The Note and the Dead Parrot
September 1, 2009 by notebuyingprofits.com
Filed under Foreclosure, Note Buying 101
Here’s a question I recently received:
“When a securitized Note is foreclosed & sold at auction, & the court approves the sale back the bank, does the Note now become a non-securitized Note? Thanks, Steve”
Great question – and it made me immediately think of John Cleese and Monty Python.
Why?
Well, a note is a note is a note, but
A mortgage is a mortgage until a foreclosure sale, after which it “is no longer” and “becomes one” with the property.
The mortgage is the parrot…
Watch this – it’ll all become crystal clear to you!
The mortgage is the parrot in the famous Monty Python Dead Parrot sketch taken from Monty Python’s Flying Circus. Let me explain:
If an investor forecloses on a mortgage (remember you technically foreclose on a mortgage or a deed of trust, not on a note), they are exercising their right to claim the “collateral” (e.g. the property) that “secures” the Note.
Why the word “secure”? Because that’s what a mortgage or a deed of trust does: it secures the Note – or the borrower’s obligation to repay a loan, to the collateral – the property. And it also gives the lender the right to reclaim that collateral if the borrower stops making payments on the Note.
So, to clarify terms here:
1. a Note doesn’t get foreclosed on, a Mortgage does
2. a Note doesn’t get sold at auction, a property does
3. a Note doesn’t disappear at auction, though you may not be able to collect on it after a foreclosure sale (details, details!)
4. a Mortgage or Deed of Trust DOES disappear at auction, regardless of whether the property reverts back to the bank or whether it is sold to a 3rd party
5. since there is no longer a Mortgage or Deed of Trust after a sale, there’s no longer any relevance to whether a Note and Mortgage was in a security or whether it’s taken out of a security.
Make sense? If not, I’ll have to get John Cleese to do a nice little skit with me. (I saw him a few years ago when I was living in London – he drove up to the little corner market in a huge yellow Bentley, walked in, got a bag of carrots, paid and walked out without saying a word to anyone. Ah well, fame extracts a price I suppose.)
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