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Collateral Assignment of Mortgage or Deed of Trust

Revised: 10/1999

AUTHOR: David Dickard


DEFINITION
A collateral assignment of a Mortgage or Deed of Trust is primarily a personal p
roperty right, i.e., the rights to the underlying Note itself given to the assig
nee, but the collateral assignment can be insured if certain steps are followed.
One way to look at a collateral assignment is that the Note and Deed of Trust n
ow have two beneficiaries, both of whom must be dealt with if the Deed of Trust
is to be foreclosed, released, or reconveyed. When a Note and Deed of Trust are
created, they become a receivable, or asset, in the hands of the lender. If the
lender itself subsequently decides to raise cash, they can sell the asset to ano
ther investor and assign the Note and Deed of Trust outright to that investor. S
ometimes the original lender decides instead to raise cash by borrowing money fr
om another lender. As part of that transaction, they can pledge that asset as se
curity or collateral for the loan they are receiving. The collateral assignment
is the document that is recorded to show that the original lender used the asset
as security to borrow money, rather than selling the asset outright to a new in
vestor.
RELATED TOPICS

DETAILED EXPLANATION
PERSONAL VERSUS REAL PROPERTY
The holder of a Collateral Assignment does not own an estate in real property. T
his is because the collateral they hold is the promissory note itself, as oppose
d to the lien against real property created by the Deed of Trust. Default by the
original lender on the collateral loan does not directly entitle the collateral
assignee to foreclose on the Deed of Trust. This makes sense if you consider th
at the property owner should not be vulnerable to losing their property to forec
losure unless the property owner itself has defaulted on the original Note and D
eed of Trust. By law, a promissory note is personal property, which is governed
by the provisions of the Uniform Commercial Code. If the original lender default
s on the collateral loan but the property owner has not defaulted on the origina
l loan, the collateral assignee must assert its rights to the original promissor
y note pursuant to the UCC. See related topics, Uniform Commercial Code.
LENDER PRIORITY
It is common for both the original lender and the collateral lender to have simu
ltaneous, proportionate rights to the original Note and Deed of Trust. One reaso
n for this is that the collateral loan is often for less money than the original
loan. When this scenario occurs, the original lender will not want to assign al
l of its rights to the original security to the collateral lender. Accordingly,
anyone dealing with a Deed of Trust that has been collaterally assigned should p
resume that both lenders have rights to that security. If a collaterally assigne
d Deed of Trust is being paid off, either both lenders should sign the release o
r the collateral lender should reassign its rights back to the original lender.
If the property owner has defaulted on the original Note and Deed of Trust and a
foreclosure is looming, the foreclosure should be conducted on behalf of both l
enders and the foreclosure proceeds should be distributed according to their pro
portionate interests in the original Note and Deed of Trust. As will be discusse
d further in the next section, it is critical that the collateral lender has act
ual possession of the original promissory note. Even if a collateral assignment
is recorded in the real property records, the UCC will still give priority to th
e actual holder of the original note. See related topics, Uniform Commercial Cod
e.
TITLE POLICY TREATMENT
The willingness of title companies to insure a collateral assignment will vary f
rom state to state. Some states will be prohibited from issuing loan policies on
collateral assignments because the primary collateral (the promissory note) is
characterized as personal property. Title companies that are willing to insure a
collateral assignment may do so via a new loan policy, but will typically insur
e by endorsement to the original loan policy. There is one common denominator to
every request to insure a collateral assignment; the only way to validly transf
er a note is by written endorsement on the original, together with physical tran
sfer of it to the new lender. Before agreeing to insure a collateral assignment,
the title company should inspect the original note to verify that the collatera
l assignee is the current holder and that any chain of endorsements is consisten
t with the recorded chain of assignments. In some cases, the title insurer will
accept written assurances of these facts from a reputable lender or escrow holde
r in lieu of inspecting the original note. However, in the event that the title
insurer cannot verify these facts to their satisfaction, they may either refuse
to insure the collateral assignment or will except from coverage any loss or dam
age incurred due to failure by the collateral lender to hold the original note.
The title insurer should also decline to provide any type of UCC coverage, becau
se the issue of UCC security priority is beyond the scope of real property inter
ests covered by a title policy.
Title policy endorsements insuring collateral assignments contain the following
language:
The Company assures <collateral lender> the Assured' (a) That the beneficial in
terest under the mortgage referred to in paragraph ___ of Schedule ___ has been
assigned to the Assured as collateral security; (b) That no reconveyance either
full or partial of the insured mortgage or any modification or subordination the
reof appears in the public records. The Company hereby insures the Assured again
st loss which the Assured shall sustain in the event that the assurances herein
shall prove to be incorrect.