Federal Home Finance Agency Office of Inspector General | 12
If a homeowner contests a foreclosure, either because of procedural
deficiencies or on the basis of substantive defenses and counterclaims,
then the case is litigated like a regular civil action. A homeowner's ability
to raise defenses and counterclaims depends on whether the foreclosing
party is a “holder-in-due-course” of the defaulted note. To be a holder-in-
due-course, the foreclosing party must: (1) possess the actual note; (2)
have given value for the note and taken it in good faith; and (3) have no
notice of any defect in the note, including that the note is in default. This
means that if the note were transferred to the foreclosing party subsequent
to the default, the foreclosing party is not a holder-in-due-course, so the
homeowner may raise a full battery of defenses and counterclaims in the
foreclosure action.
ShowMeTheNote.Foreclosuredefenselitigationhasbeguntofeaturevariationsofthe“show‐me‐the‐
note”defense,inwhichthehomeownerchallengestheforeclosingpartytoprovethatithastherightto
foreclose.Initsmostbasicform,thisdefenseisademandthattheforeclosingpartyproduce
theoriginal
mortgagenote,butthetermreferstoarangeofchallengesrelatingtotheforeclosingparty’sstanding.
Critically,theshow‐me‐the‐notedefensedoesnotinvolveaclaimthatthehomeownerisnotindefault.
Instead,itfocusesonwhethertheforeclosingpartyisthepartythat
islegallyentitledtoforecloseandhas
madetherequiredevidentiaryshowings.Determiningtheproperpartyisimportantforissuesoflegal
standing,holder‐in‐due‐coursestatus,andthehomeowner’sabilitytoraisevariousdefensesand
counterclaims,andbecauseitaffectssettlementabilitiesandincentives.Aportfoliolender,forexample,
may
haveverydifferentsettlementabilitiesandincentivesthanathird‐partymortgageservicer.
Kempv.CountrywideHomeLoans,Inc.,449Bankr.624(Bankr.D.N.J.2010)providesanillustrationofa
successful“show‐me‐the‐note”defense.InKemp,thehomeownerhadtakenoutaloanfromCountrywide
Home
Loans,Inc.Countrywidesubsequentlysecuritizedtheloan,sellingittoatrustnamedCWABSAsset‐
BackedCertificates,Series2006‐8.TheBankofNewYorkservedastrusteeforthetrustandCountrywideas
servicerforthetrust.
Thehomeownerfiledforbankruptcy,havingpreviouslydefaultedonhismortgage.Countrywide,as
servicer,
filedaclaiminthebankruptcyonbehalfofthetrust.Thehomeownerchallengedthatclaimbasedonthefact
thatthemortgagenotehadnotbeenproperlyendorsedtotheBankofNewYorkastrusteeforthe
securitizationtrustandwasneverplacedintheBankof
NewYork’spossession.Accordingly,thehomeowner
argued,thetrustwasnotapartyentitledtoenforcethenote,asonlyaphysicalholderofthenote,anon‐
holderinpossession,orsomeonewhohaslostanotemayenforceanote.
Duringthetrial,Countrywideproducedan“allonge”—a
separatesheetofpapertobeaffixedtoanoteto
allowroomforadditionalendorsements.Thisallongecontainedtheendorsementthatwasmissingonthe
noteitself(albeitwithanerrorinthenameofthetrust).Countrywide’sofficialwitness,however,testified
thattheallongehadbeencreatedin
anticipationofthelitigation.Theofficialwitnessfurthertestifiedthat
theoriginalnotehadneverleftCountrywide’spossessionandthatthenewallongehadneveractuallybeen
affixedtothenote—itwassimplyapieceofpaperwithanendorsement,butnoindicationofwhat hadbeen
endorsed.
The
bankruptcycourtdeniedtheclaimCountrywidehadfiledonbehalfofthetrustbecausethetrustcould
notshowthatitwasapartyentitledtoenforcethenote.Thetrustwasneitheraholderofthenote(an
ownerofthenoteinphysicalpossessionofthenote),nor
anon‐holder(someonewholacksownershipofthe
note)inpossessionofthenote,norhaditlostthenote.BecausetheBankofNewYork,astrustee,and
Countrywide,asitsagent,werenotentitledtoenforcethenote,thebankruptcyclaimagainstKempwas
disallowed.