The Restatement of Property and the Road to Mortgagocracy

I recently did a string of blog posts of the Permanent Editorial Board for the UCC's Report on the enforcement of negotiable mortgage notes. I'm still planning a final installment there, but I came across another document that just floored me in showing how across another American Law Institute product that just floored me in how deeply captured and compromised part of the legal elite is.  

The document in quest is section 5.4(c) from the Restatement (2d) of Property.  The Restatements are an ALI-only product (unlike the UCC, which is jointly done with NCCUSL), and they are the ALI's signature product.  They are meant to "restate" the law, meaning summarize and improve it, sort of the way Yiddish versions of Shakespeare plays were unironically advertised as farbesert un fartaytsht (improved and translated).  That is to say the restatements are meant to be positive summaries of the law, but they often have normative spins.  

Section 5.4(c) appears to stand for a very simple and uncontroversial principle (pace FNMA v. Eaton), that only the obligee of a mortgage note has the right to foreclose on the note:  

A mortgage may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.

In other words, a naked mortgage's got nothin' (are you listening AZ Supreme Court?).  But then the comments and illustration go off the deep-end. Here's Comment (e):  

Mortgage may not be enforced except by a person having the right to enforce the obligation or one acting on behalf of such a person...[including an agent or a trustee for the noteholder.]  The trust or agency relationship may arise from the terms of the assignment, from a separate agreement, or from other circumstances. Courts should be vigorous in seeking to find such a relationship, since the result is otherwise likely to be a windfall for the mortgagor and the frustration of [the noteholder]'s expectation of security. See Illustration 10.

Illustration 10 is an example in which a past agency relations is grounds for finding a current agency relationship:

Mortgagee has often served as [noteholder's] agent in the past with authority to foreclose mortgages held by [Noteholder]. A court is warranted in finding on the basis of this pattern of prior conduct that Mortgagee is noteholder's agent for purposes of foreclosing the instant mortgage.

I've never seen anything like this before. The Restatement here is saying that "courts should bend over backwards to make sure that the lender wins no matter how badly the lender has f'd things up." Is it really an accurate restatement of the law to say "lenders win even if they fuck up and don't follow the law"? That sure sounds like a Mortgagocracy.  I suspect that many ALI members would be pretty shocked to find that's what the Restatement is saying.  But it's got the ALI imprimatur on it.  

I get that the borrower has no right to a windfall, but I can't see why that means that basic principal of agency law should be disregarded and agency relationships implied where they do not exist; the ALI's Restatement (2d) on Agency (sec. 15) is quite clear in stating that an agency relationship requirement mutual consent. It isn't an implied set of fiduciary duties, etc.  Current agency is going to be implied from a past course of dealing?  What if the scope of that agency varied in the past? Curiously, the Restatement cites NO cases in support of its point.  

Let me be clear. I don't think anyone deserves a free house. But a mortgage is a contract, and a background term to that contract is that the foreclosure has to follow the law.  That's part of the deal, no different from any other (non-severable), material term.  Otherwise, why not allow self-help foreclosures and evictions?  

I don't think it's too much to say that if you're going to engage in a major financial transaction like making a mortgage loan, you'll be expected to follow the law correctly or not enjoy its benefits. Both lenders and borrowers have to play by the rules.  If you don't pay the mortgage and the lender follows the law, you lose your house. But following the proper legal procedure is no less important than the default in a foreclosure; both are equally important requirements.  It's not a windfall.  It's part of the mortgage contract. 

What about the noteholder's "reasonable expectation of security"?  There is none, and I don't see how the drafters possibly thought there was one.  Just having a note without the security instrument doesn't make you meaningfully secured.  The noteholder only has a reasonable expectation of security as long as it retains the security instrument or can prove its terms.  If it doesn't, what expectation of security could it reasonably have?  

Consider if the security instrument were destroyed prior to recordation, but not the note.  Perhaps there could be an equitable mortgage or the like, but the noteholder would have a lot of trouble proving that the note was in fact secured.  That creates a strong incentive to record, asap.  If you don't control the security instrument physically, and it isn't recorded (and recording isn't required usually for enforceability against the borrower), how can you reasonably expect to remain secured? You can't take care of that security instrument if you don't have it and don't have an agent or trustee holding it for you.  But apparently the good folks who did the Restatement of Property think that's quite reasonable.  Or more precisely, they don't care if it's reasonable, as long as the lender wins.

It's really disturbing to see an ALI product moving so blatantly away from rule of law and towards mortgagocracy.  Now the good news is that the Restatement isn't law. But this is a scary sign of how part of the legal elite, which used to fight for rule of law above the rule of monied interests, has been co-opted.  More about that whenever I get to my final post on UCC Article 9.