In today's financial world, the law regarding the transfer of mortgage notes and mortgages in the secondary mortgage market is quite a relevant topic. Issues may arise of the effect of the assignment of a mortgage note without the assignment of the related mortgage. One may also question the effect of the assignment of a mortgage without the assignment of the related mortgage note.
It appears to be the general rule in Florida that the transfer of a mortgage note transfers with it the related mortgage. The mortgage note is regarded as the principal item with the mortgage being regarded as a mere accessory. 6 Fla. Jur. 2nd, Bills and Notes, Section 123. Hence the adage "the mortgage follows the note." The Restatement (Third) of Property: Mortgages provides a general rule that is accordance with the apparent general rule in Florida but specifically provides an exception to this rule if the parties to the transfer of the mortgage note agree otherwise. The Restatement (Third) of Property: Mortgages section 5.4(a) (1997) provides that "[a] transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise." The stated objective of the Restatement is to avoid economic waste to the lender and a windfall to the borrower if the note and mortgage are split rendering the mortgage note as a practical matter unsecured. The Restatement cites the case of Carpenter v. Longan, 83 U.S. 271 (1827) which held that "[a]ll the authorities agree that the debt is the principal thing and the mortgage an accessory."
It is interesting to note that this question of law is not nothing new under the sun. A digest of California law published in 1916 provides various entries that reflect case law that the transfer of a note operates as an equitable assignment of the mortgage or deed of trust given to secure it, in the absence of any provision to the contrary. Vol. 6 The New Complete Digest of the Decisions of the Supreme Court and the District Courts of Appeal of the State of California and of all the Federal Decisions Dealing with California Law, Mortgages V section 111, James M. Kerr (1916).
The Restatement further provides that the recordation of a mortgage assignment is not necessary to the effective transfer of the mortgage note, although an assignee would be "well advised" to record the mortgage assignment.
The Restatement's exception provides that a transfer of a mortgage note is possible without the transfer of the mortgage if the parties so agree, but the effect of such a transfer would be to make it impossible to foreclose the mortgage unless the transferor of the mortgage note is made the assignee's agent or trustee with authority to foreclose on the behalf of the assignee of the mortgage note.
The opposite situation would be presented if a mortgage is transferred without the transfer of the mortgage note. The apparent rule in Florida is that an assignment of a mortgage without an assignment of the related mortgage note is deemed a nullity and creates no right in the assignee because a mortgage is a mere lien incidental to the obligation it secures. 37 Fla. Jur. 2nd, Mortgages, Section 511. See e.g., Sobel v. Mutual Development, Inc., 313 So.2d 77 (Fla. 1st DCA 1975). Vance v. Fields, 172 So.2d 613 (Fla. 1st DCA 1965).
A further provision in the Restatement would appear to inherently agree with Florida's position, but avoids its result in some situations by providing that unless otherwise required by the U.C.C. or otherwise agreed, the transfer of a mortgage also transfers the mortgage note obligation. "Except as otherwise required by the Uniform Commercial Code, a transfer of a mortgage also transfers the obligation the mortgage secures unless the parties to the transfer agree otherwise." Restatement (Third) of Property: Mortgages section 5.4(b).
It would appear that this rule of the Restatement may often only apply to mortgages secured by non-negotiable instruments as the Restatement's exception to its application would apparently apply to mortgages secured by negotiable instruments as section 3-203 of the U.C.C. provides for the enforcement of negotiable instruments only by delivery of the instrument itself to the transferee.
The Restatement comments that the "otherwise agreed" exception to this rule would apply in the context of institutional purchasers of mortgage loans in the secondary market where a mortgage originator assigns a mortgage to an appointed third party servicer while the mortgage note is transferred to the actual investor. In this situation, the agreement and intent of the parties is for the investor to be the owner of both the mortgage and mortgage note despite the assignment of the mortgage to the servicer.
Posted by Jordan E. Bublick, Bankruptcy Attorney