage naked?

By Polyana da Costa ·
Wednesday, February 22, 2012
Posted: 12 pm ET

Lenders can't foreclose on your home if your mortgage is naked. That's what the court told Fannie Mae when it sided with a Massachusetts homeowner who was close to being evicted from her home.

Yes, we can foreclose on naked mortgages, Fannie and loan servicer Green Tree Servicing say in court documents. The ultimate decision on the naked mortgage battle now lies in the hands of the highest court in Massachusetts.

You're allowed to giggle (I did). In the real estate world, a naked mortgage simply refers to a mortgage without a note (don't ask me who comes up with these terms). When you close on a mortgage, you sign the mortgage and a promissory note. Many states require that the lender present both the mortgage and the promissory note to the court before foreclosing on a property.

But lenders have been showing up in court without a note, sometimes claiming the mortgage is enough to foreclose or saying they lost the note. (Often, these promissory notes were separated from the mortgages when loans were packaged and sold to investors as securities.)

Henrietta Eaton, the homeowner in this case, was about to be evicted by Fannie Mae last year when the superior court ruled the foreclosure of her home was invalid because the lender was not in possession of the mortgage note at the time of the foreclosure.

"The holder of a 'naked mortgage' lacks any economic interest that entitles it to foreclose," says Adam Levitin, a professor of law at Georgetown University Law Center in Washington, D.C., in a brief he wrote to the court in support of Eaton.

"Massachusetts law has long held that while a mortgage and a note may be separately transferred or assigned, they must be united for a foreclosure to be successfully prosecuted," he says in the brief.

Fannie disagrees and wants to reverse the court's decision. It claims the court erred and its conclusion is "justified neither by logic nor the statutory language."

It will be interesting to see how the Massachusetts Judicial Court will rule on this one.

Bloomberg reports that if the court sides with Eaton, and if the decision is applied retroactively, it could affect the titles of 40,000 properties foreclosed in the last five years in Massachusetts.

The show-me-the-note argument has long been used in Florida courts and long been ignored by some judges. Maybe it's because we don’t call it a naked mortgage here in Florida? Maybe we should. That ought to get the judges' attention.

Anyway, if your home is in foreclosure, you may want to find out if your mortgage is naked.

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February 23, 2012 at 1:28 pm

Wasn't in foreclosure. Was trying to get out of a prepayment penalty. unfortunately, they had the note faxed to me while I was still on the phone asking for it. FAIL.